Starbucks executives Howard Schultz and Kevin Johnson sat down with CNBC for their first TV interview since the coffee giant announced Schultz would be handing over the reins of the company to Johnson in April.
Outgoing CEO Schultz, who for many investors is closely tied with Starbucks' identity, will be executive chairman and focus on the brand's Reserve roasteries around the world, its Reserve retail store format and social impact initiatives for the company. Johnson is currently president and COO of the company.
The pair sat down with CNBC to speak more about the move and the company's future.
Here is the full interview:
Andrew Ross Sorkin: Welcome back to "Squawk Box." We are live this morning in Seattle with the big news of the morning and the big interview of the morning. Howard Schultz, the iconic leader of Starbucks, announcing that he is going to hand over the reins of the company as CEO to Kevin Johnson. That's going to be effective April 3, 2017, and we have both of these gentlemen with us this morning to talk about this momentous decision. Good morning to both of you. Congratulations, Kevin, on the new title and the new role. And you're not going anywhere. I know you are going to remain the executive chairman. We're going to talk about that. But, so many questions this morning about this decision, your decision to hand over this title. How did this happen? Why and why now?
Howard Schultz: Thank you for being here, Andrew, and thank you for being in the roastery. As we discussed yesterday, Kevin and I have been together now for almost 10 years. Seven years Kevin served on the board. Two years as our CEO and president. And for the past year and a half we have co-authored the strategy of the five-year plan of Starbucks. And what was clear was that Kevin's ability, his skill base and experience, in my view, he is much better prepared to really manage the global operations of the company than I am at this stage of the company's development.
Sorkin: You said that yesterday. What do you mean by that? You don't think you're equipped to do it?
Schultz: I think Kevin's skill base and his experience, he is much better prepared than I am while I can take advantage of what I think is an enormous growth opportunity for the company in leveraging the equity of the new brand, the Starbucks Reserve brand, the roastery, the new Reserve stores, on a global scale. You mentioned earlier we are under construction in Shanghai and New York. We just announced Tokyo. There's two more coming. We're building a new growth platform at Starbucks while Kevin will manage and integrate technology in ways that I think will really advance the consumer-facing opportunity for Starbucks, in ways that I really am not as well-versed. And I think Kevin has been at my side for two years. There's no better person, no better servant leader. And what you saw yesterday at the company meeting, you saw the response that I got, but most importantly, the response that he got, the respect and the admiration that our people have for Kevin.
Sorkin: Speak to the timing. Some people had suggested you had set this up. And those on Wall Street who were focused on it, I think, understood that a succession plan was in place. I don't know if they understood necessarily the timing was going to happen now. Why now?
Kevin Johnson: Well, Andrew, let me go back to how this evolved coming out of our strategic plan. There's kind of three strategic objectives that we are trying to achieve with this five-year plan. One is around elevating the brand, the second is elevating the customer experience, and doing those two things allows us to amplify Starbucks as a destination. We delivered that strategic plan and discussed it with our board in May. And coming out of that May board meeting, Howard and I sat down and said how could we best focus our individual capabilities and contributions to help make that plan come to life? And that led to the set of organizational alignment announcements that we made back in July and the way that we set my responsibilities and Howard's responsibilities. So it evolved from that strategic plan.
Sorkin: You've tried to step back before. This is not the first time you've tried to. What is going to be different now?
Schultz: Why are you bringing that up?
Sorkin: No, no. And by the way, we saw what happened and then you had to come back.
Sorkin: But to the extent that there were lessons learned from that experience.
Schultz: Well, I think there were two things. On a macro level, I left right at the beginning of the cataclysmic financial crisis, and Starbucks had a very difficult time navigating through that. We did not have the quality of the team, we didn't have the resources and the capabilities that we have now. We didn't have the leader. I think on a personal level, I don't think I was as emotionally prepared to leave the company and not meddle at that time in my life. This time around, I've got a full-time opportunity in terms of building the new Starbucks Reserve brand. My faith and confidence in Kevin — it's a complete different situation. The wind is at our back in terms of the quality of the business, the equity of the brand, how we're doing in China. So the opportunities in front of us I think are so strong, there will be no issue whatsoever that will be even close to what happened in 2008.
