Transcript: Starbucks CEO on Instant Coffee Wars

Sept. 29, 2009 — -- Recently Starbucks CEO Howard Schultz sat down with ABC News' Bianna Golodryga to talk about the future of competing in the world of coffee.

Read the transcript of the interview below and click here for the full report.

Transcipt: Interview with Starbucks CEO Howard Schultz

BIANNA GOLODRYGA:

You've got a big launch coming out next week — instant coffee, that's not something people normally associate with Starbucks.

HOWARD SCHULTZ:

That's true. Believe it or not, for almost 20 years, we have been trying to kind of crack the code on replicating a — a cup of Starbucks coffee in instant form. And now, we have a patent-pending process in which, believe it or not, we have completely replicated the taste of Starbucks coffee and I think most people will not be able to taste the difference.

I've been polling thousands of people throughout the year — friends, my wife, business associates and no one can taste the difference. We've been testing it in Seattle, Chicago and London for the past few months. It has exceeded expectations.

We're so excited because our customers can now take a cup of Starbucks coffee on the go anywhere they want — in the office, on an airplane, travel, wherever.

GOLODRYGA:

For those lucky taste testers, what has their reaction been, when you told them?

HOWARD SCHULTZ:

When we finally tell them, they cannot believe that Starbucks Via is an instant coffee. The other thing is, this is a large category, almost the largest segment of the overall coffee business but there's been no innovation for over 50 years in instant coffee, and certainly this is not your grandmother's instant coffee.

And the quality of Starbucks, the brand reputation — we would never create an instant product that didn't meet the expectations we have of ourselves, let alone our customers. This is gonna shock people and we're so excited about this.

GOLODRYGA:

Well, instant coffee's a big hit in Europe, we know that. You have your pulse on the American consumer probably more than anyone else though. What tells you that they are wanting instant coffee right now?

HOWARD SCHULTZ:

Sure.

GOLODRYGA:

I mean are we going back to the days of Folger's right now?

HOWARD SCHULTZ:

Well, this is not anything like Folger's. I think what — what we I think really have understood is that we live in a mobile society. Everyone is on the go. And so if we can create a product that, you know, we are not — despite how many Starbucks there is, so many people complain they can't find Starbucks when they want it.

Now you can have instant Starbucks coffee wherever you are and I think just the ability of us to provide our customers with this product and they can have it in an instant is gonna be a big hit.

GOLODRYGA:

And some might say that may be a contradiction because Starbucks, of course, was all about the, the experience of walking into a store like we are right now. You've got great music playing, great ambience — do you think people are going to be able to do the same at home or have the same feeling once they drink a Starbucks?

HOWARD SCHULTZ:

Well, I think despite the success that we've enjoyed, we still have a very small percentage of the overall coffee category. And so we think this is an opportunity to introduce new customers to Starbucks and obviously create new experiences for our existing customers who are not in a Starbucks, can't get to a store. It's gonna be a accretive to the brand and accretive to the company.

GOLODRYGA:

And high end is not something people normally associate with instant coffee. What's the price range going to be?

HOWARD SCHULTZ:

Well, this package which is a tri-pack will be sold for $2.95 and a package of 12 will be sold for $9.95. So it's less than a dollar a cup of coffee. It's a great value. And you don't need any machine, it's a single-serve product, no waste, has a long shelf life.

It almost answers every possible question. But most importantly, the proof of Starbucks Via is in the cup. So all the marketing, all the PR in the world, can't change the fact that if this doesn't taste good, people aren't gonna buy it.

This is gonna shock people about how good this tastes.

GOLODRYGA:

And speaking of price, obviously this is a very difficult time in our economy right now. What is your sense of where things stand with regards to the recession and how the consumer's been affected?

HOWARD SCHULTZ:

Well, in the third quarter of our fiscal year, we began to see a sequential improvement in our own business. I think consumer confidence is rising. It certainly isn't at the level it once was or where it needs to be. But you know, I'm personally cautious— cautiously optimistic about the economy and I think things will improve.

GOLODRYGA:

And your stock price is, I think up 30 percent in the past 12 months and —

HOWARD SCHULTZ:

More than that.

GOLODRYGA:

More than that. Well, I think what is it, 120 percent this year so far.

HOWARD SCHULTZ:

Yeah.

GOLODRYGA:

What does that — I mean how often do you pay attention to the stock price? Is that something you look for —

[BOTH SPEAK AT ONCE]

HOWARD SCHULTZ:

Well, I think — for, for us as a company, we have to be very mindful of the fact that we're in a business where we're interacting every single day with our customers. We have to exceed their expectations. If we exceed our expectations of our customers and our people, we're gonna really build long-term value for the shareholders.

