Here is another outstanding interview conducted by Allen Webb  in the McKinsey Conversations with Global Leaders series. To watch the conversation in a video interactive and/or download a PDF of the transcript, please click here.

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The company once grew fast. Now CEO Howard Schultz wants it to grow with discipline—in emerging and developed markets alike.

Source: Strategy Practice

When Howard Schultz returned to Starbucks as CEO in early 2008, after a hiatus of nearly eight years, he quickly concluded that growth had become a “carcinogen” and that the company needed a transformation in its culture and operating approach. As he was leading that change process, Schultz also chronicled it in his new book, Onward: How Starbucks Fought for Its Life without Losing Its Soul. In this edited conversation with McKinsey’s Allen Webb, Schultz answers some of the questions raised in his book, describes the insidious impact of breakneck growth on Starbucks, and explains how he hopes to keep the company on a healthier growth trajectory. Emerging markets have a significant role to play in powering future growth. So does Starbucks’ transition into what Schultz hopes will be the first company to excel as both a retailer and a purveyor—in supermarkets and other mass-market channels—of consumer packaged goods.

Included with this edited summary of Schultz’s comments are video excerpts from the actual interview. The CEO describes his plans for the company to grow with discipline—in emerging and developed markets alike.

The Quarterly: In your book, you say that growth became a carcinogen at Starbucks. What do you mean by that?

Let me try and put growth in the context of the last 15 or 20 years of Starbucks’ life, and then I’ll try and specifically answer the question. You have to understand that in 1987, Starbucks had 11 stores and 100 employees, and we had this dream to create a national brand around coffee and a unique experience in our stores that, hopefully, we would be able to extend from the West Coast to around the country.

And from that point on, the dream started becoming a reality, and it almost had a life of its own. What we were building seemed to work wherever we opened stores. We had a little bit of luck and business acumen and perhaps just the fortuitous opportunity that comes along with perfect timing. For 15-plus years or so, almost everything we did worked as we built this very unique brand around coffee and a values-based organization.

When you look at growth as a strategy, it becomes somewhat seductive, addictive. But growth should not be—and is not—a strategy; it’s a tactic. The primary lesson I’ve learned over the years is that growth and success can cover up a lot of mistakes. We’re going to make more mistakes. But we’ve learned a great lesson. And as we return the company to growth, it’ll be disciplined, profitable growth for the right reasons—a different kind of growth.

So turning the clock back to 2008, what were some of the things you were seeing that felt carcinogenic?

When we reviewed some of the underperforming stores, I was horrified to learn that the stores that we ultimately had to close had been open less than 18 months. When you look at that—the money invested and the money that we had to write off—those decisions were made with a lack of discipline. Also, I think there were times, during that period when we were chasing growth, when we were making decisions that were kind of complicit with the stock price. That’s a very, very dangerous road to go down.

One thing you did, soon after returning, was to stop reporting same-store sales.

Correct.

Why did you do that, and how did it work out?

Well, there’s a fine line between trying to manage the company in the most appropriate fiduciary way—and at the same time providing analysts with 100 percent transparency, which they deserve. And I say “fine line” because you don’t want to start making decisions that are based on a P/E or stock price. However, when a P/E gets to a certain point and a stock price gets to a certain point, you begin to believe that the organization, the enterprise, is worth that. And then you get to a point where you’re managing to either uphold it or to increase it.

An albatross around the neck of most retailers and restaurant companies is this metric that Wall Street created many, many years ago: the calculation of the growth of stores open for more than one year. Taking one unit and seeing whether or not that unit is growing, year over year, is a solid case study of whether a company is healthy, but not the only one. In any event, Wall Street became enamored with this number. And as a result of that, most retailers and restaurants report comp-store sales on a monthly basis. What that does is produce tremendous fluctuation in stock prices on a monthly basis, because God forbid you get a down month.

I thought, when I came back, that we had become linked internally to the comp-store sales number, and we started making decisions that were driving incremental revenue and perhaps were not consistent with the equity of the brand. I wanted to remove that albatross from the necks of the operators.

So I announced, one day when I came back, that we were going to stop reporting monthly comps. And you would’ve thought the world came to an end. It didn’t come to an end. Now, at the time, since we were not performing, I was accused of not being transparent and trying to hide things. But what I was trying to do was make sure that our people were managing the business for the most appropriate constituent, which is the customer.

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To watch the conversation in a video interactive and/or download a PDF of the transcript, please click here.

Howard Schultz

Born July 19, 1953, in Brooklyn, New York
Married, with 2 children
Graduated with a BA in communications in 1975 from Northern Michigan University
Starbucks (1982–85, 1987–present)
Chairman, CEO, and president (2008–present)
Chairman (2000–08)
Chairman and CEO (1987–2000)
President (1987–94)
Director of retail operations and marketing (1982–85)
Il Giornale Coffee (1986–87)
Founder, chairman, CEO, and president

Allen Webb is a member of McKinsey Publishing and is based in McKinsey’s Seattle office.