Q2 Earnings and the Continuing Path Forward

Today, we reported financial results for our fiscal second quarter and provided financial targets for the three-year period of fiscal year 2009 through 2011. I wanted to take this opportunity to personally share some of the exciting news with you.

Even though we are experiencing some difficulties as a result of the tough operating environment in the U.S. and other factors, I am very proud of our accomplishments thus far and I am sure that we are on the right track to transform our customers’ experience. In just a few months, we have done some pretty impressive things, including the successful launch of Pike Place Roast™, which is our No. 1 whole bean coffee. Congratulations! Please keep sampling and sharing this great coffee with your brewed coffee customers. To say that we have been busy is an understatement! I want you to know that I am aware of how hard everyone is working to strategically and swiftly move Starbucks forward, and as always, I thank you for stepping up to the challenge.

As part of the next phase of our Transformation Agenda, we will focus on our core beverage business, specifically our cold and blended categories, which will invigorate our cold beverage offerings. This summer we will introduce three innovative beverage platforms that, we believe, consumers won’t be able to find at other establishments and will differentiate us in the category. The names of these delicious new beverages and specific introduction dates will be announced as we get closer to the implementation rollout.

Three Innovative Beverage Platforms

• The first new beverage platform represents Starbucks entry into the energy beverage category, which is a multi-billion dollar market segment. Our entry offers a significant opportunity for us to complement our current customers’ lifestyles and reach out to new customers. Other entrants into this space use caffeine as a supplement in their energy beverages, which makes Starbucks a natural—and gives us a unique position in the marketplace with Starbucks coffee as well as build equity in our brand.

With this introduction – and for the first time in the company’s history – we are leveraging the assets of our relationship with Pepsi to introduce Starbucks DoubleShot® with energy across multiple channels – in our retail stores and through the more traditional Consumer Products Group (CPG) channels.

• Living a healthy lifestyle is a personal focus of mine, and I am pleased that Starbucks is launching a Health and Wellness platform that will include some great product offerings. We also see this as an important long-term growth driver for the company. This summer, we will make our first significant step forward into this category when we introduce a Health and Wellness beverage platform, with new food offerings joining the platform later in the calendar year.

Our customers have told us that they are looking for healthy beverage alternatives that taste great, with moderate calories. We listened to them and we believe we have hit the mark with a protein and fruit-blended beverage that we have developed. This delicious drink is a made from simple and wholesome ingredients that provide the benefit of sustained energy.

We have been testing these beverages in our stores, and they have received rave reviews from our customers and partners, even exceeding our early expectations. We have a deep pipeline of many new products that we plan to introduce through the rest of the year. We are confident that Starbucks can be a destination for great healthy beverages and food.

• For some time, we have been searching all over the world for a cold beverage concept that would create the type of taste and customer excitement that our Frappuccino^® Blended Beverage did more than 10 years ago. Finally, on a recent trip to Italy, we found a unique product that we believe will be a perfect complement to our overall beverage business. This exclusive, proprietary product—which is refreshing and indulgent all at the same time—was developed through a partnership with our Italian supplier and represents a new category of beverage. With its unique frozen, smooth texture and distinctive taste profiles, ranging from fruit-based to dairy-based to yogurt-based ingredients, we are sure that these innovative offerings will attract new customers.

We are rapidly developing the product line-up, and have plans to initially launch these new beverages by mid-summer in parts of California, where there is a strong preference for robust cold beverages. I haven’t tasted anything this good in a long time. We are confident that our unique new beverage category will be received with great enthusiasm by our customers in California, and set the stage for our national launch in fiscal year ’09.

While beverages are our core competency and our primary focus, we also remain committed to enhancing our complementary food offerings – which, includes successfully replacing our warmed breakfast sandwiches with healthy, unique breakfast alternatives. We have made great progress in this area…and with other products in our food assortment – which all have a special tie-in to our beverage Health and Wellness focus. Our Food transformation begins with the launch of new, nutritious breakfast foods in September, and continues with the replacement of our current breakfast sandwiches in the first quarter of fiscal year ‘09. We will follow this with the roll-out of a new bakery and chilled foods program.

As I have stated many times since I returned as ceo, 2008 is a year of transition for Starbucks. It is a year for us to re-energize and sharpen our focus on the brand and our business. We are invigorated and we’re coming back strong in delivering innovation and creativity. Although our investment in our bold initiatives may adversely impact our results in the near term, we must aggressively pursue initiatives that position us to capture long-term opportunities. So stay tuned…This is just the beginning!

Onward,

Howard

Commitment to our Core and our Customer’s Experience

Yesterday, we pre-announced our preliminary second quarter results and our revised earnings per share target for fiscal 2008 to the financial community, which reiterated the negative effect that the economy is having on our business. Like many other retailers and consumer brands, especially at the premium end, we are experiencing a down turn in customer traffic. We have conducted research that validates that our customers are not going to other places for their coffee experience, instead they are visiting us less frequently as the result of economic pressures. However, I remain concerned about the macroeconomics of our current business environment and the duration of this challenging period in the U.S. economy.

Although these are difficult days, I promise you that we will manage through them in a way that will provide long-term value for you and our shareholders. This is the time when we must do everything within our power to enhance the customer experience through constant innovation and stellar customer service as well as partner engagement. With the recent success of the Espresso Excellence Training and launch of Pike Place Roast, we have created great excitement with our partners and renewed customer interest in our brewed coffee platform, which I believe, is an early positive sign of the potential success of our transformation.

