Howard Schultz spills the beans on his plans to save the company he founded.

NEW YORK (Fortune) — Before Howard Schultz agreed to come back to become CEO of Starbucks, the company he built from a Seattle boutique into a global mega brand, he had to get his kids’ blessing. After all if Dad was going back to the grind (so to speak), he would be working 15-hour days. And while Mrs. Schultz didn’t hesitate, not surprisingly the younger Schultzes needed some convincing. In the end Dad prevailed and in early January, Schultz reassumed the mantle. Since then the CEO redux has kept a low profile, but recently agreed to speak exclusively to Fortune Managing Editor Andy Serwer.

Q: Thanks for returning the call, Howard. First, can you tell us about the process that you went through to compel you to return?

A: The board asked me to return, but I was on a parallel track with them. Obviously, I was a witness to the downturn in the business and had concerns about shareholder value and given my passion for the company I accepted the board’s offer. The board and I had conversations over the last few months as we headed into the holiday season. The final decision was made after the holidays.

Q: You say ‘witness to the downturn,’ but shouldn’t you take responsibility for where the company is now?

A: I want to make it clear that I take full responsibility for where the company is now, and also for where it will be going forward.

Q: Did the memo that you wrote last year about Starbucks (SBUX, Fortune 500) ‘losing its soul’ undermine then CEO Jim Donald?

A: It wasn’t intended to. I have great respect for Jim. I have written many memos, this one became public. I don’t think it any way pointed a finger at him or any one person. It was a call to arms for our company.

Q: Was he hurt by this decision?

A: You have to ask him that.

Q: Whom did you consult outside the company before deciding to come back as CEO? What advice did they give you?

A: I didn’t talk to anyone but family while it was being considered. Since then I spoken to some dear friends who have been through this before, like the names who have been bandied about and I am still talking to them.

Q: You mean like Steve Jobs, Michael Dell, and Chuck Schwab?

A: I’m not going to name names.

Q: In your letter to employees, you said the company must shift its focus away from “bureaucracy” and back to customers. How do you plan on doing that?

A: In the week since announcement we have completely realigned the organization to reflect a laser focus on customers. We have incredible, dedicated partners, but as an organization we were not organized properly over the past few years. We need to put ourselves in the shoes of our customers. That is my new battle cry. Live and breathe Starbucks the way our customers do.

In the past, the U.S. and international operations leadership have also been responsible for not only the business, but also integration and the authority over real estate, marketing and merchandising. But we are too big for that. Those three businesses employ many people. Now real estate, marketing and merchandising will report directly to me. That means that for the heads of the U.S. and international operations, Launi Skinner and Jim Alling, their sole responsibility is customers. And the partners who work with them will be able to focus on customers at every level – from here at our corporate headquarters to our stores.

Q: So what are you going to do?

A: First, this is a healthy company, with more than $9 billion in revenues, more than $1 billion in operating income and 50 million customers in our stores per week. We have vast opportunities in our international business, where we have just scratched the surface. This is not a broken company. Having said that, we need to fix certain critical things, particularly here in the U.S. Yes we became less passionate about customer relationships and the coffee experience. We spent time on efficiency rather than the experience. We never wanted to be transaction driven.

Q: But wait a minute, isn’t a problem that the lines are too long?

A: Yes that’s one of them. And there are a number of things we are going to do. Also we will do more things to better reward our most loyal and best customers. Some 15 percent of our transactions are on the Starbucks card. And we need to look at store design. We haven’t done enough here. In the future, you’ll see new store design that significantly improves the customer experience. We cannot embrace the status quo. Going back to the future is not enough; we need a new level of differentiation and innovation.

Q: So does that also mean new drinks coming?

A: Yes. I feel good about 2008, even though we are going to be doing some heavy lifting this year. And I feel even better about 2009 and beyond. We will have announcements…stay tuned.

Q: Aren’t you really just a victim of slowing secular growth and that’s it? Isn’t it really a Wall Street problem more than anything else?

A: Wall Street is separate from the customer issues, but of course also intertwined. Bottom line is we can’t exceed expectations of shareholders unless we exceed the expectations of customers first. And we do both by inspiring our partners and refocusing them on the customer.

Q: Why has no strong number two competitor emerged in your business?

A: It’s not easy to get into. People sometimes fail to realize that almost unlike any retailer or restaurant, we are completely vertically integrated. We source coffee from 30 countries. We have a proprietary roasting process. We distribute to company owned stores, and finally serve the coffee. Others are resellers of commodity-based coffees.

