As Howard Schultz Retires, Will His Impact On Labor Be One Of His Core Legacies?

Aakash Kumar
Founder & CEO

Howard Schultz announced his retirement today as executive chairman of Starbucks, capping off a remarkable entrepreneurial journey building a tiny coffee-shop chain into one of the most recognized and loyally followed brands in the world. Schultz had joined the company in the early 1980s and purchased the chain in 1987, scaling it over the next three decades into the global coffee behemoth it is today with a footprint of 27,000+ stores and over 250,000 employees (or partners in Starbucks parlance).

Throughout this rapid expansion across markets, there was one remarkable tenet that was at the heart of the scaling process: the consistency of the Starbucks experience. In his book, Pour Your Heart Into It, Schultz dives deeper into his motivations and philosophy behind this key growth mandate:

More and more, I realize, customers are looking for a Third Place, an inviting, stimulating, sometimes even soulful respite from the pressures of work and home. People come to Starbucks for a refreshing time-out, a break in their busy days, a personal treat. Their visit has to be rewarding. If any detail is wrong, the brand suffers. That’s why we love the saying, “Everything matters.” In effect, our stores are our billboards. Customers form an impression of the Starbucks brand the minute they walk in the door. The ambience we create there has as much to do with brand-building as the quality of the coffee. Every Starbucks store is carefully designed to enhance the quality of everything the customers see, touch, hear, smell, or taste. All the sensory signals have to appeal to the same high standards. The artwork, the music, the aromas, the surfaces all have to send the same subliminal message as the flavor of the coffee: Everything here is best-of-class.

It's this desire to create a “best-of-class Third Place” rather than simply a widely prevalent retail store that sells coffee that may have contributed to one of his most defining legacies: a worker-centric playbook on labor management as a competitive advantage.

Schultz keenly observed that the details of the store experience – everything from the coarseness of the grind to the greeting of the customer – mattered. Thus, the front-line staff responsible to manage these details, the Starbucks baristas, were as much the product as the coffee and needed the same level of attention and focus on quality.

This view of labor is deeply progressive and is at sharp contrast to how part-time workers are often treated in the marketplace today. Starbucks adopted a more holistic view of workforce management with different metrics and different priorities. Perhaps at the forefront of this change is their focus on minimizing the churn rate of the baristas by providing key perks that helped drive down attrition. In contrast – more traditional employers focus almost exclusively on hourly labor costs and costs of worker acquisition, accepting the churn rate as systemic. The churn rate, however, is one of the most sensitive drivers in overall costs since it drives the frequency of labor acquisition and training costs that a business incurs as well as the impact on customer experience of constantly having less trained and tenured staff on the front-lines. Strategically, this focus paid off dividends for Starbucks and is arguably one of the core drivers in helping them scale effectively and consistently at their breakneck pace. Starbucks succeeded having a churn rate of ~60% which is roughly half of their peer group for similar wage jobs.

A quick dive into some of the perks that Starbucks offered makes for a solid model for other employers looking to build out a "Total Cost of Employership" outlook on labor management. This outlook factors in the churn rate and the customer experience as part of their labor costs on top of the standard costs of acquisition, training, and weekly shifts.

First and most importantly, Starbucks provided healthcare benefits to every single barista who worked an average of 20 hours per week where Starbucks funded approximately 70% of the premium costs and covered 100% of preventive care services. It is undeniably one of the boldest healthcare plans in terms of sheer scale and part-time employee coverage and has stood the test of time under intense investor scrutiny and cost-cutting pressure. In 2008, in one of the worst times for the large chain, one simple statement by Schultz drives home the magnitude of this investment:

Starbucks spends more on healthcare than coffee.

In a labor market where artificial caps on weekly hours are common as a means of healthcare cost avoidance, this strategy was both innovative and wildly successful as one of the most important perks and drivers of retention for the baristas.

Second, there is a focus on schedule flexibility and worker choice in determining weekly shifts. Schedules at Starbucks heavily factor in worker availability and consistent hours and are posted two weeks in advance, and most importantly have no on-call shifts as part of their stated practice. On-call shifts, or shifts that hold a workers time without a guarantee of pay, are one of the largest drivers of schedule and income volatility for shift workers and are facing tremendous regulatory pressure from law-makers today.

Third, there was a nuanced understanding of the needs of particular worker groups and communities in the tailoring of financial and non-financial benefits. This extends from the launch of a Starbucks College Achievement Plan to what Howard Schultz refers to as a “turning point” in their China expansion strategy. Starbucks dove into the deeply interconnected nature of the family dynamic in China and provided healthcare and a Parents Day for the family of Starbucks partners in the country. This deeply nuanced view helped build retention into their barista cohort and stemmed from the cultural understanding that parents were a large driver of their children's careers and should be embedded into the broader Starbucks partner community.

MIT Lecturer Zeynep Ton coined the Good Jobs Strategy, in a deeply insightful paper detailing out how investing in employees can boost customer experience and decrease costs. Howard Schultz, with his extraordinary leadership, has proven this fundamental thesis true and his outlook on labor management will be an enduring legacy for years to come. In a world with changing labor patterns and a future where choice and flexibility are top of mind for the workforce – some of these key ideas will become even more important to emulate for employers everywhere.

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