So you know, we're not looking at the stock price in terms of how we're making our decisions. We want to make long-term decisions like Via that will add long-term value to our shareholders. But obviously we're gratified that we've had a very good year in terms of turning the company around, getting back to the core business and I think our shareholders have recognized that and the value's been greater.

GOLODRYGA:

You kind of hit a bump in the wall a few years ago. Some of your competitors were taking great lengths to go out and say that with regards to taste tests, whatever it was with McDonald's and Dunkin Donuts — what has changed in Starbucks since then because of what critics have said. What have you done to improve?

HOWARD SCHULTZ:

Well, I think we — we've never allowed others to define Starbucks. So I think all those critics and all the noise about Starbucks was fodder for the fact that-

GOLODRYGA:

So a couple of years ago, I think it's fair to say that you hit a bump in the road after your success of what, 20 years before that. What has changed with regards to your product in those two years, especially concerning McDonald's and some of your other rivals, Dunkin Donuts.

HOWARD SCHULTZ:

Well, first off, I think candidly, our best days in terms of our company, are in front of us. We had many, many years of great success and over about a two-year period I think we —there are some things that we did in terms of our own decisions that were not in the best interests of our company.

We've recognized that, we've fixed them and we got back to the core business which is, the quality of our coffee, the customer experience, and certainly not allowing other people to define us. We're serving 50 million customers a week.

We think we're and then Zagat has, has validated that, the highest quality coffee in America, the best coffee experience. But the fact is that it's one customer, one cup of coffee and one Starbucks partner at a time that's gonna define our brand.

And we think that we're in a very unique position to create innovation and to begin growing the company again, not to mention the fact that we have less than 6,000 stores internationally. I just returned from a trip to China where I saw firsthand — we have 700 stores in greater China, there's thousands of stores in terms of the opportunity.

We're just getting start internationally and I think people are gonna be surprised that although we did have a bump in the road, we're back to where I think we're feeling — we're back on the offense and dealing with the things that are exciting about our company. Via is a piece of that puzzle.

But I think, you know, we recognize more than ever, that we're in control of our own destiny and, that the opportunity for our company is very, very significant -

GOLODRYGA:

But you clearly weren't happy with some of the things that you saw a few years ago. And famously, you closed some of the stores for three hours to retrain employees.

HOWARD SCHULTZ:

Yeah.

GOLODRYGA:

Tell us a little bit about that.

HOWARD SCHULTZ:

Well —

GOLODRYGA:

And what drove you to that?

HOWARD SCHULTZ:

Sure. I returned as CEO of the company in January of '08. And when I came back, I thought it was really important to kind of —for all of us at Starbucks to look in the mirror and recognize that there were some decisions that we made and as a result of that, some self-induced mistakes.

And there's nothing wrong with realizing that perhaps we made some decisions that were not right, and fixing them. One of things I thought we needed to do was just get back to the basics — the quality of our coffee, the quality experience and return the company to our core mission.

And as a result of that, I think we've galvanized our entire organization around a pursuit of excellence and exceeding the expectations of our customers. We did have a period where we had to go back and kind of rewind the clock and fix those things that have got — that were wrong. We've done that and we're in the midst of, I think, one of the most significant transformations of the last few years in which Starbucks is gonna return to the glory it had in the past. But that's not based on the, the editorial coverage of others or the marketing or the PR.

It has to be based on the customer experience, and customers recognizing not only the quality of the coffee, but also the values of our company. Starbucks is a company that provides healthcare for all of our employees, that gives equity in the form of stock options, that's involved with Product RED, that's doing things in Rwanda that I think would really surprise people about the heart and the conscience of the company.

And so we've always I think, from day one, wanted to build a different type of business, that in a sense created a balance between profitability and social conscience. I also think that one of the reasons why so many of our customers come back to Starbucks, in addition to the — the coffee and the experience is because people recognize that there's a large reservoir of good will about what the company stands for and I think that's vitally important, especially during this time.

Our own research strongly suggests that even though there's a downturn in the economy, that the American consumer wants to support those products and services and the companies that they trust, and I think that's why we're winning.

GOLODRYGA:

I want to know how you felt personally when you would hear over the past year or two years, financial experts advising people how to cut costs and — and saying, you know, if, if you have five cups of Starbucks a week, you're spending X amount of money. By eliminating that, you can save that much money. How did that make you feel when you became kind of a budget excess?

HOWARD SCHULTZ:

Yeah. Well, I think certainly it became fodder for the media to make the statement that one of the things you should cut out is your latte or your visit to Starbucks. I think one of the reasons why that did not really come to pass and it wasn't sustainable is because this is a luxury that people can enjoy and it's not that expensive and there is a value proposition in this experience.