As I have previously said, we will continue to focus on our core and be more innovative in the next 12 to 18 months than we have been in the last five years. This is a big statement that comes with a tremendous amount of responsibility, but the leadership team is up to the challenge. We are laser focused on every aspect of our business including managing our expenses and making the proper investments to move the business forward.

When we introduced the Starbucks Transformation Agenda in January, we promised to take a critical look at all parts of our business, without exception. Although it is painful, we are revisiting and refining certain business strategies that are not directly related to our core. Therefore, we have decided this is the appropriate time to restructure the Entertainment business. Our new Entertainment business strategy will focus on our Digital Strategy and Core Content. Digital Strategy includes Starbucks existing strategic relationships with Apple and AT&T, as well as the in-store “Now Playing” LCD screens and potential expansion into new spaces. The Core Content area includes Starbucks current relationship with the William Morris Agency that enables the agency to identify book projects that we can offer in our stores as well as provide strategic counsel on opportunities in the entertainment space. We will partner with the Concord Music Group to manage the Hear Music Record Label and leverage our superb curatorial voice to offer compelling entertainment options, including our music compilations as well as existing and new recording artists.

Ken Lombard, senior vice president and president of Starbucks Entertainment, has left the company. Under Ken’s leadership, Starbucks enjoyed success across many entertainment platforms, and I am personally grateful for Ken’s numerous contributions to the company. Chris Bruzzo, chief technology officer, has been promoted to senior vice president and will assume the leadership helm of Entertainment as part of his responsibilities, which you will learn more about in an upcoming organization announcement. The new Entertainment business will be more focused on our core, and will have fewer SKUs. Additionally, the team will be significantly smaller. The new organization is currently being finalized and partners within the Entertainment business will learn more about the structure within the next two weeks. Rest assured that we will make every effort to assist displaced partners by either redeploying them to another role within Starbucks or assisting them with their job search outside of the company. I would like to personally thank each of them for their contributions to our business and acknowledge their numerous successes in this area including: three No. 1 books on the New York Times Bestseller’s List, eight Grammy® Awards for Ray Charles’ Genius Loves Company CD, and the introduction of emerging artists like Hilary McRae and Sia.

In closing, I would like to reiterate that we are still in the early stages of our transformation and efforts to enhance our customers’ experience. There is still much work to be done, but we will succeed. Our summer, fall, and holiday promotional periods are coming up, which, I believe, will be enthusiastically embraced by our customers and partners.

We are off to a good start and I thank you for your commitment and tireless efforts to transform Starbucks for the future.

Onward,

Howard

Together Let’s Make This A Better Earth

I encourage you to join us in a great cause by using your Starbucks card–we’ll donate 5-cents for each purchase–or donating directly to our partner, Conversation International starting today, on Earth Day 2008. Together, let’s make this a better place for each other and our families. Here’s the press release:

In celebration of Earth Day—and to help ensure that the principles of Earth Day last all year long—Starbucks and Conservation International (CI) today announced the beginning of a new campaign to engage consumers to join their efforts to address climate change and create a better future for coffee farmers. This effort kicks off with two in-store opportunities for consumers to give back to the environment, including the use of their Starbucks Card and the purchase of Pike Place Roast, Starbucks new responsibly grown, ethically traded coffee.

On April 22, Earth Day, Starbucks will donate five cents to CI for every purchase made that day with a Starbucks Card at any Starbucks store in the U.S. and Canada. This is a one-time benefit afforded by the new Starbucks Card Rewards program. Every $10 donated will result in CI planting 10 trees in Chiapas, Mexico as part of an upcoming joint pilot project between the two organizations.

“Since 1998, Starbucks and CI have collaborated to demonstrate that coffee can be grown in ways that support communities and preserve the environment,” said Ben Packard, Starbucks vice president of Corporate Social Responsibility. “Through this next phase of our relationship, we hope to extend our leadership in coffee sustainability and to invite our customers to join us in promoting the protection of forests as a solution to climate change.”

CI and Starbucks recently announced a five-year global commitment to support farming communities, encourage the protection of their land, water and forests, including a three year multi-million dollar financial commitment. By taking conservation beyond coffee farms and into surrounding landscapes, CI and Starbucks are addressing the most pressing environmental issue of our day—climate change. Beginning in Mexico and Indonesia, Starbucks and CI will pilot projects that create climate solutions through the protection of standing forests and restoration of degraded landscapes.

“The issue of climate change is everyone’s issue, and by engaging Starbucks customers in one of the solutions to climate change is very encouraging,” said Glenn Prickett, Senior Vice President and Executive Director, Center for Environmental Leadership in Business, Conservation International. “Buying a cup of coffee may seem like too small an action to make a difference, but simple changes can be multiplied to reach a scale never before realized—and we are saving thousands of acres of tropical forests in the process.”

Almost 20 percent of all carbon dioxide emissions result from the burning and clearing of forests, nearly double the emissions from all of the world’s cars, trucks, and trains combined. Starbucks investment in and support for local coffee growers and the communities that help keep forests intact will help ensure that every cup of coffee brewed produces tangible benefits for both local and global communities.

