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TALK ASIA

Interview with Starbucks CEO Howard Schultz

Aired November 9, 2012 - 05:30:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


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HOWARD SCHULTZ, CHAIRMAN AND CEO, STARBUCKS: We've never quite opened a store with this level of excitement and fanfare.

MALLIKA KAPUR, CNN INTERNATIONAL CORRESPONDENT (voiceover): He's the straight-talking CEO who has turned a daily cappuccino into a billion dollar business. In the last three decades, Howard Schultz has brought Starbucks from only four stores in the United States to more than 17,000 worldwide.

Along the way, he's built a reputation as one of America's savviest business leaders, creating Starbucks' signature brand associated with everything from espresso to design to music.

SCHULTZ: We just bought "Show Me", the first downloaded song at Starbucks.

KAPUR (voiceover): Shults credits his working-class roots for inspiring the company's emphasis on social responsibility in building ethical sourcing and providing health insurance for part-time employees. And he has never shied away from strong opinion.

SCHULTZ: The kinds of services to the communities we serve and a safety net for the people that we employ.

KAPUR (voiceover): In 2011, he called on fellow CEOs to stop making political contributions until the U.S. government gets serious about the U.S. economic problems.

SCHULTZ: We're tired of what is going on in Washington, and America deserves better.

KAPUR (voiceover): He's taken the company far beyond its U.S. roots, opening stores in developed and emerging markets all over the world. But never India, until now.

This week, on "Talk Asia", we meet Starbucks CEO, Howard Schultz, as he opens his first store in Mumbai. We talk business, U.S. politics, and how he's steered Starbucks back after it ran off-course.

SCHULTZ: Growth is a strategy and is not a reason for being.

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KAPUR: Howard Shults, welcome to "Talk Asia".

SHULTS: Thank you very much.

KAPUR: You're here in Mumbai to open your first store - to introduce Starbucks - the coffee, the store. But also the Starbucks experience. What is the Starbucks experience?

SCHULTZ: The experience of Starbucks over the last 40 years has been defined by two very important things. Obviously, an extraordinary cup of coffee that we hope to bring to so many people throughout India. But much more than that, it has been the people - the humanity of the company - that has brought that experience to life. I think people will walk into the Starbucks store and overnight recognize the significant difference between what Starbucks represents day-in and day-out and all the other coffee companies that have been serving coffee in India for so many years.

KAPUR: I know you talk a lot about your inspiration - getting inspiration from the coffee shops in Milan. At that phase, did you ever dream that one day you'd be so big and in so many countries? You're now present in 60 countries.

SCHULTZ: When I think back about the company, it's hard for me to believe that in 1987 we had 11 stores and 100 employees and a dream to create a national brand. But we also had this dream to build a different kind of company - a company that would balance profitability and a social conscience.

KAPUR: Building the right kind of company - you talk about that very often.

SCHULTZ: Yes?

KAPUR: So it seems that that value system - those ethics - are really important for you. What or who do you attribute your very strong value system to?

SCHULTZ: I was born on the other side of the tracks, in public housing in Brooklyn, New York. My dad never made more than $20,000 a year and I grew up in a family that lost health insurance. So I was scarred at a young age with understanding what it was like to watch my parents lose access to the American dream.

And, in a sense, I think what I was trying to do early on was build the kind of company that my father never got a chance to work for. So everything we've done over the last 40 years - it's one thing to say, "Yes, we have a market cap of $40 billion and we employ 200,000 people and we're in 60 countries". But we never set out to build a company just to make money.

KAPUR: I've also read that a defining moment for you, perhaps, was when you were very young, seven-year-old boy, and you came back to find your father had fallen and hurt his hip.

SCHULTZ: Well, yes. At the age of seven, exactly true, my father fell on a sheet of ice. He was a truck driver. He was dismissed because he got hurt on the job. There was no workman's compensation, there was no benefits. And this was the beginning of watching the fracturing of the American dream. And those scars stayed with me. So, in a sense, building Starbucks was an opportunity for me to create a company whose benefits would value people at all aspects of the food chain within the company.

KAPUR: Partners, as you call your employees, are obviously a huge priority for you.

SCHULTZ: Yes.

KAPUR: And one of the things you've done for them is to give them health insurance, even people who work part-time for you. What motivates you to do that?

SCHULTZ: Well, it's true. We were the first company in America to give comprehensive health insurance and equity in the form of stock options to every single employee. And, as I said earlier, that was, in many ways, trying to pay homage to my father, who did not have those benefits as a worker in America.

KAPUR: I want to talk a little bit about Starbucks, the business, now.

SCHULTZ: Yes.

KAPUR: And during '80s and '90s, we did see the company go through a period of very aggressive growth.

SCHULTZ: Yes.