I also think that we were hungry as people, especially during this downturn in the economy for human connection and the sense of community and the third place experience that goes in our stores. So certainly I didn't like hearing it, but we've worked harder than ever to demonstrate that we're selling more than a cup of coffee and it's worked.

GOLODRYGA:

Well and sales have been great. You've also lowered prices on, on many of your items. And I want to know with regard to the Starbucks experience seeing as it is so unique, especially what it was when you initially started the company and your initial vision —is the Starbucks experience amenable to change?

HOWARD SCHULTZ:

Yes. I think whether you're in the coffee business or the news business, I think the — embracing the status quo is not a sustainable endeavor, that you have to keep pushing for self-renewal and reinvention. But along the way, I think when you [ ? ] new products like Starbucks Via or anything else, it has to be within the guard rails of the brand and the heritage of the company.

We've got a big initiative around health and wellness in terms of Starbucks Vivanno and oatmeal and other food products that we're doing. And I think that's consistent with recognizing our customers want healthier foods and alternatives and we can do that. But that wasn't part of our original history.

And so I think we have to adapt but we have to adapt in a way that's consistent with the heritage of the brand of the company.

GOLODRYGA:

Has there been an aha moment for you since then, since the launch of the company to where you said, this is what the — this is what it is, this is what it's going to take to get the consumer to come in? Was it the experience? When did that come to you, why did that become such an important part?

HOWARD SCHULTZ:

We did something last year and I wouldn't call it an aha moment but I think it was a galvanizing moment in the last year and that is we, we took 10,000 of our store managers to a three-day offsite, a leadership conference and we brought them to New Orleans.

The reason we went to New Orleans is we thought it was important in terms of the values of our company to go to New Orleans and give back volunteer hours. In addition to the 50,000 hours that we volunteered, we had this meeting of galvanizing our entire company around a singular focus about the quality of our experience.

And I think once people thought and saw that we were going to invest in them and have this kind of meeting — and also the, the importance of having it in New Orleans because of everything that that city has been through... was a very important moment. I think in many ways we look back as a turning point, a watershed moment, on the last 12 months. But I've never been more optimistic about the [inaudible] of our company and the things that we're doing and the innovation of things like Starbucks Via and what's coming in terms of 2010.

We have more innovation for the next 12 months than we've had probably for the last five. But they're all within the consistency of the heritage of the brand and trying to surprise and delight our customers.

GOLODRYGA:

I think they might be a little surprised to hear that alcohol and then now instant coffee. Where do you see, what is a typical Starbucks store going to look like in 2020?

HOWARD SCHULTZ:

It will still be steeped in the romance of coffee. It will be steeped in the values of Starbucks in terms of what we stand for and the experience. But in terms of products and services, who knows? I think there will be a, a level of integration in terms of technology.

I just came back from China as I mentioned and the way the Chinese consumer is using mobile payments is fascinating to me and I'm sure that's gonna come to the U.S. sooner than people think. But I, I don't know. I will say this, that we are gonna continue to lead, we're gonna continue to push innovation.

And I think one of the hallmarks of the company has been taking the road less traveled and having the courage to do that. And I think when we're at — when we're best is — is when we, we kind of go to a place that people don't expect us.

And I think Via is a, a great example of the courage it takes to go to a place that people said, instant coffee, how could that be? But this isn't instant coffee the way it has been, this is Starbucks' version. And I think only Starbucks could have done something like this.

GOLODRYGA:

We in "GMA" love looking at economic indicators — whether it's the color of shorts people wear or if you look at the price of oil and gas, what are some of the indicators you've seen with regards to people's reaction to the economy? Have they been ordering fewer sweet drinks? I mean has there been a trend?

HOWARD SCHULTZ:

I think at the worst point of the economic downturn at the end of 2008, we certainly saw, you know, a level of attrition in traffic and we also saw people trading down in sizes. And then we also saw people coming less frequently.

By trading down in sizes, they were still drinking their normal drink, but doing it in a smaller size. Over the last few months or so, we've now seen a return in which people are now coming back and so the average ticket in traffic is getting to a place, not where it was but sequentially it's improving and that's why I feel optimistic, cautiously optimistic about 2010.

I also think we've given people a reason to come back in terms of the experience, the quality — you mentioned prices, we've lowered prices on some of our beverages. And I, I think overall, we've tried to put our own feet in the shoes of our customers and understand that people are under substantial pressure and what can we do to add value.

But I wouldn't underestimate the experience and the fact that — that we are all in need of some human connection. And the sense, the social aspect of Starbucks and the sense of community — there is a, an emotional connection that people are seeking that in many ways, we are still providing and it's so relevant.