Earth Day is also when the new mark will be launched that symbolizes Starbucks ongoing commitment to coffee communities and to environmental sustainability through the expanded relationship with CI. This mark will first appear on Pike Place Roast™. Coffee bearing the new mark is purchased from C.A.F.E. Practices approved suppliers. These suppliers have undergone rigorous third-party inspections in the field. C.A.F.E. Practices—Starbucks sustainable coffee buying program—is designed to build long-term relationships with suppliers of high quality coffee who demonstrate excellent performance on sustainability criteria addressing issues such as healthy workplace conditions and conservation of natural ecosystems.

In addition, consumers can support the purchase of trees for Chiapas coffee farmers by contributing through the CI website at www.conservation.org/coffee.

Building Something to Admire

Each year Interbrand conducts a brand valuation and love study and each year Starbucks ranks among the most beloved. As proud as that makes us, what’s telling are the categories in which we rate highest and the company we keep.

• Which brands inspire you most: Apple, Nike Coca-Cola, Google and Starbucks
• What brand can you not live without? Apple, None (tough category), Coca-Cola, Google and Starbucks

What these brands have in common are an outstanding experience, innovation, passion and a team of people behind the brands that show up every day to make the brand worth admiring.

Onward

Pick of The Week, Starbucks+iTunes

Wanted to pass this along to you as a tax-day bright spot: Starbucks & iTunes Bring Complimentary Digital Music and Video Offerings to Customers with Starbucks “Pick of the Week” More Than 1.5 Million Downloads Every Week Driving Discovery of New Music and Music Videos
Starbucks (NASDAQ:SBUX) and iTunes today announced Pick of the Week, a new program offering coffeehouse customers a chance to discover complimentary new music and music videos each week. Pick of the Week featured artists include a great line-up with Carly Simon, Duffy, Counting Crows, Adele, Sia, Hilary McRae and many more.

Each Tuesday, more than 7,000 Starbucks company-operated locations in the US will stock a new Pick of the Week download card redeemable on the iTunes Store (www.itunes.com) for a complimentary song or music video hand-picked by the Starbucks Entertainment team and iTunes. The first Pick of the Week, available starting today at participating Starbucks locations, is Counting Crows’ new song, “Washington Square.”

“With Pick of the Week, Starbucks will leverage its trusted curatorial voice in music and entertainment through its partnership with iTunes to provide our customers with a world-class digital discovery experience,” said Ken Lombard, president Starbucks Entertainment.

“Pick of the Week provides an incredible way for Starbucks customers to discover great new music and videos for free on the iTunes Store,” said Eddy Cue, Apple’s vice president of iTunes. “With the world’s largest online catalog of music and video there is truly something for everyone.”

In October 2007, Starbucks and iTunes teamed up to launch Song of the Day, which offered Starbucks customers the opportunity to pick up a new complimentary download hand-picked by Starbucks Entertainment and iTunes each day for a month. Customer response to Song of the Day was unprecedented and resulted in more than 6 million songs downloaded. Realizing that a large audience hungry to discover new music and entertainment content had been tapped, Starbucks and iTunes worked together to create an ongoing version of the program to drive discovery and sales for great artists.

Once Pick of the Week cards are distributed, customers will then have up to 60 days from the date they are available to redeem their complimentary digital entertainment offering on iTunes.

Pick of the Week is the next phase in a partnership between Starbucks and Apple which began with the launch of the Starbucks Entertainment Area within iTunes in October 2006 and the launch of the iTunes Wi-Fi Music Store at select Starbucks locations in October of 2007. The iTunes Wi-Fi Music Store at Starbucks lets customers at participating Starbucks use the Wi-Fi network to wirelessly download music onto their iPhone, iPod touch or computer with no Wi-Fi connection fees or hotspot login.

The iTunes Wi-Fi Music Store at Starbucks is currently available in select Starbucks locations in the New York, Seattle and San Francisco metropolitan areas on its way to a national service rollout. Starbucks also offers the exclusive Now Playing feature on the iTunes Wi-Fi Music Store, which allows customers to instantly preview, buy and download the music currently playing overhead in participating Starbucks locations.

Onward

Splash Stick Is A Metaphor

Filed under Transformation Agenda #13: Thank you for the truly remarkable achievements last week! It reminds me of our early days … great coffee (the likes of which you can only get at Starbucks), proud partners engaged and having fun, and customers embracing the Starbucks Experience. Pike Place Roast™ and the reinvention of brewed coffee are off to a fantastic start. The coffee performed as we knew it would and our partners in over 7,000 U.S. company-operated stores brought it all to life.

This is just the beginning of enhancing the customer experience through coffee, demonstrating our relentless commitment to innovation, and increasing partner engagement. Let’s keep the momentum going and show the world our best days are ahead — one partner, one customer, one cup at a time.

Our efforts to enhance the Starbucks Experience — no matter how big or small — are making an impact. Let me give an example:

Friday morning, I walked into one of our stores and watched as a customer inserted a “splash stick” into the lid of his coffee cup. He recognized me and went out of his way to acknowledge this little item that has made Starbucks® coffee more enjoyable. As he left the store, he thanked me and said, “Only Starbucks would think of something like this!”

The experience stayed with me and I now recognize that the “splash stick,” is a metaphor for what we do every day to exceed the expectations of our customers. I don’t know another company that would go to such lengths to design the perfect tool to elegantly prevent a customer from spilling coffee … and that is exactly what we have done. The “splash stick,” although small in size, and brewed reinvention, although large in scale, are threaded together to enable customers, and all of you, to have an exceptional experience that only we can provide.

