By Lisa Baertlein
LOS ANGELES (Reuters) - Four years ago, generous benefits and opportunities for advancement convinced Leigh Swanson to use her new master's degree in human resources to manage a Starbucks cafe. She called it one of the best workplaces she had ever experienced.
Then, in 2007, with the coffee chain in the midst of a building binge, the worst downturn since the Great Depression hit, hammering Starbucks' bottom line. Sharp cost-cuts, the introduction of corporate efficiency tools like scheduling software and an increased emphasis on pushing product sales have helped the company return to record profitability.
They also led Swanson to quit in May. The disappearing perks and the financial fixes dampened her enthusiasm for recruiting potential new partners, as Starbucks calls its employees. "I found it really sad. I was really invested," said Swanson, who was in charge of a Starbucks in the Florida Panhandle. "I just didn't feel proud anymore. I wasn't in it to manage a McDonald's."
Disillusionment among Starbucks workers like Swanson may be early signs of a culture change that could strike at the heart of what makes Starbucks Starbucks: that warm, fuzzy feeling stemming from its original commitments to the global community as well as its own healthy, happy staffers who provide service with a smile.
Of course, Starbucks' cafe workers are not the only ones being asked to work more for less. But the world's biggest coffee seller built its reputation as the anti-McDonald's. Its culture underpins the "Starbucks experience" that draws loyal customers back time and again to pay a premium price for fancy coffee drinks that they could get for less somewhere else.
For now, Wall Street is all smiles. After all, shares in Starbucks Corp have nearly tripled from recent lows and appear poised for more gains.
But for investors and management, the question is whether Starbucks can keep growing if the Starbucks culture unravels.
FROM SEATTLE TO SHANGHAI
Howard Schultz bought Starbucks' name and assets -- a few cafes and a roasting plant -- in 1987. The espresso empire now has annual revenue of around $10 billion through its almost 17,000 global stores.
Starbucks used better benefits to attract bright and enthusiastic workers, like college students and actors, who were passionate about the company's mission and took the time to remember your name and your beverage of choice.
Schultz stepped down as CEO in 2000, just a few years after his book "Pour Your Heart Into It" became a best-seller. He stayed on as chairman and added a new role: chief global strategist in charge of international expansion.
His January 2008 return to the CEO chair came nearly a year after he penned a now-famous memo to Starbucks' brass. Titled "The Commoditization of the Starbucks Experience," it expressed dismay over what he called "the watering down of the Starbucks experience" and a loss of "soul" in the cafes.
Yet, Schultz's fingerprints were on many of the changes that got the company to that place, including the switch to automatic espresso machines.
For its part, the company insists that its commitment to workers remains as strong as ever.
"Starbucks from day one was intended to be not only a place for a great cup of coffee but also an exceptional place for people to work," Kalen Holmes, Starbucks' executive vice president of partner resources, told Reuters.
"The reality is that the recession caused us, like most companies in the United States, to have to make some really, really tough decisions. They were decisions which were not taken lightly at all. They were done with a lot of thought and care," Holmes said.
Starbucks still offers better compensation than most of its peers -- even after its painful retrenchment in 2008 and 2009. Nevertheless, its roughly 105,000 cafe workers are grappling with higher out-of-pocket medical costs, lost personal days, slower vacation accrual and hourly pay that is lower than at some of its fast-growing rivals.
Now that it is on firmer footing, Starbucks is enhancing its compensation package to boost its competitive edge and retain workers. In addition to protecting its Bean Stock options grant program and healthcare coverage for full and part-time staffers, Starbucks has made this fiscal year's 401(k) retirement savings plan better for hourly employees and plans to significantly increase its investment in that program.
Still, the trimming around the edges is what gnaws at many of Starbucks' hourly workers who, like most in the industry, earn close to minimum wage. According to government figures, full-time workers in the food preparation and service industry take home about $20,000 a year, not a huge amount more than the federal poverty line of around $14,000 a year for a family of two.
Erik Forman, a Starbucks barista in Minnesota's Mall of America and a member of the scrappy IWW Starbucks Workers Union, said cafe workers bore the brunt of management's hard decisions but have not shared the rewards of the turnaround.
"It's just been cut after cut ... The fact is that it's just gotten harder and harder to survive working this job," Forman said. "If Starbucks is doing what every other company is doing, then what makes it a different kind of company?"
COUNTER CULTURE
Wall Street analysts, who think in 12- to 18-month blocks of time, cheered when Starbucks slashed costs and took a more aggressive approach to selling.
While the financial community calls for Starbucks to put an even tighter squeeze on labor, some analysts acknowledge that cuts to employee perks could create higher turnover in future. That in turn could crimp recruiting just as the economy and employment pictures improve. Starbucks' size already makes it difficult to find the high-caliber workers it needs.