KAPUR: And then you stepped down in 2000 and things didn't go that well for the company for a little while after that. And you say it's because of growth - growth became a problem. Most people would long for that kind of problem. You know, to have that aggressive growth. How and why did growth, itself, become a problem?

SCHULTZ: It wasn't just growth. From 1987 to 2007 - a 20-year period - not only were we growing, but everything we touched seemed to turn to gold. And I've used the expression that we were on a "magical carpet ride" for 20 years.

KAPUR: That's a good thing, right?

SCHULTZ: A very good thing, but at the end of that period, the company started making poor, undisciplined decisions. And I think something happened that is not that unusual, but when it happens to you, it's critically important. And that is the human condition of success, somehow a level of hubris and entitlement enter the company. And, even though I was not the CEO at the time, I was as responsible as anyone else.

And I returned in 2008 with a passionate group of leaders to try and right the ship. And that's exactly what we did. And then, since 2008, we've had record performance, record stock price, and I think, most importantly, we have a new level of muscle memory and commitment that the mistakes of the past will never be repeated again. And success is not an entitlement. Growth is a strategy and is not a reason for being.

KAPUR: When you came back, one of the things you did was quite controversial and certainly unusual. You shut down all the stores for a couple of hours one Tuesday evening - all the stores in the United States - to retrain your staff. You lost money doing that, but I know you've said before that it was worth it.

SCHULTZ: Well, I think when I came back, the most important thing that I had to do to every stakeholder, but most importantly our people, was to talk with great honesty and transparency about the situation and what we had to do. And what I felt was that we had lost an understanding of what it is we were here to do and the basic elements of making the perfect cup of coffee somehow became a little mediocre.

And I decided that we were going to retrain the entire company on the basic fundamentals of brewing coffee and making espresso. And I didn't care if we got negative press or the competition used it against us - we were going to go back to the reason the company began.

KAPUR: Back to basics?

SCHULTZ: Yes. And that was a - at the time, a very controversial decision - but turned out to be the right one because it was honest and it was important and it gave us, I think, a galvanizing opportunity to realize the things that we had to do to turn the company around.

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SCHULTZ: We have never built a store as beautiful, elegant, and stunning as the store that's going to open. It's going to be an unbelievable experience and the people here, in Mumbai, are going to gravitate to it.

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UNIDENTIFIED MALE: I was waiting for the Starbucks for the last so many years. And the other night will be [UNCLEAR] in Bombay.

UNIDENTIFIED FEMALE: I feel so proud. Like, Starbucks is finally in Bombay, in my country, so I can tell the people that, yes, we have it now.

UNIDENTIFIED MALE: Early in the morning, at eight o'clock, and when I was ready to camp outside the Starbucks store all night long.

UNIDENTIFIED MALE: I cycle to [UNCLEAR] to try and get my cup of coffee.

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KAPUR: When you first started expanding internationally, there were some skeptics who believed that Starbucks, perhaps, wouldn't be so successful outside the United States. But the model has worked. What is it about the Starbucks model that allows it to be successful in so many markets?

SCHULTZ: Well, you mentioned people thinking that we wouldn't succeed outside of the U.S. There were thousands of people who thought we would never succeed in the U.S. either. So we've always had cynics, we've always had people who doubted what we could or would do. If you look at what Starbucks has done, the word I would use is relevancy. We have become highly relevant in very different parts of the world.

If you can visit a store in Oman, Jordan or Shanghai or Tokyo or here in Mumbai this week, you will see a common thread of an experience. And that experience is not American - it has universal appeal because we are dealing with and appealing to human behavior. And that human behavior is doing everything we can to create value, respect the customer, and really create a deep sense of appreciation for the human experience. What I've learned over the years is, in all of these places that Starbucks does business, there is a longing for human connection. There's a longing for true authenticity and a deep sense of community.

KAPUR: You know, the reaction in India to Starbucks opening here has been, "Wow, that's great". But there's also people who've said, "You know, about time. They went to China, what, 13 years ago?"

SCHULTZ: Yes.

KAPUR: So why did it take you that long to enter the Indian market?

SCHULTZ: Well, you know, I've been asked this many times, as you might imagine. We've always wanted to come here and we always thought we would be successful. We determined early on, this is a very complex market to do business and we needed to find a partner. We had many people who were interested in becoming our partner. But, for one reason or another, we and I never felt we met the right people until we met Tata. And Mr. Krishna Kumar and Mr. Ratan Tata - when I met the two of them, it was love at first sight. I mean, I knew first-hand that these people, who had such a deep respect for the human condition - who gave back to the communities they serve and protected their people - these are the kind of people that I wanted to help represent Starbucks in this country.