For years now, I have said that everything we do matters, our success is not an entitlement and we have to earn it. Last week, we earned our success and presented to the marketplace what we do best –- creating a blend of coffee that is best of class, and providing our customers with legendary service that brings the Starbucks Experience to life.

During countless interviews this past week, members of the media asked about the coffee wars and competition. As you know, I have always been mindful and respectful of all competitors small and large, but I have also been resolute in my position that this is not about anyone else but us. The economy, and its affect on consumer confidence, is a major challenge and will probably become more fragile before getting better. Competitors will continue their attempts to interfere with the relationship we have with our customers. However, my faith and confidence in our company has never been greater than it is today. Pike Place Roast™ is the first of many initiatives that we have planned to enhance the customer experience. The response (despite the strong economic headwind) from our customers is quite encouraging.

We will continue to innovate in a variety of unique ways. (Wait until you see what we have planned for summer, and for our leadership conference when we unveil our coffee and merchandise plan for Fall and Holiday). You will be blown away …

We have taken a great step forward (the first of many). The road ahead, I promise, will be filled with the pride and excitement we are all feeling with the launch of Pike Place Roast™. Get ready for lots more. We are just getting started.

Thank you for all that you do.

Onward,

Howard

Customer Training Night?

Over at Starbucks Gossip –an outstanding site (although I take exception with their tagline) that may be more about the community of customers, partners, fans and haters/cynics than we could have created ourselves–this comment was brought to my attention:

“Maybe [Starbucks] should have a “customer training night”. Customers can attend and be taught how to properly order a drink useing the correct slangs, symbols and phonetics.”

That sounds like a great idea. What do you think? Once a year, quarter or month? With 87,000 different possible combinations of drinks, we’ve got a lot to cover. Let’s get started…

Announcing Pike Place Roast

Next week we will experience one of the most significant moments in the history of our company. After much anticipation, we will introduce our new coffee, Pike Place Roast, which we will serve everyday in our U.S. company-operated stores. In my opinion and that of several others who have tasted this incredible coffee, Pike Place Roast is truly one of the best coffees we have offered our customers in our 37-year history and it will reinvent brewed coffee. It is so good that when we discussed names, it felt only right that it should be named after our home in Pike Place Market. We would never have considered naming the coffee after Pike Place unless it achieved all of our expectations in the cup…and it did that and more. And the original logo acknowledges our pride in our past and embraces our heritage as the world’s leading purveyor of specialty coffee.

As you know through various internal conversations about Pike Place Roast, it is a unique blend of the highest quality, sustainably grown beans. It is our first coffee to carry the new mark that symbolizes Starbucks renewed commitment, with Conservational International (CI), to support farmers, workers and their communities and help ensure that our coffee is responsibly grown and ethically traded. Pike Place Roast features Starbucks signature bold flavor with a smoother finish and showcases our 37 years of coffee roasting experience, knowledge and passion. Starbucks master coffee blenders and roasters have “done us proud.” And I would like to thank the following coffee and roasting technology partners for their dedication to creating a superb blend, with a flavor profile that reflects input from customers and baristas: Andrew Linnemann, Anthony Carroll, Geory Kurtzhals, Leslie Wolford, Dave Wickberg, Brad Anderson and Brian Hayes. In addition, I would like to recognize Katie Simons, Mindy Sagez and the other members of the Beverage team, who also helped to launch Pike Place Roast.

That said, please know that words can’t really express just how pleased we are with this wonderful coffee. The proof of its excellence is not in my words, marketing or hype … the proof is in the cup. It truly represents the best of who we are! I ask that you do everything you can to sample and put a cup of Pike Place Roast in the hands of every customer you encounter next week. I encourage all U.S. partners in company-operated stores to have a conversation about this exceptional coffee as well as our new quality standards for freshness, hand-scooping, and smaller brewed coffee batches with no more than 30-minute hold times. Pike Place Roast takes us one step closer to achieving our goal of transforming the in-store experience by restoring the connection our customers have with our coffee.

Pike Place Roast also gives us another opportunity to celebrate our history and heritage that takes us “back to the future.” We are so very proud of what we have achieved, so let’s talk about it! And we will be doing just that across the U.S. next week, with major coast-to-coast celebrations beginning in New York City and ending in Seattle. This is such an exciting and important time for the company, and I can’t say enough about how proud I am of what we have accomplished with the introduction of this outstanding coffee.

Although Pike Place Roast will not be available in our international markets at this time, they will migrate to 30-minute hold times for brewed coffee in the coming months, while a longer-term brewed program is being determined. U.S. licensed stores and Canadian locations will freshly brew House Blend every 30 minutes and will be introducing Pike Place Roast within the year. However, I am happy to tell you that our international, licensed store and Canadian partners are anxious to join our brewed coffee reinvention and share our enthusiasm for Pike Place Roast. They also recognize that it exemplifies everything that we are experts in: buying, blending and roasting the highest quality arabica beans in the world, as well as providing an excellent experience for all of our customers.

So I will close now by extending my gratitude to you, once again, for all that you do on behalf of Starbucks and invite you to raise a cup of Pike Place Roast in a coffee toast to the future success of our great company.