Q: The average number of customer transactions per store dropped in the most recent quarter for the first time ever. With a recession looming, how do you counter the fact that some people might need to trade down from a $5 cup of coffee to something cheaper?

A: I am concerned about any attrition in customer traffic at Starbucks, but I don’t want to use the economy, commodity prices or consumer confidence as an excuse. We must maintain a value proposition to our customers as well as differentiate the Starbucks Experience. That is the key.

Q: Cannibalization by new stores has been a concern in the U.S. Will you pull back on store openings? Do any stores need to be closed?

A: This is another area that needs to be better explained. We do not believe the market is close to saturation. Over the past 15 years our new stores on average cannibalized 30 percent of an existing store nearby, and yet we had same store sales growth of 5 percent or better over 13 of those years, with 20 quarters of consecutive comps.

We think we know real estate and store locations. By the way, the pundits said we were saturated in Seattle in 1992. Since then we have opened 340 stores in the state of Washington.

However, it is the case that we have stretched the real estate selection process further than we have in the past in terms of demographics. And yes that has resulted in some attrition, so we will now open fewer stores and we will close some in the U.S. The size of the prize is still huge. We sell less than 10 percent of the coffee consumed in the U.S. and less than 1 percent outside the U.S. The momentum will come from international. Slower growth in the U.S., accelerating growth overseas. The response to the Starbucks brand has been phenomenal in our international markets.

Q: Some say that the hot food detracts from the coffee smell. Will you make changes to the food you offer, or pull back on selling food?

A: We need to reinvent food at Starbucks. Less could be more. There are no sacred cows. I don’t want to say what we will do today. We rely on others for food, because we don’t want to be in the bakery business and some of it isn’t as good as it should be. We don’t want to be a food company. We are a coffee company.

Q: Some say the movie side of the business has become a distraction. Do you agree? Will you back away from movie promotions?

A: We’ve had great success with music, including our partnership with Apple (AAPL, Fortune 500). Books also. We have not succeeded that well with film. Again, no sacred cows. Entertainment needs to be complementary to the coffee experience. We are examining everything.

Q: Starbucks now does national TV ads, which you once said would never happen, as they would diminish the brand. Are the ads working? Will you continue them?

We are evaluating what happened over the holidays. We have a fair amount of innovation coming, so I am not ruling it out.

Q: Are you looking forward to budget meetings again?

A: I’ve already been in a few. They were enlightening.

Q: In what way?

A: Probably in terms of people being open and transparent about what’s ahead. That hasn’t always been positive, but crucial for me to know and be aware of all of this.

Q: Back in 2004, you told us that the company was in the second inning of a nine-inning game. Where are we now?

A: It’s still very early. People will look back and recognize the indisputable power of the Starbucks brand.

Q: Did McDonald’s (MCD, Fortune 500) announcing it was moving into the coffee business in a bigger way figure in your decision?

A: No.

Q: What is the timetable?

A: On January 30, we will have our quarterly earnings release and conference call. At that time we will lay out some specifics about our plans to slow growth in U.S. Then at our annual meeting on March 19th, there will be a number of announcements. And as I said, while you will continue to see some things coming through 2008, it’s also a year for doing some spadework, so in 2009 and beyond some longer-lead time developments will start coming to market.

Q: What has been the reaction internally to you coming back and to the changes that might be on the horizon?

A: We had a company meeting on Monday January 7, and 4,000 people were there. It was very emotional. [A Starbucks exec says Schultz received a standing ovation.] Since then I have received almost 2k e-mails from shareholders, customers and friends wishing us well. 

http://money.cnn.com/2008/01/17/news/newsmakers/starbucks.fortune/index.htm?postversion=2008011805

A web-friendly golf game is teeing up in offices everywhere. U.S. productivity, meet your new worst enemy.

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(Fortune) — Whether the economy improves or weakens over the next year is anyone’s guess, but I’d like to make a bold prediction for 2008: by June, white-collar productivity will fall through the floor like a Looney Tunes anvil dropped from a skyscraper.

How can I be so sure? I hesitate here only because I worry about the ethics of doing what I am about to do. In sharing what I know, I could be blamed for the looming meltdown. Would Einstein have published his theory of relativity had he known it would lead to the bomb? Like him, I can’t hold back the inevitable.

Three words then: World Golf Tour.

Where I live, in San Francisco’s Bay Area, someone is always gassing on about the Next New Thing or the Killer App. Increasingly, the Killer Thing they’re buzzing about has to do with gaming.

