Wrestling with Starbucks: Conscience, Capital, Cappuccino

Chapter 2: Running the 10-K

27 Running the 10-K 2 To present a company’s best face, annual meetings tend to include plenty of spectacle and flash, a way to show stockholders, the press, and the public that the company is simultaneously comfortable and innovative. These meetings also spawn a forest of paperwork. To follow Schultz’s parallel visions of profit and principle, I began with two Starbucks reports: the annual 10-K that every public company must file with the U.S. Securities and Exchange Commission, and the annual Starbucks Corporate Responsibility Report. These reports are looking-glass images—one justifying the business in market terms, the other validating it in human terms. The Starbucks 10-K is a catalogue of achievements, goals, and risks anchored in numbers. Gray and single-spaced, the document is a bracing antidote to the chatter and hyperbole that frequently surround the company. It’s where you get a chance to rummage through a company’s clean, folded linen, looking for loose buttons and stains that haven’t quite disappeared in the wash; a place where you can hunt for lost socks. That is, if you know where to look. I handed the 2005 report to analyst and activist Randy Barber of the Center for Economic Organizing. A few weeks later he offered this summary: “When you go by the numbers, this 10-K looks and quacks not like a culture, but like a corporation,” albeit one that was doing very nicely indeed: it had plenty of profits and considerable growth coexisting with minimal debt. The 10-K also reminds you that big is relative. Given all the hype, not to mention the company’s obsessive presence in downtown America, you’d be forgiven for thinking Starbucks is bigger than it is. In fact, it’s only been in the Fortune 500 since 2003, although it continues to work its way up the list. As of 2006, it sat in the lower middle , at number 338, between Dynegy, a company that produces and sells energy, and Safeco, an insurance company. The kingpin coffee purchasers—Altria (until recently the parent company of Kraft) at number 20 and Procter & Gamble at number 24—far outrank Starbucks on the charts. Nestlé, the biggest coffee ogre, is a Swiss company and therefore not part of the list, although it makes Starbucks look puny. On the other hand, in 2006 Starbucks was the third-largest food service player among the Fortune 500, smaller than McDonald’s or Yum! Brands (home of Kentucky Fried Chicken, Pizza Hut, and Taco Bell) but bigger than Wendy’s. Like its founder, however, what Starbucks does have is a strong desire for upward mobility. Starting on the first page of its 2005 10-K, Starbucks pressured itself to outdo its own performance. “The Company’s objective is to establish Starbucks as the most recognized and respected brand in the world,” paragraph 1 announced humbly. “To achieve this goal, the Company plans to continue rapid expansion of its retail operations . . . and to selectively pursue other opportunities to leverage the Starbucks brand through the introduction of new products and the development of new channels of distribution.” But respected and recognized aren’t always synonymous. To accomplish these twin objectives, Starbucks needs to make profits that meet Wall Street’s projected targets and grow ever more rapidly. It has to expand its reach abroad, especially in China, and protect its brand; but it needs to do so while retaining the trust and patronage of you and me, the coffee consumers. And it needs to accomplish all these tasks while meeting its obligations as a publicly held corporation. There is a difference between private and public ownership. The latter is both more regulated and less controllable. To be a listed corporation means that the company can be used by speculators as well as various investors, all of whom have a piece of it. Publicly held corporate management must deliver profits and meet expectations. Starbucks stock (SBUX on the NASDAQ) has done what stocks do: it has danced. Nevertheless, for more than a decade its averaged and sustained growth was undeniable. As Brian Lund, a columnist for the snappy stock advice website Motley Fool, pointed out in 2000, 28 W R E S T L I N G W I T H S TA R B U C K S “One reason we don’t comment on Starbucks is that nothing...