Onward,

Howard

Keep The Tips

Official company release on tipping to address mischaricterization in media:

Recent litigation has resulted in misunderstanding among some of our customers and partners (employees) about tipping in Starbucks stores. Our tip policy allows hourly partners (baristas and shift supervisors) to receive their fair share of customer tips. Shift supervisors are not managers and have no managerial authority. Even the California Court recognized this distinction.

Listening

At the annual shareholder’s meeting last week we announced an initiative to listen to you better by creating our first online community, MyStarbucksIdea.com. It takes the Starbucks Experience outside the store and enables customers to play a role in shaping the company’s future. The reactions have been mixed, from supportive to defensive and all the spectrum in between. To be clear, this isn’t the only initiative bent on listening and broadening the debate from esoteric sites to a larger community of Starbucks stakeholders.

For SocialNet Communities, check out some of the ones created by and for the community:

• Addicted to Starbucks (70,000+ groupies as of this post)
• I Heart Starbucks (14,000 strong)
• Starbucks Partners (5,000+, 170,000 to go)
• And more

Thank you for keeping the conversation and connections going, which is ultimately more of the Starbucks Experience in The Fourth Place.

Onward, Howard

Mischaracterization in Media VM

Voicemail to partners: Hello partners, this is Howard calling.

I am calling regarding the recent press coverage that mischaracterizes Starbucks position as it relates to California’s court ruling in terms of the tipping issue and most recently the situation in Massachusetts over the last couple of days. Hopefully by now you have read the letter that I posted on Starbucks.com and the store partner portal last Friday that directly addresses the California courts ruling against Starbucks.

The ruling would take away the right of shift supervisors to receive the tips they earn for providing superior customer service.

I want you to know that we strongly believe that this ruling is extremely unfair and beyond reason. I could go on and on about how wrong I think it is.

Nevertheless, for the record and to really clarify the situation, Starbucks Coffee Company has never and will never take money from our baristas or any other Starbucks partners. This is so contrary to our values, our culture and just everything we stand for.

I can’t tell you how much it upsets me that we are being so grossly mischaracterized in the newspapers by the media and I want to personally let you know that we would never condone any type of behavior that would lead anyone to conclude that we would take money from our people. When I read these headlines about Starbucks skimming or stealing from our partners it’s just beyond my comprehension how irresponsible it is.

To the contrary, we put the highest priority for 35+ years on treating our partners with respect and dignity, and we do our best never to jeopardize the trust we have with one another. Are we a perfect company? Absolutely not. Do we make mistakes? Yes. But our heart has always been in the right place.

Now, unfortunately, there has been another copy-cat litigation, including the recent Massachusetts lawsuit that we have been advised about, but we have not yet been served and that has caused more press that has mischaracterized the situation.

The reason I am calling is that I want you to really understand the truth. I promise you that we will vigorously defend ourselves and appeal the recent California ruling as well as any other lawsuits that we believe are unjust.

We have built a wonderful company that all of you have helped to make successful, and I ask that you continue to do all the things that you do for Starbucks every day. I want you to hear my voice and understand both my concern about the mischaracterization, and most importantly, the truth, and really separate the fiction from the facts. So there you have it. I will leave it at that and if there are any questions or concerns, you can email me and I will respond and hopefully we will get through this in a way in which the truth will win out.

March 19 Annual Shareholders Meeting

Eleven weeks ago, I made a personal commitment to every one of our customers and partners (employees) to reaffirm our place as the world’s coffee authority. By embracing our heritage, returning to our core – all things coffee – and our relentless commitment to innovation, we will reignite the emotional connection we have with our customers and transform the Starbucks Experience. I am confident that the ground-breaking initiatives we’ve announced today demonstrate our laser focus on living up to that commitment. We know that this is just the beginning, but we also know that there has never been a more exhilarating or promising time in our history.  Continue to  learn more  about our initiatives including  the  acquisition of  an innovative  brewing system.

Transformation Agenda Communications #10

Last week in Seattle, we held a global summit of Starbucks top leaders. It was a remarkable experience that will have a lasting and significant impact for a long time to come. We convened approximately 200 senior members representing our regions, Asia Pacific, Canada, EMEA, Latin America, greater China, and the U.S., in an unprecedented gathering. It was an intense, exciting and productive three days for the leadership of the company. We had a singular purpose to explore, imagine, and then commit to the future of Starbucks. Our objective was to build on the transformation work that has already begun and chart a new course for the future of our company.

I can’t recall any meeting (in our history) that had this level of strategic importance. It was a provocative and productive three days filled with lots of good discussion, debate, and agreement and I am proud to report to you that the leadership of the company demonstrated bold and courageous thinking, while embracing (every step of the way), the culture, values and guiding principles that have been at the foundation of our company. It reaffirmed my belief that as we go forward, Starbucks will be an even stronger company than it is today. Our conversations centered around the following points:

Our Case for Greatness. We started with a discussion about the need for great companies and great icons to challenge themselves — indeed, the mark of enduringly great companies is that they challenge themselves to never accept the status quo. As leaders of Starbucks, we believe it’s our responsibility to focus and fuel the success of our partners — because when we do, we do right by our customers.

Our Aspiration. Indeed, among the fundamental things our top leaders agreed on was our aspiration — to create one of the world’s most recognized and loved brands, known for inspiring and nurturing the human spirit. The focus of the meeting was how we should go about doing that.

