By Barbara Gray, CFA – March 26, 2012 – I was so moved by Starbucks’ recent Annual General Meeting (AGM) and the words spoken by Howard Schultz that I felt compelled to share my thoughts. Although I have not yet had the pleasure of meeting Mr. Schultz, I have a deep admiration for him. Looking back, I think reading his book “Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time” back in 2006 was really the turning point in my career as an Analyst to start thinking about companies in a more holistic sense. And part of my original conviction on lululemon (LULU-NASDAQ; LLL-TSX) came from the parallels I saw between lululemon and Starbucks as he spoke about how “our goal was to build a great company – one that stood for something – one that valued the authenticity of its product and the power of its passion”.
I digress, back to the AGM… I wish I could have gone down to Seattle to attend the AGM in person but logistics were too difficult with Brady so I had to make due with logging into the webcast. I have to admit this is the first time I have attended (virtually) a Starbucks’ AGM but wow – what a difference from your typical boring soulless corporate AGM! And what I loved most was the real sense of passion and caring conveyed throughout the meeting. The AGM lasted over two hours and I actually took ten pages of notes – so I will just share with you the highlights.
What I loved is how Schultz started his speech talking about the values that define the company and how Starbucks is a different kind of company as it has been built through the lens of humanity. And near the end of the meeting, the company’s CFO, Troy Alstead, emphasized that “our value comes from our values” and talked about how important it is to do the right things for the right reasons and related how Starbucks’ shareholder value is derived by its core values. Although this makes intuitive sense, unfortunately this is a radical departure from the views of most investors who suffer from financial myopia. But to these cynics, I say take a look at what Starbucks has achieved since its IPO…
When Starbucks went public in 1992, the company had 300 employees, 150 coffee houses, and less than $150 million in revenue. Over the past twenty years it has grown into a global coffee empire with 149,000 employees, 17,000 coffee houses in 58 countries, and revenue of $12 billion. And how did the shareholders do? Well, its market cap was $250 million when it went public and just reached $40 billion – up 160 fold – which by my math equates to a CAGR (compound annual growth rate) of 29% a year!
I am ashamed to admit that when I used to research companies, it didn’t even occur to me to look at a company’s core values. And looking back to when I studied for the Chartered Financial Analyst (CFA) designation, even though the curriculum places a huge emphasis on Ethics, I don’t recall any of the textbooks covering the topic of core values. I believe this is a significant oversight as I do more and more research, I realize how important it is for companies to have an authentic set of core values to guide them. Starbucks is a great example of this as one of its principles of how it lives its mission is “we can be a force for positive action – bringing together our partners, customers, and the community to contribute every day.” And this is not just talk.
During his speech, Schultz shared that Starbucks will be giving the profits back to the community for two of its stores in LA and Harlem. In addition, in a time when most companies elect to reduce costs by locating new plants outside the United States, Starbucks has decided to open a new roasting facility for its VIA instant coffee product in Augusta, Georgia that will create 150 to 200 new jobs. And on top of this, Schultz decided to take the unorthodox approach of using Starbucks’ scale for good and created the Jobs Initiative Program which has raised millions of dollars from over 600,000 customers donating money to establish a national network of loans for small businesses. The AGM actually took an evangelical tone as Reverend Calvin Butts III, pastor of the Abyssinian Baptist Church in Harlem, took the stage and shared his admiration for Schultz and how what he represents is so important.
And Starbucks is not just resting still. During the AGM, Jeff Hansberry, President of Channel Development, shared how the company will be able to leverage the deep emotional connection consumers have to the Starbucks brand with its unique ecosystem of Starbucks stores, retail distribution channels, and strong digital presence (40 million Facebook fans and 2 million Twitter followers) to launch innovative new concepts. At the AGM, Starbucks announced the launch of three new concepts : 1) Verismo system (at-home premium single cup espresso machine) it developed with Germany’s Krüger GmbH & Co.; 2) Starbucks Refreshers (a new natural energy product that leverages new technology around green coffee extract); and 3) Evolution Fresh (its new fresh juice/health store concept). Personally, I believe the most important new concept from a strategic perspective is Evolution Fresh as it marks Starbucks’ entrée into the $50 billion Health and Wellness market.
Cliff Burrows, President of Americas, spoke about how the Starbucks Card is now used for 1 in 4 transactions and how there were 26 mobile transactions last year. I downloaded the Starbucks app on my IPhone back in the Fall and I love the ease and convenience of using it over cash and it seems like more and more people are starting to use it. He also mentioned how Starbucks is launching a new crowd-sourced community program called “Vote, Give, Grow” where customers can vote on how $4 million is allocated to non-profits. Michelle Gass, President of Europe, Middle East, Africa, who architected the U.S. turnaround spoke about how she is working to re-introduce Starbucks to Europe by re-training all the baristas and creating personal connections by putting names on the partners and names on the customers’ cups. John Culver, President of Asia and China, shared how Starbucks formed a $1 million cup fund to support its partners in Japan impacted by the earthquake and spoke about how values truly do transcend cultures. He also spoke about how Starbucks plans to build its brand in a holistic way and have over 1,500 stores in Mainland China by 2015, representing Starbucks’ highest retail growth opportunity, with the added benefit of the region offering the highest profit margins.
The bottom-line is the strong and authentic stakeholder foundation of a heart and soul company, like Starbucks, will convert into a high velocity of social capital. This will accelerate its value creation process by serving to lower the company’s risk profile and act as a growth catalyst for it to continue to grow its comparable store sales, further expand its global footprint, and launch new concepts such as Evolution Fresh. And throughout Starbucks’ AGM, my mind kept wandering back to the inspiring speech delivered by Tim O’Reilly, Founder of O’Reilly Media, at the recent SXSW Interactive Conference…how companies need to be held to a higher standard and his advice of not just doing good-ism but “do good by doing business that matters”.
Disclosure: I have a LONG position in Starbucks Corporation (SBUX-NASDAQ).