Starbucks Smarts

Last Sunday I was shopping when I stepped back from the counter and bumped into Glenn Abbott. Although Glenn has been a client of our firm for a long time, I hadn’t seen him in years. We found a coffee kiosk, ordered a couple of hefty doses of caffeine and sat down to catch up.

“I’ve been meaning to call you,” Glenn said. “But I’ve been working hard lately and I haven’t been able to do some things that I really wanted to make time for.”

“The last time we got together you told me you were planning on slowing down,” I said.

“Well,” Glenn nodded. “It’s certainly time to do that now. I was 52 last month. The kids have moved out. My wife wants us to take a long holiday. But here I am, doing what I’ve always done.”

“And you’re not happy?”

“We have a four partner firm. I’m the oldest, but we’re all around the same age. We work hard. Competition is fierce. And I’ve put myself in a jam with my lifestyle.”

“I don’t think of you as being a heavy spender,” I said.

“We have three kids in university. Donnie wants to go to graduate school, and I want to help him. Also we bought a big house when the kids were fairly young. Now a decade and a half later, the house is worth what I paid for it at the market peak in 1989, and I still owe on the mortgage.”

“Has the business grown in value?” I asked.

“Not really. You’ve seen our books. Consulting engineers don’t make that much. At the same time, the cost of living keeps going up. Look at what we’re drinking. A latte costs four dollars. Ten years ago, a cup of coffee cost about 50 cents. And our generation is going to live longer. How do you save for 20 years of retirement? We have $600,000 in our RRSP’s. That should keep us going for about seven years at the rate we spend money. Then what?”

“Obviously you have to make some changes while you have time,” I said. “Most professional businesses aren’t run very well. I would guess that there are a lot of things you can do to improve things.”

“Give me an example,” he said.

“I can’t really do that without a diagnosis of your business.”

“I’ll level with you, Hank. My partners and I don’t really want to spend a day talking about goals and missions and visions. It ends up costing money and energy and it doesn’t get us anywhere.”

“It’s true, just talking won’t achieve anything,” I said. “But consider your latte. You have to admit that Starbucks is a pretty good business.”

“Of course.”

“A typical restaurant has a food cost that’s 35% of the retail price. I’d guess Starbucks’ cost of goods sold is in the 10% range. And it’s a simple business, too. They have about 20 items on the menu, all variations on the basic coffee theme. Unlike McDonald’s, they don’t need a cook staff in the back. Almost all their space is devoted to customer seating. No expensive ovens or French fry machines.”

“What’s your point?”

“In the early 1980s when Howard Schultz was setting Starbucks on its course, no-one thought selling coffee was a particularly good business. The shops were dumpy and margins were low. Shultz redesigned the business by finding a way to satisfy the consumer more. He added value to the experience of coffee drinking, and Starbucks made a fortune as a result. Your business can change as well. You can earn higher margins and do more interesting work. But you can only do that by changing the system that’s developed in your firm. The system is very robust. That’s why it has survived for so long. To make real improvements, you actually have to alter the way you and your staff think about your business — that’s what Shultz did.”

“What do you mean?”

“I’ll give you an example. In our office we educated all our staff in the economics of our business. In essence we taught them the way we make money. Then we provided everyone with income statements that we review at a meeting each month. From there, we developed monthly income goals. The staff and the partners negotiated an incentive program. The crucial thing is that our bonuses are paid frequently and are based on results that are understandable. The change in our staff has been profound. Everyone really works hard to make the business work — and the numbers have improved beyond what we had hoped for. It’s up to you. You really have to want to do it. But if you don’t change, the worries that you’ve told me about today will never be fruitfully addressed.”

Hank Bulmash, MBA, CA is a principal of Bullmash Cullemore, chartered accountants of Toronto.