Bus 645- Strategic Management- Chapter 11 Closing Case Starbucks: Taking a Stand on Social Issues
When Howard Schultz founded Starbucks in 1987, he wanted to create a company that would genuinely care for the well-being of its employees. He had been very influenced by his memories of his father, noting that his father “struggled a great deal and never made more than $20,000 a year, and his work was never valued, emotionally or physically, by his employer … This was an injustice … I want our employees to know we value them.” He also believed that happy employees are the key to competitiveness and growth. As he stated: “We can’t achieve our strategic objectives without a work force of people who are immersed in the same commitment as management. Our only sustainable advantage is the quality of our work force. We’re building a national retail company by creating pride in–and stake in–the outcome of our labor.”
Schulz set out to accomplish his goals by creating an empowering corporate culture, exceptional employee benefits, and employee stock ownership programs. While Starbucks enforces almost fanatical standards of coffee quality and customer service, the culture at Starbucks towards employees is laid back and supportive. Employees are empowered to make decisions without constant referral to management, and are encouraged to think of themselves as partners in the business. Starbucks wants employees to use their best judgment in making decisions and will stand behind them. This is reinforced through generous compensation and benefits packages.
In 2000, Schultz announced that he was resigning as CEO and left the firm to pursue other ventures (though he remained chairman of the board of directors). However, after Starbucks began to suffer from slumping net income and decreasing share price, Schultz returned to the helm in 2008. Rather than cutting costs and reducing the work force, Schulz announced his “Transformation Agenda”–a controversial plan to invest in Starbucks’ employees, environment, and community. His plan included:
Competitive employee compensation plans that include equity-based compensation for nonexecutive partners. In 2013, $230 million was paid out in equity awards. In 2015, Starbucks gave all baristas and supervisors a pay raise and increased starting pay rates across the United States. In 2018, Starbucks’s U.S. baristas earned between $7 and $15 an hour (with an average of $9 an hour), plus an average of $742 a year in cash bonus, $286 in stock bonus, $442 in profit sharing, and $1,095 in tips.
Industry-leading health care benefits and 401K benefits for both part-time and full-time workers. Other companies that offer health benefits to part-time workers typically only do so for employees who work at least 30 hours a week. Starbucks broke with industry norms by creating benefits for employees who work at least 20 hours a week.
Tuition reimbursement for students. In June 2014, Starbucks unveiled a “College Achievement Plan” wherein employees who work more than 20 hours a week can work towards a bachelor’s degree through an online program from Arizona State University.
An ethical sourcing plan. Starbucks’ coffee must be purchased from suppliers that adhere to Starbucks’ “C.A.F.E.” standards. These standards include practices related to product quality, economic accountability, and transparency (e.g., suppliers must provide evidence to demonstrate that the price Starbucks pays reaches the farmer), social responsibility (e.g., third-party verifiers provide audits to ensure that suppliers are using safe, fair, and humane working and living conditions, including minimum-wage requirements and the prohibition of child and forced labor), and environmental leadership (e.g., measures to manage waste, protect water quality, and reduce use of agrochemicals).
Whether investors and consumers were inspired by the Agenda, were encouraged by Schultz’s return, or just floated up with the recovering economy is unclear, but Starbuck’s stock price and balance sheet roared back to life. Revenues and net income began to climb again and, by September 2014, Starbucks’ sales had reached $16.4 billion–160% of what sales had been when Schultz returned as CEO and an all-time high for the company. With a 12.6% net margin and 19.2% return on assets, Starbucks was one of the most profitable food retailers in the world.
In late 2014 and early 2015, Schultz decided to leverage the company’s influence in the world by speaking out on such issues as gay marriage (Schultz supports it), gun-carrying laws (Starbucks requests that people not carry guns into their locations, even in states that permit it), and treatment of veterans (in March 2014, Schultz committed $30 million of his own money to posttraumatic stress disorder programs and other initiatives to help veterans, and vowed to hire 10,000 veterans and military spouses by 2018).
The company drew some ire in taking on issues that bear little relationship to its core activities. Critics admonished that such initiatives risked alienating some consumers and investors, and creating elevated expectations that the company might not always be able to meet. As Schultz noted, “I can tell you the organization is not thrilled when I walk into a room and say we’re now going to take on veterans (issues).” But he adds, “The size and the scale of the company and the platform that we have allows us, I think, to project a voice into the debate, and hopefully that’s for good … We are leading [Starbucks] to try to redefine the role and responsibility of a public company.”
Sources: C. Birkner, “Taking Care of Their Own,” Marketing News, February, pp. 44–49; M. Rothman, “Into the Black,” Inc., January 1993, p. 58; D. Ritter, “3 Reasons It’s Hard to Hate Starbucks,” Wall Street Cheat Sheet, July 6, 2014; www.usatoday.com, A. Gonzalez, “Starbucks as Citizen: Schultz Acts Boldly on Social, Political Issues,” Seattle Times, March 15, 2015; www.seattletimes.com, www.starbucks.com (accessed April 28, 2015); Yahoo Finance; Hoovers; Data from www.glassdoor.com retrieved October 13, 2018.
Case Discussion Questions
What are the pros and cons of Starbucks taking a stance on ethical issues such as minimum wage requirements, sustainable growing practices, and more? What do you think motivated Schultz to implement these standards? Explain your answer.
Do you think it makes sense for companies to hold themselves to a higher standard than the law? Do you think it makes sense for companies to utilize ethical standards that might not increase profitability? Explain your answer.
How much influence do you think a company with the size and reach of Starbucks could have on the legal and ethical environment of the countries in which it operates? Explain your answer.