And, once we met the Tata family and people, we've moved very quickly. We have never built a store as beautiful, elegant, and stunning as the store that's going to open - it's going to be an unbelievable experience and the people here in Mumbai are going to gravitate to it. And the differentiation between us and everyone else selling coffee is going to be very, very wide.

KAPUR: But I have to ask you, you know, here in India, most people wake up in the morning and have that cup of chai.

SCHULTZ: Yes.

KAPUR: A cup of hot, sweet, murky tea. Is that going to be a challenge for you to get them to move towards coffee?

SCHULTZ: I don't think so. I think our own research is that there's a tremendous amount of coffee that's being sold and served in this market. We will sell very high quality tea and chai tea in our stores, but I suspect that we're going to do extremely well here. The unaided awareness of Starbucks in India is very, very significant.

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KAPUR: Howard, you were so passionate when you described the store. What's your favorite part of the store?

SCHULTZ: The - I mean, you can't pick one part of the store. Every element of this store has been gone over with such painstaking respect and sensibility to the Indian culture. However, you're walking into a highly beautiful, elegant, stylish Starbucks store that feels like a slice of India. And I think even the floor -

KAPUR: Yes.

SCHULTZ: If you look at the floor - how we take in the detail -

KAPUR: Yes.

SCHULTZ: Everyone who's walked in so far, I think, is almost speechless about how beautiful it is.

KAPUR: Yes.

SCHULTZ: The scale of it - it's one of the largest stores we've ever opened.

KAPUR: It's big, yes.

SCHULTZ: And yet, there's so many intimate spaces and I'm just - I'm so proud of it. I can't wait for people to walk in, taste the coffee, experience the third place between home and work.

KAPUR: Can you tell us a little bit about the picture that we're seeing here?

SCHULTZ: Here's a great example, where we've actually taken photos -

KAPUR: Yes.

SCHULTZ: -- that we thought would be interesting and representative -

KAPUR: Yes?

SCHULTZ: -- of Indian people, and yet we gave him a little slice of Starbucks. And it's almost like a little wink.

KAPUR: Yes, yes.

SCHULTZ: It's not too much.

KAPUR: I didn't even notice that initially, until you pointed it out. I see it there, I see it there.

SCHULTZ: Yes, it's in everything. It's in everything. Yes.

KAPUR: On the motorbike over there.

SCHULTZ: Yes.

KAPUR: On the - you're right, I didn't even notice that initially.

SCHULTZ: So I think the lines are already starting. People are calling.

KAPUR: There is the bus.

SCHULTZ: Yes, there's the bus.

KAPUR: Tell me just a little bit about your goals for the Indian market. How many stores you hope to open, what your timeline is?

SCHULTZ: Well, we'll open up a few stores here in Mumbai over the next week or so. We'll open up a store in Delhi after the first of the year. We recognize this is a very large and robust market. With the partnership with Tata, we have great infrastructure and support. I can't tell you a number, but we're here to build a very large business, invest into the Indian economy, and, I think, prove to the world that this is a very big market for Starbucks.

KAPUR: You talk so passionately about making the ideal cup of coffee. What, according to you, makes a cup of coffee the ideal one? A perfect one?

SCHULTZ: Well, I'm glad you asked that, because one of the things that's very different about this opening that we've never done before is that the coffee in every shot of espresso, every cafe latte, every cappuccino, is coffee that has been sourced and roasted here, in India. We have never done that before.

KAPUR: And the first time for Starbucks to do it all locally?

SCHULTZ: Yes, the first time in our history.

KAPUR: Wow.

SCHULTZ: And over the last six months we have worked with our master blenders and roasters to make the perfect shot of espresso with coffee that has been grown and roasted here, in India.

KAPUR: I just looked at some of the food, and I see a lot of Indian touches there. Some paneer, some chicken tika.

SCHULTZ: Well the food is so good, I gave a little taste to my wife yesterday and she said, "Why don't we have this food in Seattle?"

(LAUGHTER)

SCHULTZ: So, again, with the help of Tata and Taj (ph), we're bringing great food to the Indian consumer. And, again, it's not based on our palate, it's based on yours.

KAPUR: And you can take some of it back with you to Seattle.

SCHULTZ: We can.

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SCHULTZ: We deserve the leaders in Washington to take the steps necessary to move the country forward and to put aside the partisanship that exists.

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KAPUR: I want to turn our attention to Europe for a minute.

SCHULTZ: Yes.

KAPUR: Particularly the U.K., where Starbucks has been in the spotlight recently.

SCHULTZ: Yes.

KAPUR: With allegations that the company hasn't paid its fair share of taxes.

SCHULTZ: Yes.

KAPUR: Which, of course, you know, Starbucks has said that it's paid its legal share - its fair share. But there seems to be some confusion about whether Starbucks is profitable or loss making in the U.K.

SCHULTZ: Yes.

KAPUR: Is it profitable or loss making in the U.K.?