Sorkin: How hard was it for you to decide to do this, though? Just emotionally. Even in the past 24 hours.
Schultz: You know, something like this, it doesn't hit you until you actually say the words. You prepare for it. You put yourself in a position to say the words. But when you're in front of everybody and you make the announcement and it's real, you realize you've crossed over the rubicon. But I'm really at peace with it. I'm at peace with it because the company has never been healthier. I've got a great partner who I trust in Kevin. And I'm in a good position personally.
Sorkin: There's a very special person back East known as Jim Cramer, who has been following this company for a very long time, who knows you very well, who I know has a question or three, if not more, for you. Jim, let's bring you into the conversation.
Jim Cramer: Howard, even Kevin in the conference call last night said that you were one of the world's most iconic leaders and entrepreneur. Why would I want to own this stock of Starbucks if the man I most identify with Starbucks is only the executive chairman and is working on a division that may or may not pan out even as I know that Kevin is a strong leader?
Schultz: Well, you know, Starbucks has been in business now for 45-plus years. You know, I'm not putting myself in the class of Tom Brady or any other athlete that has been at the cornerstone of success on a team sport. But, Jim, this is a team sport. It has always been a team sport. I've gotten more credit than I deserve. The company has a large base of fantastic leaders, and I'm not going away. I'm going to add value in the areas that I think are skewed towards my entrepreneurial creativity and DNA. I'm going to support Kevin when he needs it. And the company's going to continue to perform at a high level. I have no doubt whatsoever that Starbucks, the foundational elements of the equity of the brand, the customer experience, the pipeline of innovation – both in product and beverage – the pipeline of innovation in terms of technology and what the roastery and Reserve brand is going to be. This is a great time to own Starbucks. And if I look at the stock price, you know I'll probably regret saying this on air, but I think the stock is undervalued.
Cramer: Fair enough. Howard –
Sorkin: Howard, let me ask you. Oh, go ahead, Jim.
Cramer: I'm just trying to figure out whether your role will be – I know you want to come in all the time. I know you are being involved with a particular division that you're very excited about. But do you think you'll be more of an ambassador? Do you think you'll be able to speak out more? Do you think if you don't like something that President-elect Trump does, you're freer as an executive chairman to speak out than you would be as a CEO?
Schultz: Well, Jim, I have not had a problem over the last couple of years in trying to demonstrate what I believe we all have a responsibility to do. And that is demonstrate moral courage with regard to how many people in America are unfortunately being left behind and the issues that we're facing as a country. I don't think my role and responsibility, executive chairman, and my voice is going to change. I think Starbucks continues to need to use its scale for good and its platform. And I think as I said two years ago, I strongly believe that businesses and business leaders in America need to recognize that the rules of engagement have changed. And we need to do everything we can to bring our employees along on the journey, share success and support the communities we serve.
Cramer: Kevin, just a quick one here.
Sorkin: Kevin –
Cramer: I'm sorry. I will back out, Andrew, after this question for Kevin. Okay?
Sorkin: No, no, please.
Cramer: Kevin, I've known you for many, many years. I knew you at Juniper. Let's say I were interviewing you now to be the new CEO. Not that you'd been there for a long time. I would say what is your experience in consumer packaged goods or is the issue with Starbucks the lines, the throughput, the technology? Because the coffee's darn good, but we can't get it fast enough and throughput is the most important thing I see for a problem in the domestic stores and maybe international.
Johnson: Yeah, that's a great question, Jim. I point to the fact that I've been on this journey with Starbucks for nearly eight years now on the board -- be eight years in March of 2017. I've been intimately involved with the management team and coauthoring the strategy for the company here over the last two years and operating in every part of the business. And so you say, 'Ok, what is the unique value add?' Well, if we look at this five-year strategic plan that we've outlined, it is the most ambitious strategic plan in the history of the company. And in order to execute against that, we've got to do many things in parallel and we've got to do them very well. And so my ability to be a great partner to Howard and get the best out of Howard, and then take all of this great vision and the ideas and the strategy we have and figure out how to land it in a way that allows it to propagate globally and elevate the brand, elevate the customer experience, and ultimately, amplify Starbucks as a destination. That's what I intend to do. I have great confidence in my partnership and relationship with Howard. I have great confidence in our leadership team, and I believe in this strategy. We're going to make it happen.
