Pepsi's Challenge

Interesting article that demonstrates CEO Indra Nooyi's leadership during these challenging times for PepsiCo.

The Pepsi challenge - By Betsy Morris, senior editor (Fortune Magazine)

Can this snack and soda giant go healthy? CEO Indra Nooyi says yes, but cola wars and corn prices will test her leadership.

Pepsi can have a strange effect on people. The company, that is, not the beverage. No sooner had PepsiCo president Indra Nooyi gotten word 18 months ago that she was to become the next CEO than she hopped on a plane to Cape Cod, where Mike White, her main challenger for the job, was vacationing. The two had worked together for years. Both had been CFOs and rising stars. Both loved music. When they'd been kicked out of a board meeting the previous month while their fates were being discussed, they went to the Jersey Boys musical on Broadway and sang along to all the Frankie Valli songs.

As Nooyi's plane landed on Cape Cod, there was White waiting for her at the airport with a card he'd written to congratulate her. They took a long walk on the beach. Back at his beach house, he played the piano and she sang. Before she left, they went for ice cream. "Tell me whatever I need to do to keep you, and I will do it," she told her longtime colleague, who was vice chairman at the time. White said he would sleep on it.

That kind of scene may be rare in the hypercompetitive realm of C-suites, but not at PepsiCo (PEP, Fortune 500) (rank on the 2007 Fortune 500: No. 63). PepsiCo's three ex-CEOs, all on good terms with one another, weighed in to help Nooyi keep White onboard. She says she asked the board to increase White's compensation to nearly match hers (Nooyi's 2006 compensation: $7.1 million). White was Pepsi's best operations man - the kind of guy who would be indispensable in a downturn. He would be an important advisor. In the end, White decided to stay. When it was his turn to speak to the troops at the meeting the following week to announce Nooyi's appointment, he put it this way: "I play the piano and Indra sings." Says Nooyi: "I treat Mike as my partner. He could easily have been CEO." At key meetings she makes sure he is seated on her right.

That isn't the way a new CEO usually takes charge, but Indra Nooyi is an entirely different kind of CEO, a product of her native India as well as of PepsiCo's family-values approach to grooming CEOs. She is not hung up on pay. She's not shy about asking for help when she needs it. She's 52 years old and does not plan for this job to be her last. Her friend Henry Kissinger predicts that it's only a matter of time before she is plucked for a big Washington post, possibly a cabinet job, and Nooyi acknowledges that at some point, she'd like that. She's cosmopolitan, rigorously educated, and a strategic thinker - her background is Boston Consulting Group - much more interested in the burgeoning markets in Russia and China than in the noisy U.S. cola wars. A dinner gathering at her house is as likely to include Tony Blair and government ministers from India or Mexico as traditional pinstriped business types. As a vegetarian who for years has been talking about the importance of "gut health," she's not who you'd think would be leading a maker of sugary soda and salty snacks - but that's why she's taking the company in a different direction. She sings karaoke; she plays electric guitar. Her South Asian heritage gives her a wide-angle view on the world.

Since becoming CEO, she has reorganized PepsiCo to make it less fixated on the U.S. and broadened the power structure by doubling her executive team to 29. She has installed an Italian native, Massimo d'Amore, atop the division that includes the troublesome U.S. soft drink business, and recruited a former Mayo Clinic endocrinologist to head up R&D. Last year she spent $1.3 billion on acquisitions like Naked Juice, a California maker of soy drinks and organic juice. She has created a motto - "Performance With Purpose" - that puts a positive spin on how she wants PepsiCo to do business both at home and abroad.

It essentially boils down to balancing the profit motive with making healthier snacks, striving for a net-zero impact on the environment, and taking care of your workforce. "If all you want is to screw this company down tight and get double-digit earnings growth and nothing else, then I'm the wrong person," she says. "Companies today are bigger than many economies. We are little republics. We are engines of efficiency. If companies don't do [responsible] things, who is going to? Why not start making change now?"

Nooyi didn't wait to become an elder statesman CEO before making herself heard on the public stage. Her predecessor, Steven Reinemund, calls her a "larger-than-life leader." In a speech to the food industry in January, she pushed the group to tackle obesity. "Do you remember campaigns like 'Keep America beautiful'? What about 'Buckle up'?" she asked. "I believe we need an approach like this to attack obesity. Let's be a good industry that does 100% of what it possibly can - not grudgingly but willingly." At the 2008 World Economic Forum in Davos she told Secretary of State Condoleezza Rice it was critically important that "we use corporations as a productive player in addressing some of the big issues facing the world."

Her fluency in the global arena is increasingly critical to the business. With the U.S. marketplace in slow-growth mode even in the best of times, the biggest opportunities are overseas. PepsiCo's international business grew 22% last year, triple the rate of domestic sales, and now contributes 40% of total revenue ($39 billion last year). And a CEO had better be taking the moral high road. There is no longer a free pass for the ugly American company: Should Baked Lays fail to live up to its health claims, it'll get bounced off the store shelf by regulators in Britain. And if you are just the next greedy American corporation, you don't stand a chance in China's tight labor market. Set too ambitious a profit target in India, and there will be hell to pay if your bottling company drains the water table.

"If you look at the job entirely from the American perspective, then it becomes impossible to run a global business," says Kissinger, who consults for Pepsi and other companies on international matters. "You have to relate your interests to the interests of other parts of the world - to be relevant in their societies. Indra seems to understand this instinctively."