Seven Bold Moves. I’ve talked a lot about the goals of the transformation — how we’re going to turn-around the U.S. business, how we’re going to reignite our emotional attachment with customers, and how we’re going to create foundational change for the long term. We used the three days of our meeting to work out how we’re going to do that. What emerged are seven bold moves that we’ll make in the coming weeks, months, and years:

1. Be the undisputed coffee authority
2. Re-engage and inspire our partners
3. Re-ignite our emotional attachment with customers
4. Expand our global presence — while making each store the heart of the local neighborhood
5. Be a leader in ethical sourcing and environmental impact
6. Create innovative growth platforms worthy of our coffee
7. Deliver a sustainable economic model

We charted actions we’ll take, step by step, for each of these seven bold moves. I think the most important thing to understand at this moment is that these seven form the backbone of our plan. We are now one company with one strategy. And, these seven are going to receive our attention, our investment, and our talent.

People Are the Outcome of High Expectations. We were all inspired by a presentation from Bill Strickland, who I met more than a decade ago. Then, he was a social entrepreneur in Pittsburgh, who had the audacity to build a training center in one of Pittsburgh’s toughest neighborhoods — just four blocks from where he grew up. Filled with light, art, jazz, jobs, and hope, his center was producing remarkable results. Boy, what a difference ten years makes! Bill’s ideas have taken flight in nearly a dozen cities around the world, where his centers and his thinking are sparking hope and futures for thousands of youth, most of whom society considers “at risk” or “disadvantaged.” Bill joined us at our three-day meeting, and he countered, “People are born in this world as assets, not liabilities. In the end, we are the product of expectation. Expect a lot, and you create amazing people.”

The meeting closed on an emotional note. We committed to one another to have a laser focus on our customers, to provide all of you with the tools and the resources to succeed, and to measure our actions by the quality of our coffee. I commit to you that I will hold myself to the same standards that I am asking of all of you. I can’t thank you enough for all you have done and continue to do on behalf of Starbucks.

 

Onward,

 

Howard

Transformation Online As Well

From time to time you may get one of these messages from our website:

“The Starbucks Coffee Company website you are attempting to reach is
temporarily down for maintenance.

“We apologize for any inconvenience, and appreciate your patience as we
improve our site.

“Please check back at a later time. “

I realize that this is an inconvenience and we strive to deliver the same excellence online as we do in our stores. To that end, when our servers our down for maintenance or for any other reason, we will endeavor to give you an estimated time for repair so that you know when to return.

In this 2.0 world, you should also be able to access the information you want when you want it, so we should be distributing our content in micro-sized slices that you can subscribe to via RSS and on any device.

While we won’t commit to every request and must prioritize those that bring the best experience for our Partners and customers, why don’t you weigh-in below on what and how you want information from us. Got a great idea for an application or want to promote one you’ve already created? Here’s a good place to start.

I’m sure the open source community will beat us to the punch on the ones they have the most heart for–we’ve heard it takes a lot of Starbucks to run on 2.0.

Reflections Returning from Italy

As I write you this note, I’m flying back to Seattle with a small group of Starbucks partners after spending a few days in Italy. No, we were not there to open our first store in Rome, although I’m quite certain that day will surely come. We were there to conduct a market visit to take in “all things coffee,” and to have strategic discussions with leading food and beverage companies.

We tasted and consumed coffee in every coffee bar we encountered. We saw elegant designs, experienced the artistry of baristas, ate fantastic food, and were introduced to new and interesting product ideas for the future. It was exciting for me to, once again, return to where it all began. The Italian people are wonderful. Their passion for life, their love of food and wine, and their coffee, is contagious.

During our visit, I made the following observations:

The Barista — The Barista is highly trained and very skilled. He presents each cup of espresso with great care and pride after intently watching the pour of the shot. He steams the milk as an artisan to produce a velvety foam, and from time to time, truly elevates his work to “art.”

The Coffee — This will probably surprise you (and hopefully you will not view my assessment as arrogant, but rather as honest), but the coffee was not that good. It turns out that most Italian coffee roasters blend their coffee with robusta beans. This is most likely because of a need for increased profit, but as a result of this decision, much is lost in the cup. The coffee leaves you with a strong, acidic, somewhat sour taste on the side of your tongue. This taste was unpleasant and disagreeable, but prominent in almost all the coffee we tasted.

Despite the change in the taste of the coffee, the experience we had was overwhelmingly positive on both a personal and professional level. We all felt a strong sense of pride in our company and in all of you. For many years now, we have been a respectful inheritor of the Italian coffee culture. We have built our business honoring the very things we saw and experienced. And, in some cases, I am humbled to say, we have improved it.

All of you deliver a world class experience to our customers –- one that I believe Italians would praise. We have challenges and opportunities ahead of us, but as long as we embrace our heritage and tradition, have faith in our coffee, our values, and our core purpose, we will continue to win the hearts and minds of our customers. As for the coffee, we never have and never will blend our coffee with robusta beans. We will leave that for others. It is important to note that today; we ethically source higher quality arabica coffee than in any other time in our history. And, in my view, we roast it at a quality level that is better than in the past because of new technology.

So, this trip brought me back to where it all began, but at the same time reinforced how good we are and how far we have come. We learned a lot. And, we will utilize much of this learning to keep pushing for innovation, while at the same time embracing our core, our people, and our coffee. All of which I am proud to say would stand tall even in the greatest coffee theatre of them all.