Sorkin: Kevin, when you were speaking to some of the employees yesterday, you acknowledged something that was very authentic. You said that when he asked you to take the job, you went home and you said to yourself, 'Can I do this?' Meaning like, actually can I do this. When you ask yourself that question and you think about the challenges ahead, what is it that you worry about? What is it to the extent if there's anything that makes you anxious, I imagine something must, in terms of something that you want to accomplish in this role?
Johnson: Well, I think, you know, anyone that is being asked to step into this role would recognize this comes with great responsibility. And it is following someone who is an iconic entrepreneur and leader. And I think this would be something that anyone stepping in this role would have to consider. How do you step into that and knowing that I have to be authentic and lead in my way. I can't try to be Howard. I'm not Howard. Howard and I share many things in common – the values, the way we think about the business, the appreciation for the mission and what this company stands for. But we come at it through a different lens because we have different life experiences. So acknowledging that and knowing that I need to lead in an authentic way. I need to trust in my partnership with Howard. And I need to leverage this world class leadership team that we've assembled.
Sorkin: First new thing that you plan to do and of course, one of the big questions is same-store sales. What can you do to really increase that number in a meaningful way? What's on tap?
Johnson: Well, you know, same-store sales, a big part of what's powering it is this digital fly wheel. It's the work we've done to extend the in-store experience to the digital experience and how mobile order and pay is helping amplify that. But you look at mobile and pay. That is only deployed in company-operated stores fundamentally in North America. We are now building that capability to extend to our license partners, to extend to other geographies. That's a big unlock. If you look at this growth agenda, we're going to have to grow more in the area of food. We've had great success from the acquisition of La Boulange and how we've deployed that frozen supply chain for our breakfast sandwiches and our pastry case. But the next frontier is going to be can we crack the code on the lunch day part.
Sorkin: You've tried food before without real success. What have been the missing ingredients?
Schultz: Well, La Boulange has been a huge success for the company. If you look at where we were and where we are right now, our food sales and the attachment of food in the morning has been a significant driver. The question now is can we take advantage of multiple day parts and multiple need states? And I think we'll be able to do that.
Sorkin: You're going to spend time on the premium business, the Reserve business. We're here in this roastery. I call it a Willy Wonka-like emporium of sorts. How much can this ultimately move the needle for the larger business?
Schultz: Yeah. I tried to explain that on the conference call. Let me slowly kind of walk you through that. I hope we have the time to do that. So in many other industries, the fashion industry, the automobile industry, there has been segmentation at the upper end in which businesses and brands have been able to go up in their core business. What we have created here in the last two years is a significant immersive experience that not only takes coffee to a new level, but there's no retail experience like this. It has far exceeded our expectations. It has four times the average ticket of a typical Starbucks store and has become a primary destination for every tourist in Seattle. We now believe that we can take elements of the roastery and bring it down to a different type of store – about 4,000 square feet, twice the size of a Starbucks store – and build Reserve stores in the same theme of roasteries. But we also believe there'll be 20 to 30 roasteries around the globe that will shine a halo on the entire company. We'll build out a new retail format of 1,000-plus stores of Reserve stores in this brand and then we're going to integrate into existing Starbucks stores, Reserve bars. All of that will add incrementality, drive comp-store sales, elevate the brand and create separation in the marketplace. Now, while I'm doing that, Kevin and his team, besides managing the global business and growing the business, will take the same level of initiative on the technology side and integrate a pipeline of new innovation in terms of customer facing technology within the mobile ecosystem. And so a year from now, a year and a half from now, the company will be completely transformed both at the high end and in terms of consumer facing technology. The last thing I'd say is, and we haven't discussed it, is what's going on in China for Starbucks. There's no western consumer brand that has accomplished what we have on any level let alone our scale: 2,500 stores in China. We're opening more than a store a day. We're going to do that for the next five years. That's 500 stores a day. The roastery in China, in Shanghai, opens a year from today. Twice the size. I think China's going to be larger than the U.S. Six hundred million middle class Chinese coming into the marketplace. And we are positioned so well to take advantage of that. So this is a wonderful time for the company. And I think I'm going to get an opportunity myself to take advantage of what I do best while Kevin is managing the business.