Interviews with two dozen current and former cafe baristas and managers around the United States confirm a growing sense that the downturn and two-year overhaul are transforming the company's famously idealistic, employee-centric culture into one that is increasingly pragmatic and corporate.
"The culture is different. It's not bad," said a store manager from the Northeast, who was a big supporter of Starbucks management. Employees are defensive of the culture and dislike change, the manager added. "There are people who used to be successful who aren't or can't be anymore."
While Starbucks has been grappling with the recession and problems of its own making, new rivals have stepped up their game. Dunkin' Donuts started selling lattes popularized by its upscale rival. McDonald's Corp, the world's biggest restaurant chain, threw its weight behind new espresso drinks and frappes. At the same time, a wave of independent upscale operators like Intelligentsia Coffee & Tea stepped in to the gap Starbucks left open when it went down market to capture enough customers to support its growth.
"The hard shift happened when the economy started to tank," said a loyal Seattle-area barista. He said Starbucks was more interested in progressive things such as fair trade coffee when he joined four years ago. "Now it's like Starbucks and McDonald's are a comparable thing. They're now a competitor of ours," he said.
ENTER THE BEAN COUNTERS
Starbucks built its global brand on a building boom so exuberant that it was lampooned with this 1998 headline in the Onion: "New Starbucks Opens In Rest Room Of Existing Starbucks".
The chain boasted more than 10,000 U.S. cafes, some across the street from each other, when the expansion hit a wall in late 2007. The crash laid bare problems, like cannibalization and undisciplined operations, that were brewing for years.
The housing bubble hadn't yet burst in November 2007, when Starbucks reported its first-ever quarterly drop in visits to established U.S. cafes. Soon after, sales began to fall and there wasn't enough money to support its huge overhead. As profits plunged, the economy cratered and investors headed for the exits.
Schultz hit the brakes on construction, shuttered more than 900 cafes and slashed more than half a billion dollars in operating costs. Executives said layoffs, scheduling software, labor management, waste reduction and efficiency strategies borrowed from Japanese manufacturers contributed to those savings.
After two years of quarterly declines, sales at established restaurants turned up for the period ended December 2009 and since have stayed in positive territory. Starbucks has been reporting record earnings and at the end of October 2010, its shares were flirting with $30 -- still short of their apex near $40 in 2006, but significantly above their sub $8 turnaround nadir in late 2008.
Schultz now has the difficult job of squeezing more sales out of Starbucks' U.S. business. The plan is to corner the middle market with its more mainstream Seattle's Best Coffee brand and to sell more Starbucks products, like its new Via instant coffee, outside its namesake cafes.
Cash flow from Starbucks' U.S. operation, which generates about 75 percent of overall revenue, will fund the company's next big expansion phase in overseas markets like China.
The CEO, who lost his rock star status during Starbucks' darkest hours, has his mojo back. He is talking publicly about plans to pen a second book focusing on the turnaround. He also is in the position to add tens of millions of dollars to his already abundant wealth, thanks to options granted when Starbucks shares were trading for less than $10.
THE DAILY GRIND
Schultz won kudos from the rank and file when he cut his own pay during the retrenchment. He also angered them with the purchase of a $45 million corporate jet.
Shareholders, some of whom reaped big gains betting on the turnaround, were rewarded with their first-ever dividend and, soon after, a 30-percent dividend increase.
Employees, who got their underwater options repriced during the fix-it years, doubt that they are in line for payouts anywhere near the magnitude enjoyed by investors.
"In the last two years, the company has become more dedicated to its shareholders and less to its employees," said Omaha barista Tyler Swain, a vocal union member.
The company's largest investors declined comment for this article but an analyst for one firm with holdings, who spoke on the condition of anonymity, said Starbucks' benefits are "super luxurious" and that baristas would be "better to shoosh up about it."
Health insurance has always been one of the big draws for staff. In fiscal 2009, Starbucks spent roughly $300 million -- more than it spent on coffee -- to provide that benefit.
CEO Schultz this summer told Fortune that an investor cut his position in Starbucks after he refused to budge on healthcare. Schultz has stuck to his guns because he saw what happened when his father, who worked a string of low-wage jobs, got sick or injured and couldn't work.
Starbucks picks up 75 percent of the cost of providing healthcare to workers who put in more than 20 hours a week. Last summer, Starbucks asked employees to pick up a larger share of the growing cost and increased co-pays for office visits and medications.
Peet's Coffee & Tea Inc, which has historical ties to Starbucks, is a rare direct competitor that provides full health coverage for employees. Most have plans similar to those offered by McDonald's, which has plans with benefits of up to $10,000 annually.