Thank you for all that you do.

Onward,

Howard

As we embark on Espresso Excellence Training

Aged Sumatra … that’s what I’m drinking as I write you this note. Hands down, it’s my favorite coffee. Aged for three to five years in a warehouse in Singapore, then shipped as green coffee to our plant in Kent, Washington, and roasted to perfection. The result is a stunning cup of coffee. The velvety mouthful, the full-body of one of our classic Indonesian coffees, and the subtle but ever-present earthiness and spiciness brought to life by our proprietary aging process. It’s rare, it’s exotic, and it’s ours. What a gift … and we get to share it with one another and with our customers.

Tomorrow evening, we will come together in an unprecedented event in our company’s storied history. We will close all of our U.S. company-operated stores to teach, educate and share our love of coffee, and the art of espresso. And in doing so, we will begin to elevate the Starbucks Experience for our customers. We are passionate about our coffee. And we will revisit our standards of quality that are the foundation for the trust that our customers have in our coffee and in all of us.

But, as I think about it, there is another perhaps equally important reason why we have scheduled this training. It’s to celebrate who we are.

We are Starbucks. We should be incredibly proud of what we have built. We are the worldwide leader of specialty coffee. And, believe me when I tell you, we are just getting started. We will overcome the difficult and humbling challenges we face, and will be stronger for it. You have my word on that.

We are Bean Stock, we are Healthcare, and we are also the Cup Fund.

We are at our best when we are entrepreneurial and courageous, push for innovation and reject the status quo. We are leaders not followers–we leave that for others.

We are the third place in the lives of millions of our customers. We are the coffee that brings people together every day around the world to foster conversation and community.

As Starbucks partners, we are bound together by the passion we have for our coffee and the customer experience. More than 170,000 of us stand for quality and an uncompromising ethical standard. We uphold our guiding principles by demonstrating respect and dignity for one another, and for our customers.

Thank you in advance for embracing tomorrow night in the spirit in which it is intended. Have fun, but also make it matter. Learn, teach, and share with your fellow partners.

Celebrate our coffee, one another, and the respect we have for our customers.

Onward,

Howard

Transformation Agenda Communication #7

Since I returned as ceo six weeks ago, we have experienced a lot of change in a very short period…with our renewed focus on the customer experience and the return to our core—all things coffee–as evidenced by our decision to discontinue warmed breakfast sandwiches in U.S. stores by the end of Fiscal ’08; unprecedented Art of Espresso three-hour training for U.S. store partners on February 26; free Wi-Fi for partners and customers beginning in the Spring, and more to come. I hope you view these changes as positively as I do. Together, we have created a blueprint to transform the company, and I sincerely appreciate all that you have done and will continue to do every day on behalf of Starbucks.

I pledged to communicate with you about our efforts to improve the current state of our U.S. Business, reignite the emotional attachment with our customers and make foundational changes to our business; and I have done so in six previous emails. However, this is my most difficult communication to date.

As I have mentioned in previous communications, in order to reinvigorate our company we must continually analyze and review every part of our company operations. This rigorous look at our business will ensure that we are managing and optimizing our resources as effectively as we can in order to improve the Starbucks Experience.

We realize that we are operating in an intensely challenging environment, one in which our customers and partners have extremely high expectations of Starbucks. And we have to step up to the challenge of being strategic as well as nimble as our business evolves. Unfortunately, we have not been organized in a manner that allows us to have a laser focus on the customer.

Over the last several weeks, we conducted a thorough organizational analysis, which was, at times, very emotional and extremely stressful. But as I sit at my desk and think about my responsibility to over 170,000 partners and their families who rely on me and others to preserve and enhance our company, I know that I am responsible for ensuring the success of the company for the long term, which means that difficult decisions must be made. Personally, I continue to struggle with the outcome, because I realize how painful it will be for some partners.

As the result of our review, which was done with great thoughtfulness and respect for everyone concerned, organizational changes have been made. These changes will restructure the company, but they will also result in a decrease of both the number of positions and partners by approximately 600. This total includes the elimination of existing positions and open headcount, as well as the reduction of our current workforce. Within this context, approximately 220 partners have separated from the company. Nearly all were U.S. partners serving in non-retail support roles. We are thankful and proud of the contributions our departing partners have made, and we are committed to treating them with respect and dignity.

Today, we are announcing the following modifications to our organizational structure that are designed to strengthen our focus on the customer in our U.S. field operations, and centralize and/or consolidate many of our support functions to drive functional excellence and reduce redundancies:

U.S. Field Operations
Effective Monday, February 25, the U.S. field organization will begin transitioning from two divisions to four, with full implementation completed by March 24. The new divisions are: Western/Pacific, Northwest/Mountain, Southeast/Plains and Northeast/Atlantic.

Not only will this organizational structure create more capacity for our field teams, it will enable the company to align our leaders closer to our customers and partners. This will ensure a stronger level of support in partner development, coaching and accountability in the field. Establishing a customer-centric field support structure in the U.S. Business enables our field teams to focus on our partners, customers and our coffee.

Each division will be led by a senior vice president, reporting directly to the U.S. president. Within each division, partners supporting Store Development, Marketing, Partner Resources and Finance will report directly to their respective functions while still being accountable for results at the divisional level. These teams are being centralized to create an infrastructure with global span, capability and effectiveness. Senior leaders in the U.S. Business will provide specifics in their individual team Town Hall meetings that will be held later today.