I’m not talking about the Wii stuff your kids play in the living room. I mean games you play online on your computer. It’s a fast-growing segment of the industry that market research firm Strategy Analytics estimates will generate $5 billion in revenue this year – and more than twice that by 2011. Internet gaming, after all, is what drove Activision into Vivendi’s arms last month, creating one of the largest digital game publishers in the world.

So when a friend sidled up to me and whispered “World Golf Tour” in my ear, I chalked it up to the usual hype. I mean, digital golf games are as old as Moses and about as much fun. But then I checked it out one afternoon. Days later I stumbled away from my computer to eat and, if there was time, bathe.

I’m not going to give you the web address. Anyone who wants it can Google (GOOG, Fortune 500) those three magic words and enter at his own risk. The game is still only a demo; in its current state, you play nine holes of a closest-to-the-pin competition. But when the full site goes live, sometime in the next six months, you’ll have access to all 18 holes of the famous Ocean Course at the Kiawah Island Golf Resort. A half-dozen real courses will be online by year-end. That’s when business life as we know it grinds to a halt.

World Golf Tour combines three elements that could prove irresistible to corporate slackers: (1) It puts you on world-class golf courses in stunning, high-definition color; (2) it streams the game through any garden-variety browser without extra downloads (which means you can play in your cubicle without running afoul of the corporate firewall); and (3) you’ll be able to play with your pals – to meet up for a virtual foursome or play in a league – from your desktop.

While that last point isn’t new to web-savvy teenagers, it’s a pretty radical step for games aimed at older guys. World of Warcraft, for instance, Vivendi’s bestselling multiplayer game, has attracted more than nine-million mostly male combatants who meet online to engage in quests and smite each other with battle-axes. It’s also a cash machine that generates nearly $1 billion a year.

It was World of Warcraft that inspired YuChiang Cheng, co-founder and CEO of World Golf Tour. He was working for a company that handles back-office systems for casinos and gaming sites last January when he had his big idea. “I was watching things like World of Warcraft take off and spending way too much time with my fantasy football team,” he recalls. He started thinking about what “mature men want to play online.” World Golf Tour, he says, aspires to be “World of Warcraft for older sports guys.”

Cheng partnered with co-worker Chad Nelson, who had a hand in creating scores of games for the PC (and who claims to be a scratch virtual golfer), and J.F. Prata, the former COO of game companies Westwood Studios and Maxis. Together they devised a novel way to map the rules of Newtonian physics that drive animation-based video-games onto high-definition photos. In other golf games that use video, a relatively small number of canned shots are recycled to simulate play. With World Golf’s technology, however, the video feedback is virtually infinite. You feel as if you are really there.

Backed by first-round funding from venture firm Battery Partners, the World Golf team has been taking high-resolution pictures of every square inch of far-flung golf courses – from Pinehurst in North Carolina to the Bali Hai Golf Club in Las Vegas – using a small fleet of helicopters and radio-controlled drones. It takes a dozen people six months and $200,000 to make one World Golf course simulation, says Cheng. But that’s a bargain compared with the millions it can cost to design, animate, and distribute a conventional video or PC game. Cheng says the site will make money through advertising, sponsorship deals, and various premium offerings.

To date, 100,000 Internet duffers have found the demo site through word of mouth. One top-rated player is reported to be playing 30 hours a week. “He’s an adult, and he has a job,” says Cheng. “His whole office is now playing.” You’ve been warned. 

http://money.cnn.com/2008/01/16/technology/online_golf.fortune/index.htm?postversion=2008011804

GALLERY

Novel Images

‘The Invention of Hugo Cabret’ is an award-winning book that reads like a movie

Each year the American Library Association awards the Caldecott Medal to the artist of the most distinguished American picture book for children. Historically, the artist has illustrated shorter classics for younger readers: “Make Way for Ducklings,” “Owl Moon” and “The Polar Express.” But this week the ALA gave the honor to author-illustrator Brian Selznick for “The Invention of Hugo Cabret,” a 533-page book for 9-to-12-year-olds. Selznick uses words on some pages, and black-and-white pencil drawings on others, to tell the tale of a 12-year-old orphan who lives in the walls of a Paris train station and tries to finish his dead father’s mysterious invention. In the process, the fictional boy meets a real silent filmmaker, George Méliès, who’s working in the station’s toy shop. NEWSWEEK’s Karen Springen talks with Selznick:

NEWSWEEK: You wrote and illustrated your first book, “The Houdini Box,” in 1991. But with “The Invention of Hugo Cabret” winning the Caldecott, do you feel like an overnight success story at 41?
Brian Selznick: I still feel excited about the idea that anybody looks at a book that I make. I started out as a bookseller. When my first book came out, I was working at Eeyore’s Books for Children in New York City [which no longer exists]. I would secretly hand sell it to people! So much of what I know about books, how I think about books, is related to what I learned at that store. There’s no one kind of book that kids read, just like there’s no one kind of book that adults read. People used to come into the store and say, “Hey, I want to write a book for kids—what’s selling?” At first, I’d be like, “I guess circus books sell.” But it’s not a matter of thinking about what the audience wants. It’s a matter of thinking about what story it is you want to tell. When I was working on “Hugo,” people would say, “You’re making a book about French silent movies?” I was like, “It does sound like a terrible idea.” I brought this up with my editor, Tracy Mack at Scholastic. She said if these subjects are interesting to the main character, then they’ll be interesting to the reader. Tracy was right. Now to meet kids who want to see silent movies and ask for them after reading the book is just completely wonderful.

In “Hugo,” your pictures give new information, rather than just illustrating what the words have already told the reader. Is that a first, and how did you come up with the idea?
I can’t say if it’s a first. It’s not something specifically that I had seen myself. I was trying to figure out how to tell the story in a way that would be best for the story itself. It came out of the movies that I watched and out of the picture books that I’ve made, and because I wanted the book to really be like a movie.  

How did George Méliès inspire your story?
Years ago, I saw “A Trip to the Moon” [one of the very earliest films, made in 1902] and found out it was by this guy George Méliès. Every once in a while I would come across Méliès’s name and find out some interesting tidbit about him. About four years ago, I was reading a book called “Edison’s Eve,” about the history of automata. There was a whole chapter on George Méliès that says he had a collection of automata that he had to donate to a museum, but they ended up being destroyed because they sat up in an attic. This image of this pile of broken, rusty machines really got to me. I immediately pictured a kid finding one of those broken machines and trying to fix it. I realized that that was the beginning of a story. I wanted to know who the kid was, and I wanted to know why he thought he could fix one of these machines. And I wanted to know what the machine would do once it was fixed.

Why is the book called “The Invention of Hugo Cabret”?
We had a really hard time coming up with a title. It was called “The Ghost of Paris” for a while. But then it’s not really a ghost story. And then I was going to call it “King of the Moon,” but Scholastic thought it made it sound like it was for younger kids. A friend of mine suggested “The Inventor” because Hugo invented things. Then I thought of “The Invention of Hugo Cabret,” and that seemed right because it had several different meanings. Hugo finds himself. It’s how he puts together a world for himself. At the very end of the book, we find out that the book that we’re reading is actually written by an automaton that Hugo invents. I wanted it to be that at the end, you would find out that the book you’re holding actually is the result of the invention that Hugo has created. At the end of the story, you find out that the book itself is part of the story.

How did you come up with the name “Hugo Cabret”?
Hugo is actually named for a toy that I had when I was a kid called Hugo: Man of 1,000 Faces. He comes with all of these prosthetic facial features, like wigs and mustaches that you could glue onto his face to make him into a disguise, and you could also glue them onto your own face. I thought Hugo sounded kind of French. That was going to be his temporary name. After working on the book for two and a half years, he was just Hugo. Cabret I just made up. It’s very rare, but there was a French mathematician with that name. I just liked the way it sounded.

http://www.newsweek.com/id/94804

NEW YORK (CNN) — Almost a half century ago, the state of Michigan put an auto industry executive named George Romney on the political map. On Tuesday evening, it may have put his son’s presidential campaign back on track.

More than four in 10 GOP voters called Mitt Romney’s Michigan ties important, and they sided heavily with him.

more photos »

Mitt Romney scored a sorely needed victory in his native state’s GOP primary by assembling a formidable coalition of ideological conservatives and self-identified Republicans.

In a state suffering from the highest unemployment rate in the nation, voters turned to the businessman-turned-politician who pledged to help turn their economy around.

Not surprisingly, the economy was by far the most important issue to Michigan voters. For Romney’s chief competitor in the Michigan primary, John McCain, that was bad news. Only three in 10 voters who cited economic concerns as their top priority gave their votes to McCain; almost four in 10 went for Romney.

Eight years ago, the maverick Arizona senator stunned then-Gov. George W. Bush by beating him in Michigan with a coalition based primarily on the votes of independents, moderates and liberals.

On Tuesday, McCain’s coalition included the same voters, but it was noticeably smaller. In 2000, independents comprised 35 percent of the total Republican vote; Tuesday, they comprised only 25 percent. Eight years ago, moderates and liberals were 54 percent of the vote; Tuesday they were only 44 percent.

