Starbucks’ Big Mug

Howard Schultz knows the economy on a level that only a guy selling coffee a cup at a time could comprehend. And at the height of the financial meltdown, Starbucks looked like a company headed for the grinder. “At that time, we were on the short list of things to cut out. We were on every list,” says Schultz, Starbucks’ founder. There is no purchase more discretionary than a $5 latte. The company’s decision to close 900 underperforming stores had a way of underlining that point.

What Schultz has figured out since stepping back into the CEO spot from chairman several years ago is that there are two economies–call them the 2% and the skim. Staying attuned to the stronger part of the economy that has spending money has made Starbucks as vibrant as a quad espresso. The company’s recent quarter was its best ever, with sales up 15% to $3.2 billion at over 17,000 stores worldwide. Annual sales are approaching $13.4 billion.

Starbucks is now using its position of strength to move beyond coffee: it has unleashed a blitz of new products and begun expanding into the fresh-juice and bakery businesses with the acquisition of two companies, the Evolution Fresh and La Boulange chains. It will also add 300 Starbucks stores this year in the U.S., including prototypes that offer beer, wine and small meals in a comfortable setting. A new coffee called Blonde debuted in January to address the 40% of consumers who prefer lighter roasts. Globally, the company is in the middle of a major push in China, which will more than offset weakness in Europe. “There are more customers going through our stores today than any other time in our history,” says Schultz, pouring a cup of French-press-brewed Sumatra for a visitor.

Schultz, who has used his CEO platform to insert himself into the national debate, also has a plan for the non-Starbucks economy, where unemployment is high and jobs are scarce. Since the financial crisis, large global companies–including much of the FORTUNE 500–have floated above national troubles. Many CEOs don’t see the country’s problems as their own. That doesn’t include Schultz, who sees economic divide in America as an issue that will ultimately create a more difficult climate for business. “What Schultz and other CEOs might say is, We are looking ahead of the curve at the long-term threats to the business, including climate change, income inequality and educational disparities,” says Aaron Chatterji, who teaches strategy at Duke’s Fuqua School of Business.

Whether because the economic issue resonates with him personally (Schultz grew up poor) or because he believes American companies must reach beyond Washington’s poisoned politics to boost the economy–or a combination of both–he is walking the walk. The company’s foundation is helping underwrite a campaign called Create Jobs for USA, designed to fund job development in poor areas. To support the campaign, Starbucks is introducing a brand called Indivisible, which will include coffee, mugs and other items, with a portion of the sales going toward the jobs program. Starbucks is even working with a struggling ceramics company in Ohio to make mugs for its stores to keep jobs in the U.S. “We have an opportunity to demonstrate both our relevance in terms of the experience of our stores and perhaps a redefinition of the role and responsibility of a corporation,” says Schultz.

Second Cup

If there’s one thing he’s familiar with, it’s redefinition and reinvention. In the midst of the recession, with its numbers going south and facing a round of unprecedented layoffs at its Seattle headquarters, Starbucks gathered its store managers for a meeting in New Orleans, where Schultz, who had been reinstalled as CEO that year, plotted a turnaround. There he had a revelation: he had to let the managers know just how badly things were going. “The question is, At a time like this, what do you share?” he says. Everything was his answer.

The solution came as a three-part strategy. The first part was basic economics. Starbucks had to bring more value to recession-hit customers in the form of more for their money and improved loyalty programs.

The second prong was technological. Starbucks is practically corporate HQ for the Facebook generation–you know those Occupy Starbucks people who sit at the tables for hours, working their laptops. It made perfect sense to use digital and social platforms to reach them. Starbucks had already used its website to mine customers for product ideas and let them share their experiences. As social and mobile grew, the company dived in, creating what Schultz called “world-class capability” that gave it a high standing on Facebook and Twitter in less than a year.

The message wasn’t a hard sell but more like an open door. Starbucks has some 30.5 million Facebook followers–a massive constituency for a retailer–allowing it to dispense with lots of traditional advertising. Those Web-engaged customers pushed the company into accepting mobile payments, quickly making Starbucks a top retailer in that category. Customers use their phones in an average of 1 million transactions per week at Starbucks. These buyers are likely to be younger too, a coveted commodity because people tend to stick to their beverage preferences over a lifetime.

At the same time, Starbucks stopped opening up stores everywhere for growth’s sake–growth that hid underperformance elsewhere. Instead it expanded only where the economics made sense. As a result, stores opened in the past 18 months are the best-performing in the company’s history.

Caffeine Constituency

Schultz contends that because customers buy the company’s values along with its java, they have given it license to venture beyond the traditional corporate mission–and that these efforts will actually support Starbucks’ growth as well as bolster American employment. Create Jobs for USA works with the Opportunity Finance Network (OFN), a group of community lenders that makes grants to create jobs in poor communities in everything from child care to charter schools to small businesses. So far, Starbucks has raised over $10 million for the effort, including a $5 million donation from the Starbucks Foundation. OFN president Mark Pinsky says it takes about $21,000 to create and retain each new job; each $3,000 that Starbucks raises eventually creates a job. According to the company, the campaign has added at least 3,500 jobs across the country.

Starbucks is also adding new products–lots of them. In early June, the company announced the acquisition of La Boulange, a Bay Area bakery chain and supplier that could vastly improve its mediocre baked goods. Late last year, Starbucks spent $30 million in cash to acquire Evolution Fresh, a company that makes and markets fresh juice drinks. There is now just one Evolution Fresh retail store. When you consider that Starbucks has more than 11,000 units in the U.S., the math can get mouthwatering.

Of course, the world’s biggest coffee retailer is by no means done with coffee. The company is expanding rapidly in China, where its stores offer a rare oasis of retail cleanliness and peace in bustling cities. Schultz envisions 1,500 stores there–tripling their presence–by 2015. And in the U.S., a new retail iteration is being developed along the lines of what Italians call a birreria: a combination coffee, wine and beer bar that also offers small plates of food. It’s a place to stand or sit and, more important, it addresses parts of the day–such as after work and evenings–when Starbucks isn’t all that busy.

Its future once looked tepid, but Starbucks has become a company that retail analysts say will likely double its footprint over the next two years, in part by replicating the coffee experience in other categories. “We’ve transformed Starbucks Coffee Co. over the last three years,” says Schultz. “Over the next 18 months or so, we’re going to transform the nature of the American corporation.” That’s asking a lot of a cup of coffee, but Schultz clearly thinks he can brew it.