Sorkin: Melissa back in New York has a question. Melissa.
Melissa Lee: Yeah. And by the way Howard, I was just in Hong Kong a couple weeks ago. I love the red bean scones. I always have them whenever I'm in China. I wanted to ask you, though, because you've been a vocal supporter of Hillary Clinton in the past. And since the election, there's been a real optimism in the stock market about prospects of the U.S. economy. Gauging your stock price, investors feel the same way. Your stock was down 10 percent going into the election. Since the election, the stock is up 7 percent. So I'm wondering, do investors have it right? Should they be more optimistic under a Trump administration for the prospects of the U.S. economy and therefore the prospects for Starbucks?
Schultz: Well, I need to separate the prospects of Starbucks from the Trump administration and the momentum in the stock market. You know, if you look at the success we've had in terms of building market value and building shareholder value, it's been primarily based on our ability to execute, build shareholder value and balance profit with social impact. I'm not spending a lot of time on the cause and the effect of the Trump administration. Obviously, we all want the president-elect to do well, but Starbucks is going to have to do what we do based on the things that we can control.
Sorkin: Do you feel that the Starbucks brand is at odds with the administration and Donald Trump? The reason I ask is there have been boycotts of #TrumpStarbucks or boycott Starbucks as it relates to Trump people who asked baristas – they asked them to write Trump on the cups and scream out the name. And just what the Starbucks brand represents at large.
Schultz: I don't think on any level that the brand or what we represent is at odds with the president-elect or his supporters. Ninety million customers a week are going through Starbucks stores and I assume many of them voted for Donald Trump. We feel very strongly as a company that our role and responsibility in addition to making money and building shareholder value, as you know, is to demonstrate a level of social impact in the communities that we serve. We, as a company, the board, me personally, Kevin, have been deeply concerned about a number of issues - social issues that for the most part have not been addressed by the Republican administrations in the past and hopefully will be addressed by the president-elect. I think that as we go forward, we will have an active voice in demonstrating what I've said before: the moral courage to address things that we think are important to the promise of America and the American dream.
Sorkin: Ken Langone back in New York has a question for you. Ken?
Ken Langone: Howard, how are you?
Schultz: I'm very well. Nice to talk to you and nice to see you.
Langone: Now, you and I are supposed to get together pretty soon with Jim Meade so I look forward to that.
Schultz: I do too.
Langone: Let me first of all congratulate you for the company you founded and the way it's running, the way it's operated. Let me try – let's both of us try and push aside our political and philosophical differences. Let's talk about one thing that we can say is created by a bipartisan effort, and that's public education in America. If we want to close the income gap, if we want to really be – address the issue of income inequality, we need to understand that we've got to prepare these kids better than they're being prepared globally and around the world, but also in America. And I think that there's no doubt in my mind if you look at hard numbers since the education department has been founded in 1978 or '79, public education has only gotten worse. When we talk about qualifying people for opportunities, we need to have them have the basic tools to succeed. And I think here's an opportunity for me a conservative and you a liberal and people like us to sit down and say, 'Ok, let's push all this aside. Let's come up with an approach that's going to be good for us.' Because very frankly the only thing of any enormous value at the Home Depot today are the 360,000 wonderful people who work there. They're the heart and guts of this. Anybody can build a big box. Anybody can buy inventory. All of those things can be done. The genius of Home Depot and I guess I'm being proud to say I'm part of it – Bernie and Arthur as well all of the people that are there – is our people. That's what separates a great company from a company that's not so great. And I think, Howard, you go into your stores and it manifests there as well. But we have got to get together as a nation, do better than we are doing to educate these kids because it's getting worse and worse and worse. And one of the things I'm excited about – hopefully you'll have some more time now that you've turned over the CEO role – that people like you and me can sit in a room and say let's forget about what we believe and don't believe. Let's just talk about the numbers and how to fix them. I hope you're going to do that. And I congratulate you for handing off the baton. By the way, I love your stock. I think it's a great company, and I think it's got a bright future. So to that extent, I'm excited.