McCain also found himself fighting a losing battle against the legacy of Romney’s father. George Romney served three terms as Michigan’s governor in the 1960s and is fondly remembered there. More than four in 10 Republican voters said that Mitt Romney’s ties to the state were important, and those voters chose Romney over McCain by a solid 41-point margin.

Finally, Mike Huckabee finished a distant third in Michigan in large part due to his disappointing showing among born-again and evangelical voters. The former Baptist minister relied on this key segment of the GOP electorate in his stunning Iowa victory and was hoping to repeat the feat in Michigan.

It didn’t happen. While born-again and evangelical voters constituted almost 40 percent of Michigan’s total vote, they actually broke for Romney by five points, 34 to 29 percent. Huckabee will need to perform much better with this portion of the electorate as the race for the Republican nomination now shifts to Saturday’s South Carolina primary — for most of the candidates.

McCain and Huckabee, a former Arkansas governor, had already landed in South Carolina before the Michigan results were announced Tuesday — leaving Romney alone to bask in his first major win of 2008. And Fred Thompson bypassed Michigan altogether, putting all his Southern conservative chips into South Carolina in what many believe is a make-or-break contest for his presidential campaign.

South Carolina Republicans proudly boast that the state’s primary voters have sided with every eventual Republican presidential nominee since 1980 — the beginning of the Reagan Revolution.

But Rudy Giuliani is looking to break that streak by skipping the primary altogether as he continues to pursue his Florida and Super Tuesday strategy. Romney has decided to split his time between South Carolina and Nevada — which is holding caucuses the same day.

With three major contests having produced separate winners, the wide open race for the Republican nomination has turned into a hunt for delegates.

“We believe we can be competitive in all of these early primary states, and Nevada is one of them,” said Romney spokesman Kevin Madden, explaining the former Massachusetts governor’s decision to campaign in Nevada and South Carolina in the coming days.

“I think the expectations are greater on the other campaigns in South Carolina, because they have been there for this past week. But we expect we can be competitive there. A competitive finish, a lot of people would see it as a victory, and it shows that we are competitive across the board.”

A very well-connected South Carolina Republican operative, who is supporting another candidate, said Romney had been well positioned to win the South Carolina primary, but back-to-back losses in Iowa and New Hampshire took the wind out of his sails. A victory in Michigan Tuesday night came too late, the operative said.

Speaking on the condition of anonymity, the operative added that even though Romney worked hard over the past year to appease evangelicals’ concerns about his Mormon religion, he was not altogether successful.

That said, his religion likely will not be as big of an issue in Nevada. The Church of Jesus Christ of Latter-day Saints estimates that there are more than 34,000 Mormons residing in South Carolina, compared with almost 170,000 living in Nevada.

Nevada has 31 delegates on the line Saturday, compared with South Carolina’s 24. Romney apparently did the math.

The South Carolina primary now seems to be a battle between Huckabee, McCain and Thompson. Huckabee and Thompson are competing for the evangelical vote, while McCain is banking on his decorated military service appealing to Republicans in that patriotic state.

And McCain hopes the bridge burned between him and the evangelical community following the 2000 campaign has been repaired enough to help him pull out a win Saturday.

While South Carolina is legendary for operatives engaging in dirty campaigning, South Carolina Republican Party Chairman Katon Dawson noted that this is “one of the cleanest, above-board campaigns I have ever witnessed in South Carolina.”

Dawson said he thinks that it has been relatively above board because “there has not been a distinct frontrunner” in the race for the nomination.

But within hours of Dawson making this statement, the McCain campaign e-mailed reporters a copy of a direct mail hit piece focusing on his time as a prisoner of war in Vietnam. And late Tuesday night, the Thompson campaign accused Huckabee’s campaign of making deceptive telephone calls distorting Thompson’s record to voters in South Carolina.

With only four days remaining, Dawson thinks the campaigns need to shift their focus to get-out-the-vote operations if they want to win on Saturday.

http://www.cnn.com/2008/POLITICS/01/16/analysis.michigan/index.html

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Did you know that the latest cars not only include hybrids that are running on both electricity and gas, the hummer convertor who made the hummer into a machine that could do 30 mpg using pizza grease, Toyota’s new iQ that boasts space vertical as opposed to longitudinal, but there will be Flying Cars very soon? “In the near future, vehicles like the M-400 and the Skycar might take flying cars out of science-fiction movies and onto– or above– your city’s streets.”
http://videos.howstuffworks.com/howstuffworks/456-how-flying-cars-work-video.htm

- David Jang

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