GOLODRYGA:

And as you're cautiously optimistic about a return to normalcy and economic growth, are you going to adjust and raise prices again? Are you going to keep it where —

[BOTH AT ONCE]

HOWARD SCHULTZ:

No, we have, we have — you know, the pricing architecture of Starbucks has been slightly refined in which we've lowered prices on some of the core beverages and adjusted prices on some of the more complex beverages. But the —in terms of an overall price increase, that's not where we're looking, no.

GOLODRYGA:

And I have to ask you, have you tried any of your competitors' coffee? Have you had — [BOTH SPEAK AT ONCE]

HOWARD SCHULTZ:

Yes, I, I have — I think it's really important to be open-minded. And I've gone into every national competitor and the local ones that I think are doing a good job and I can unequivocally say that the highest-quality coffee in the world is Starbucks coffee and the experience we provide is significantly different and I think much better than anyone else. That's why we're winning.

[BOTH AT ONCE]

GOLODRYGA:

And I, I — I have to ask you about healthcare. I know that's a very important issue for you. You were the first company to provide healthcare for part-time workers. I know you briefly met with the president as well last month, I believe.

HOWARD SCHULTZ:

I did.

GOLODRYGA:

Where do you see the road to healthcare reform going?

HOWARD SCHULTZ:

Well, I'm not a politician —

GOLODRYGA:

But as a businessman because that's clearly a huge part of the plan.

[BOTH SPEAK AT ONCE]

HOWARD SCHULTZ:

Yes. So this is what I would say is, we've been providing comprehensive health insurance for our employees for a very, very long time and we've seen significant increases, year after year after year. And it is the highest — it's, it is the most significant line item in terms of overall expense to our company. It's also perhaps the most important benefit in terms of the culture and values of our company. It's something that we will not turn our back on.

So we were at the center of kind of sharing our own story with politicians, and as you said, with the president and trying to make people understand that we're — we are on a collision course with time if we don't get some relief.

Now there's a lot being said about how to get there and I, I don't have a silver bullet. But what I know to be true is this: that the significant nature of the uninsured and what as a result of that, the cost shift in the system that relates to companies like Starbucks — and if I can be specific about that, I know we have limited time — is this: as a result of the large amount of money that is in the system — as a result of people who do not have insurance, the cost shift of that — anywhere from three to five and some people say six percent going into the system and putting — putting that on the backs of many, many companies, thousands of companies that do the right thing — so we are paying and it's so perverse, as a result of doing the right thing, we're paying three to five, maybe six percent more in terms of our overall cost as a result of the uninsured.

So at the center of this, whatever — whatever form the healthcare debate takes, there has to be a solution and it must be universal, that everyone must have health insurance. And it's not only because of the fracturing of humanity, it's the fact that it is costing the system so much money.

GOLODRYGA:

With regards to a public option, where do you stand with that? I know a lot of people with businesses are concerned that if this public option were to come into place, that they would be forced to switch from their current provider.

HOWARD SCHULTZ:

Well, I think the, the operative word is option. So if, if there is going to be a public option, it can't be mandatory. People have to have choice. And again, I'm not a politician, I've seen the debate go both ways. You know, whether or not there's a public option to me is, is not the question.

The question is, are we gonna have real reform and is, is reform going to significantly —significantly lower the cost to companies like Starbucks? And I think what will be tragic is if we get some kind of bill and we get reform but it doesn't have a significant effect in terms of the system and the cost in the system.

But I, I think — to continue on this course and not have any significant change is really problematic. And when we — when we look at the picture and budget this thing out, you cannot sustain double digit increases year after year after year. And I talk to many people who do cover their employees and are trying to do the right thing and we're all trying to talk to one another to find ways in which we can reduce costs, and there's nowhere to go.

GOLODRYGA:

Right. Well, I couldn't imagine not having insurance and would I, personally with my problems because it is a big issue, I want to end, I just want to end on a [inaudible] note, on a good note. Have you, has there ever been a surprise with regards to somebody that you've seen drink coffee, drink a Starbucks product, have you seen someone saying, oh, my God, I can't believe that person is drinking Starbucks or — and seeing that person drinking a Starbucks?

HOWARD SCHULTZ:

You mean like a famous person?

GOLODRYGA:

Anybody.

HOWARD SCHULTZ:

No. I can't think — sorry.

GOLODRYGA:

If you think of somebody, let us know. This is the UN week, so it's funny, you see some people who I — you know —

HOWARD SCHULTZ:

Who's been in the stores recently? I'm trying to think —

GOLODRYGA:

Alec Baldwin gave you all a shout-out.

HOWARD SCHULTZ:

Well, you know, Alec Baldwin.

GOLODRYGA:

Anna Wintour, yeah, okay.

HOWARD SCHULTZ:

Sorry.

GOLODRYGA:

Maybe there will be a fun answer.