Schultz: Can I respond to that?
Schultz: First off, coming from you and what you've accomplished over your career and what Home Depot still represents in America, I'm humbled by that and I really appreciate it. I think what you've just described unfortunately we did not see a lot of over the last year in terms of the lack of civility and lack of respect between the two parties and the campaign. And basically, what you've just describe is a level of civility and common language to address a very serious problem. If you look at the problem we have today, the education issue is deeper than just education. We have almost 6 million young people in America who are between the ages of 18 and 24 labeled as opportunity youth. The majority of them are African-American and Hispanic. We have one out of six in America today that is – goes hungry every single night. We can speak a great deal about the fact that there has been a fracturing of opportunity in American in which, unfortunately, your station in life is beginning to define whether or not you have access to the promise of the country. What the country needs more than ever before is a level of unity, of inclusion, of civility and people coming together over a common goal. And I think the subject that I would talk about mostly is a level of compassion and empathy that we need to try to recognize that the only way our society and the promise of America and the American dream can continue to exist is to ensure the fact that those people who were at the lower end have the same opportunity that people have with the right ZIP code in America. And I think that's the question that unfortunately is being answered today in a negative. And I think I would look forward to sitting down with you and others in a bipartisan way to address this issue so that we as business leaders can recognize that we can make a difference and address this issue and not wait for Washington. Obviously the dysfunction and the polarization we've seen for years hopefully is not going to continue. But what's been coming out so far is not as encouraging as one would hope.
Sorkin: Amen to that. I want to – Jim Cramer I know has one last question then I have a final question for both of you gentlemen.
Cramer: Howard, it's got to be difficult for Kevin. You're an executive chairman. You're not a chairman. That means you'll be intimately involved. You're staying on in a very important mission. How will you really let Kevin have the reins? Because an executive chairman is in there doing exactly what a CEO could do if he's not careful.
Schultz: No. Jim, I can't let you get away with that one. Kevin Johnson starting in April is going to be comprehensively all in the chief executive officer of Starbucks Coffee company. Howard Schultz is the executive chairman to support whenever Kevin needs it. He is managing the business. He's managing the team. He's setting the strategy. I'm here to help and support. There should be no misunderstanding whatsoever. And Kevin Johnson is well equipped to take the company to the next level. And that's going to be a wonderful opportunity for our shareholders.
Johnson: And let me just add to that, I think it's a gift having Howard as an executive chairman. He and I have developed a relationship over more than a decade. We've worked together nearly eight years at Starbucks. The last two years intimately –
Sorkin: What do you go to him for? You guys have a door between your offices. In this new role, when do you think you are going to open the door and walk in?
Johnson: We talk to each other multiple times throughout the day on a wide range of topics. I know one thing. Every time that door to my office opens and Howard pops his head in, there's going to be some new exciting adventure ahead.
Sorkin: Ok, we have to go. Final question and you know I have to ask it. And given that we're talking about education and policy and public policy. Everyone wants to know whether you are laying the ground work, not necessarily now, but perhaps four years from now, to run for the big office.
Schultz: Andrew, I'm all in at Starbucks, and that is my focus at this time.
Sorkin: I imagine we are going to come back, and you'll be asked that question again in the future. Gentlemen, thank you both. Kevin, congratulations on the new job.
Johnson: Thank you.
Sorkin: And we really appreciate you spending time with us this morning.
Schultz: Andrew, thanks for being in Seattle.
Sorkin: Thank you. And I want to thank Jim Cramer for his brilliant questions as well. Guys, I am going to send it back to you in New York.