Hourly cafe workers say Starbucks' recent efforts to boost quality and standardize tasks have piled on extra work, adding an assembly-line feel to their jobs. On top of that, in 2009, they lost their one personal day per year. The company also took away their ability to earn 40 hours of vacation in their first year and cut the maximum for years two and three in half to 40 hours.
These days, restaurants are protecting profits by holding the line on labor costs. Starbucks is no different. Staffers and managers told Reuters that starting pay appeared to be getting closer to minimum wage and that the raises baristas get after their first six months are smaller.
Starbucks representatives said the company offers fair and competitive wages, which vary by market. They added that they did not have the information to say whether the gap between the company's hourly pay and minimum wage had changed, but noted that Starbucks recently raised pay in several high cost of living metropolitan markets due to competitive pressures.
Research from compensation data firm PayScale.com showed that median hourly pay for a worker with less than three years experience was $8.30 at McDonald's, $10 at Starbucks and $10.15 at Panera Bread Co.
Panera and Chipotle Mexican Grill are fast-growing chains that could compete with Starbucks for workers since they are selling premium food at premium prices. PayScale.com did not have wage data for Chipotle. Neither chain offers full health benefits to hourly workers.
Peter Sachs, who worked at a Silicon Valley cafe for four years ending in 2002, said he noticed big changes when he returned as a Chicago barista for two months in 2008.
"One of the things that was a little shocking to me was that they were starting us at 25 cents above minimum wage," said Sachs, who said he was paid about $2 above minimum wage when he joined the company for the first time in 1998.
SELLING BEHAVIOR
For years, Starbucks products sold themselves. No longer.
Baristas, who always have had a role in turning customers on to new drinks, are the stars of a plan to debut new products in cafes before they are sold in grocery stores and other retail venues.
Swanson, the former manager from Florida, remembered that the company started urging her to hire baristas with so-called selling behaviors. "The same people who make customers come back over and over every day because they really like them, they're not people with selling behaviors," she said.
Baristas' selling skills were put to the test when the company launched Via "ready brew," a powdered instant coffee product that Schultz predicted would revolutionize the moribund category.
Schultz had a lot riding on Via. The guy who built Starbucks wanted to bring innovation back to the brand and was looking for a product that would become a billion-dollar business, like Frappuccino did after its launch in 2005.
He spent significant money to launch, sell and market Via. It exceeded early sales expectations and Starbucks is building a portfolio of Via products, including new flavored varieties.
When the charge to sell Via came down from high, some district managers took up the cause with a little too much gusto. Morale in some cafes took a hit when some unnerved -- or simply overly ambitious -- partners cut corners to hit ever-rising targets meant to motivate baristas. A popular scheme included giving customers a free drink in exchange for buying Via. Some managers even went so far as to buy Via to meet goals.
Starbucks told Reuters in a statement in August that "there have been limited instances where some beverage sales have been rung up as Via sales. This, however, does not have an impact on Via reaching $100 (million) in global sales in just 10 months. With more than 16,000 stores around the world, isolated incidents and mistakes do occur."
Twelve people, including baristas, store managers and customers in locations such as New York City, New Jersey, Virginia, Omaha, St. Louis, Oregon, San Francisco and Los Angeles, said they witnessed the activity first hand. They included a reporter in Reuters' Los Angeles office, who for two days in a row in August had his $3.65 tall Mocha Frappuccino comped in exchange for buying a $2.95 packet of Via.
Some analysts compared the misrung sales to using specials like buy one/get one free, but Bernstein Research's Sara Senatore said: "You want to see healthy growth, but you want to be sure its sustainable."
A spokesman this week said Starbucks' emphasis on Via sales were similar to prior launches, including Pike Place brew.
Some employees said they quit over what they called "unethical" Via sales practices, while others suggested that Schultz go back and read "Pour Your Heart Into It."
A Tucson barista, who said he was the top Via salesman in his cafe without cheating, wondered why he was being pushed so hard to sell a product that seemed so out of sync with the in-store experience that makes Starbucks great.
"Starbucks should not be about how to sell stuff. That just tells me that we're in the wrong place," he said. "We should be focused on things that are darn good and are going to make your day better right now."
Bradford Hudson, an assistant professor at Boston University's School of Hospitality Administration, agreed: "I think this is an existential moment for Starbucks."
"When you get so large that you can't be a luxury product any more, but you are, what to you do with yourself?" asked Hudson, who has built the curriculum for two classes around a famous Starbucks case study. "I think it's going to be hard for them to capture that magic in the bottle again."
(Reporting by Lisa Baertlein; editing by Claudia Parsons and Jim Impoco)