Support Functions
The reorganizations of Starbucks support functions are designed to consolidate functional activities into teams that have a shared vision and goals to support the business.

The following support functions are being reorganized and/or consolidated:

• U.S. Store Development
• U.S. Licensed Stores
• U.S. Finance
• Partner Resources
• Marketing
• In-Store Experience
• Global Supply Chain
• Global Communications
• Partner & Asset Protection

As a result of these organizational changes, some partners may have new roles or new managers. Senior leaders in these areas will provide specifics to partners in their individual team Town Hall meetings that will be held later today.

Partner Care and Support
As I said earlier in this communication, while these decisions were necessary to move our business forward, I fully recognize the personal and professional impacts these actions have on individual partners, and we are committed to making the transitions as smooth as possible.

Once again, I would like to thank all of our dedicated and passionate partners for their numerous contributions to the company.

Onward,

Howard

The Commoditization of the Starbucks Experience

This internal memo went to Jim Donald and copied Anne Saunders; Dave Pace; Dorothy Kim; Gerry Lopez; Jim Alling; Ken Lombard; Martin Coles; Michael Casey; Michelle Gass; Paula Boggs and Sandra Taylor

I want to share some of my thoughts with you.

Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.

Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces. For example, when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific decision became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista. This, coupled with the need for fresh roasted coffee in every North America city and every international market, moved us toward the decision and the need for flavor locked packaging. Again, the right decision at the right time, and once again I believe we overlooked the cause and the affect of flavor lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma — perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage? Then we moved to store design. Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee. In fact, I am not sure people today even know we are roasting coffee. You certainly can’t get the message from being in our stores. The merchandise, more art than science, is far removed from being the merchant that I believe we can be and certainly at a minimum should support the foundation of our coffee heritage. Some stores don’t have coffee grinders, French presses from Bodum, or even coffee filters.

Now that I have provided you with a list of some of the underlying issues that I believe we need to solve, let me say at the outset that we have all been part of these decisions. I take full responsibility myself, but we desperately need to look into the mirror and realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.

I have said for 20 years that our success is not an entitlement and now it’s proving to be a reality. Let’s be smarter about how we are spending our time, money and resources. Let’s get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. We source and buy the highest quality coffee. We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and the 150,000 partners and their families who are relying on our stewardship.

Finally, I would like to acknowledge all that you do for Starbucks. Without your passion and commitment, we would not be where we are today.

Onward…

The Starbucks Experience Begins with Training

As part of our ongoing efforts to transform the company and renew our focus on the customer, we have announced an historic in-store education and training event for our more than 135,000 store partners across the United States. We will close each of our nearly 7,100 company-operated stores in the U.S. on Tuesday, February 26 at 5:30 p.m., local time, to conduct a nationwide hands-on espresso training experience, designed to energize partners and transform the customer experience. Stores with evening hours will re-open at 8:30 p.m.

Our unprecedented level of commitment to and investment in our people will provide them with the tools and resources they need to exceed the expectations of our customers. We believe that this is a bold demonstration of our commitment to our core and a reaffirmation of our coffee leadership.

The comprehensive educational curriculum for all U.S. store partners will provide a renewed focus on espresso standards that will help ensure the exceptional quality of every beverage. As a result, baristas will be better prepared to share their passion and knowledge with customers. Customers will be able to truly enjoy the art of espresso as Starbucks baristas demonstrate their passion to pull the perfect shot, steam milk to order, and customize their favorite beverage.

This unique in-store education event signals the company’s focus on transforming the Starbucks Experience for both our customers and our partners. We hope that any customers inconvenienced by the early closures will see this as an investment that will have long term benefits. Starbucks partners will have an opportunity to connect and deepen their passion for coffee with the ultimate goal of transforming the customer experience.

I am really excited about this and the impact it will have on you and our customers. And don’t be surprised if I stop by one of the stores during this time!

Onward,

Howard

Expanded WiFi Services, Free Even

Dear partners (posted on website as “Transformation Agenda Communication #5),

Over the past couple of weeks, I have spoken with you about our plans to transform our company and to be laser focused on our customers. Today, I am pleased to share with you another action that will enrich the Starbucks Experience through innovation.

I am very excited to announce that we have expanded our existing long-term relationship with AT&T by adding Wi-Fi services within our U.S. company-operated stores. This will allow us to evolve our in-store offerings to provide a high-quality Wi-Fi experience that both you and our customers will enjoy.

Beginning this spring, our new Wi-Fi program will offer free and easy internet access on a high-quality network. We will offer two hours of free Wi-Fi service per day for registered and active Starbucks Card holders as a gesture of appreciation to our loyal customers.

We would also like to extend our appreciation to our partners who make the Starbucks Experience happen in our stores every day. Also beginning this spring, all U.S. Starbucks partners will receive complimentary AT&T Wi-Fi accounts and enjoy internet access in company-operated locations offering Wi-Fi access.

We will be rolling out this service market-by-market to more than 7,000 Starbucks stores. We will be sure to communicate the details about your market through our regular store operations communications channels.

This is only the beginning! We will continue to renew our creativity and focus on our customers. I appreciate your ongoing commitment and passion when delivering the Starbucks Experience.

Onward,

Howard