SCHULTZ: Yes, I'm glad you're asking me this question, because it gives me the honest opportunity to kind of clarify our view of the situation.

We have paid about 160 million pounds of taxes - the back-tax - over the last three years. The unfortunate issue within the U.K. is we're not a profitable business in that market. We have about 800 stores in that market, but we're not profitable. We do pay a royalty back to the core business, and that royalty is consistent with all the other markets that exist within Starbucks.

And whether you're profitable or not, the business must pay a royalty back to the company that are providing the services. So, within the U.K. press, there is a misunderstanding - "How could you be paying a royalty if you're not profitable?" And so, we do pay a royalty, as does other markets that are in its formative stage, or are not making a profit. But we do pay taxes in U.K., a substantial amount, but we have not paid corporate income tax because we have not made a profit. That's the true story and it's unfortunate that there's such sensationalism around it.

KAPUR: You've talked over and over again about the American Dream - you've lived it yourself, you say. But you seem to be a bit disillusioned with the economic direction that the United States is taking at the moment.

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SCHULTZ: We need to send a message to congress to go back to Washington and please address the issues of the day and bring confidence back to the American People and the rest of the world.

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KAPUR: And you wrote in an open letter last year that, "Our country is better than this". What did you hope that the letter would achieve?

SCHULTZ: If you look at America, just on the facts alone, with almost $15 trillion in debt, 14 and a half million people unemployed, 42 out of 50 states in a budget deficit, municipalities like San Bernardino declaring bankruptcy. There are a lot of issues. What I wanted to do, and I knew it was somewhat unprecedented and unorthodox, is as a public CEO I have a platform.

I wanted to speak out with respect and civility, but I wanted to say to the American people, but specifically to the politicians, that we deserve the leaders in Washington to take the steps necessary to move the country forward and to put aside the partisanship that exists - that has become so polarizing and which very significant issues, like the debt ceiling, and now the fiscal cliff that's coming up, gets dealt with in a way that serves the people. And I think the question I was asking -- and I think I hit a nerve - is, "Are we getting all that we need? And don't we deserve better than this?" And I think the out crying of support was palpable because we all realize that we do deserve better. And we need leaders to show up.

KAPUR: You seem to be particularly concerned about jobs -

SCHULTZ: Yes.

KAPUR: About unemployment in the United States. Could you tell us a little bit more about the work the Starbucks foundation is doing to create more jobs?

SCHULTZ: Yes.

KAPUR: You have a campaign called "Create Jobs for USA".

SCHULTZ: Yes, this little wristband right here.

KAPUR: Oh, is that what it is?

SCHULTZ: Yes, that small businesses in America do not have access to credit. So, what we decided to do, since the banks were not lending, is - could we create a national system in America in which the Starbucks foundation and customers would donate to this fund to help create jobs for those people who were unemployed. We raised millions of dollars. And those millions of dollars that we raised had a multiplier of 7x, which turned into over $100 million. Most of that money has been - gone out to low-interest loans.

We are tracking every single dollar. 100 percent of it with no admin cost. And we are creating jobs in America. Now, Starbucks and our customers are not going to eradicate the unemployment issue, but I think it is a signal that we can't wait for government. That businesses and business leaders also have a responsibility. The other major issue is that we're down to less than nine million manufacturing jobs in America from a high of over 50 million after World War II. If we continue to lose our manufacturing base in America, the situation in terms of future jobs and the economy is going to be in a very sad state.

KAPUR: You seem not only to be concerned about creating new jobs, but keeping jobs in the United States. And I believe you've teamed up with a struggling ceramics maker in Ohio to make your own coffee mugs?

SCHULTZ: We have done that, as well as the fact that, as we sit here today, we have two manufacturing plants under construction. A juice plant in California and a new coffee plant in Georgia. Both of those plants could have easily been constructed in Mexico, in Asia, and would have cost the company at least 15 to 20 percent less, as well as operating costs would have been. But we decided we must make an investment in America.

With regard to the ceramics plant, we want to start making things in the U.S. and we want to find things that we are selling in our stores that mostly are being made in China or Korea, and make them in the U.S. We found this plant that was basically closing and we funded it, and we're using that plant [AUDIO MISSING] mugs in our stores that we're selling. And it's one great example of just trying to do all that we can.

KAPUR: On this activism, would you ever consider running for public office?

SCHULTZ: No. No, no. I'm quite satisfied doing what I'm doing. But I do feel, in a sense, the rules of engagement for citizenship has changed and we must encourage other people to speak up and to take action. And we must encourage Washington to bury the partisanship and embrace citizenship.

KAPUR: Thank you very much for your time.

SCHULTZ: Thank you. Good questions.

(LAUGHTER)

SCHULTZ: And you did your homework.

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