This long read from the Washington Post is a brilliant case study of just how dramatically the world has changed in the past four years – supply side issues (especially the supply of labour) are now a critical challenge the world over. The even deeper issue is that inflation is lifting the cost of living so dramatically, that many workers are not being able to afford the essentials of life even if they put in long hours. Whilst this article is an extended case study of how Starbucks and its founder Howard Schultz were caught on the wrong foot by the speed of change, the same issues are also relevant for millions of companies across the world, including Marcellus.
69-year old Howard Schultz, the son of a taxi driver, saw himself “as the good guy of American capitalism, believing that his own wealth and Starbucks’s rise to become one of the most ubiquitous brands on the planet was a direct outgrowth of the company’s concern for its workers and their well-being.
Only now all of that was being challenged. Across America, workers who had labored through a once-in-a-century pandemic were concluding that they deserved better and were quitting or demanding more from their bosses, or in the case of some Starbucks workers, unionizing. An organizing effort that began in Buffalo in August 2021 with a handful of cafes had, by the time Schultz took the stage in early July, spread to more than 225 of Starbucks’s 9,000 U.S. stores…”
So how did things come to this pass? After all, until a few years ago Starbucks was seen as an exemplar for how capitalism can deliver a win-win for shareholders, employees and customers: “From the beginning, Schultz said he was building a different kind of company, unlike anything that had ever existed for low-wage service workers. In the early 1990s, he offered health insurance and stock options to his employees — even the part-timers — and insisted they be called “partners” to show that they had a stake in the company’s success. He worried that his employees were carrying too much student loan debt, so Schultz teamed with Arizona State University to offer free online college to all of his employees.
He told his baristas that they weren’t merely selling drinks, they were creating a sense of belonging for customers in an increasingly atomized world.”
Part of the problem it seems is that Schultz took his eye off the ball as he rose up Maslow’s hierarchy of needs: “In 2018 Schultz cut ties with Starbucks to explore a run for president that never got off the ground. Three years later he was overseeing his family’s philanthropic endeavors when the first stores in Buffalo filed for union elections.”
And as luck would have it, just as Schultz was taking his eye of the ball, Covid-19 struck: “The pandemic had exhausted Starbucks workers, driving attrition to the highest levels in the company’s history. At the same time, a nationwide labor shortage had given the baristas some real negotiating power.
Kevin Johnson, a former Microsoft executive who succeeded Schultz as CEO in 2018, never visited Buffalo, but Schultz, who held no official position with the company, made two trips to the city in the fall of 2021. On his first, store managers told him of broken equipment that the company never seemed to fix and flooding in their cafes: “things that I had never heard before,” Schultz recalled in an interview.
A month later Schultz returned to beg a ballroom full of baristas to give Starbucks a chance to fix the problems without a union. His plea failed, and in December 2021 the first Buffalo stores voted to be represented by Starbucks Workers United. By early April, Schultz was back as CEO, explaining to tens of thousands of his employees watching online and in person at Starbucks’s headquarters his understanding of the problem. It wasn’t that Starbucks was losing money or that demand for its beverages was waning, but that corporate executives hadn’t listened to their employees. They hadn’t understood the strain the pandemic was putting on their lives.”
As CPI inflation revved up towards the fag end of Covid-19, things went from bad to worse for Starbucks’ employees: “Baristas told him that they weren’t making enough money to pay their bills. They complained about equipment that had been broken for weeks, understaffed stores, insufficient training and supply chain snarls.
Some of the problems seemed bigger than Starbucks, rooted in a country that had taken a dark turn during the pandemic, Schultz said. He visited Nashville, Phoenix and Long Beach, Calif. Workers routinely told him that their customers had grown angrier, more aggressive and demanding. He traveled to New York, Chicago, St. Louis and Denver. He heard more and more from baristas about frightening encounters with homeless people and drug addicts in their store’s bathrooms.”
The Washington Post article is replete with references to Starbucks’ employees who are not being able to earn a wage which matches their cost of living. What’s interesting is that what is at issue is not just the per hour wage rate but also the number of hours an employee gets to work: “Whisler had contacted the union earlier this year after the company’s algorithm, which predicts customer demand, had slashed her and many of her co-workers’ hours. Several workers, unable to pay their bills, found other jobs. Some, Whisler said, were forced to choose between rent and food….Now new technology was on the way that would help baristas work more efficiently. Among the innovations: new blenders and store designs that would cut the time to make a Frappuccino from 86 to 35 seconds.”
As Laxman Narasimhan takes over the reigns from Schultz, we shall keep a close eye on how he deals with the labour strife at Starbucks because, unlike, say, Walmart, Starbucks isn’t a discount retailer. Starbucks’ products aren’t really ‘cheap’ even by American standards. And yet if even Starbucks cannot stabilise its supply-side then a major change in the retailing business model is bound to be around the corner.
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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