Suddenly, however, a change in the economic environment is likely to test whether Nooyi is a leader for all seasons. With a possible recession looming in the U.S., PepsiCo is headed into the toughest period it has faced in a decade. Prices are soaring for its main ingredients, commodities like corn and cooking oil. Its newest products, like premium-priced juice, may face resistance from budget-conscious consumers. Meanwhile, archrival Coke (KO, Fortune 500) is gearing up to revive the cola wars with such products as calorie-free Coke Zero, which looks like a hit, and the company's newly acquired Vitaminwater lineup.

For a long time, investors have been enamored of PepsiCo for its bold strategic moves and steady, reliable growth. The company's stock has more than doubled since 2003 and now hovers around $70 a share, up about 10% since she took over. But Wall Street will care much more about how well Nooyi handles corn prices than about how well she solves world problems. So far, so good. In the fourth quarter of 2007, revenue went up 17%, to $12.3 billion, and operating profits rose 9%, to $1.7 billion. Industry analysts at Bank of America say PepsiCo "is demonstrating great flexibility in a tough environment."

Nooyi has a hard act to follow - one she played a part in shaping. Insiders attribute PepsiCo's success to the combination of the two cultures that were merged to form the company in 1965: the get-things-done expertise of Frito-Lay and the never-take-anything-for-granted underdog mentality of Pepsi-Cola, which Coke had nearly put out of business. The result was a contrarian, risk-taking big company that prides itself on acting like a small company and has posted an eye-popping compound annual growth rate of 13% over the past 42 years. Since 2000 the company's revenue has nearly doubled. As PepsiCo's strategy and M&A chief, Nooyi created a growth machine, shedding restaurants and bottlers and buying Tropicana and Quaker Oats.

PepsiCo today has a completely different flavor. Old Pepsi: Fritos and Cheetos. New Pepsi: Stacy's Simply Naked (pita chips) and Flat Earth (fruit and veggie chips). Old Pepsi: Diet Pepsi and Mountain Dew. New Pepsi: Naked Juice Pomegranate Blueberry and IZZE Sparkling Clementine. Old Pepsi: ill-fitting acquisitions like North American Van Lines and Wilson Sporting Goods. New Pepsi: joint ventures with compatible partners like Lipton (bottled ice teas) and Starbucks (canned frappuccino).

New Pepsi was so early getting beyond soda pop and into the healthier, faster-growing noncarbonated beverages (bottled water, sports drinks, and teas) that it commands half the U.S. market, about twice Coke's share, according to Beverage Digest. Not that PepsiCo is anywhere near becoming purely a health-food company, mind you. The bulk of its products (upwards of 70%) are still in what it euphemistically calls "fun for you" foods, as opposed to its two other internal categories, "better for you" and "good for you." But its acquisitions and product reformulations, even in fried-food-loving markets like Mexico, indicate the strategic shift is more than just show.

Taking the right side of public opinion, of course, has additional benefits in blunting potential legislation, regulation, and criticism that take aim at junk food and soda pop for obesity rates. It doesn't, however, protect against a sudden change in zeitgeist about products like bottled water - PepsiCo's brand is Aquafina - the most innocent of all beverages but lately under siege as environmentally wasteful. At a time when public opinion and tastes can surprise even a fast-moving company like PepsiCo, the CEO of a consumer products company has to be extraordinarily adaptable.

Indra Krishnamurthy Nooyi has one of those incredible, impeccable track records. She grew up in Chennai (formerly Madras), on the southeast coast of India, the daughter of an accountant and a stay-at-home mother who "encouraged us but held us back, told us we could rule the country as long as we kept the home fires burning," she says. Her grandfather, a retired judge, scrutinized report cards, presided over homework, and in his later years prepared her in advance for all the theorems in her geometry book to be sure she'd be able to excel if he were to die before the school year ended. Every night at dinner her mother would present a world problem to Nooyi and her sister and have them compete to solve it as if they were a President or Prime Minister. Though her family is Hindu, Nooyi attended a Catholic school, was an avid debater, played cricket, badgered her parents (and the nuns) until she was allowed to play the guitar, and then formed an all-girl rock band - the first ever at the Holy Angels Convent. Though the band knew only a handful of songs (including "Proud Mary" and "Yummy, Yummy, Yummy"), "we were a sensation," she says exuberantly.

Nooyi collected master's degrees in business from the Indian Institute of Management in Calcutta and the Yale School of Management. She did stints at Boston Consulting Group and then held strategic-planning positions at Motorola (MOT, Fortune 500) and the engineering firm Asea Brown Boveri. She was about to go to work for Jack Welch at General Electric (GE, Fortune 500) when former PepsiCo CEO Wayne Calloway, then a GE board member, lured her to PepsiCo instead. He told her PepsiCo needed her more than GE did, and that was exactly the right button to push.

When Nooyi stepped into her new job as CEO, she had an unusually large council of elders to guide her: three former PepsiCo CEOs who keep in touch with one another almost daily. They have no organizational ties - they're friends. "She gets help if she wants it, but not if she doesn't," says Reinemund. He stays in contact from his home in Dallas, as does his predecessor, Roger Enrico, chairman of DreamWorks Animation, from La Jolla, Calif. Don Kendall, 86-year-old co-founder of the modern PepsiCo, has an office down the hall from Nooyi's and serves as a consultant. Nooyi says Reinemund will e-mail her back in 30 seconds and offer to fly up to her office in Purchase, N.Y., if she needs advice. "They were my bosses and my best, best friends," she says. They call her on special occasions and sometimes show up for birthdays.

Not long after Nooyi joined PepsiCo in 1994, its recipe for growth suddenly wasn't working anymore. Its restaurant operations, which included Pizza Hut, Taco Bell, and KFC, stalled. An attempt to catch up to Coke overseas - Coke had 71% of its revenue from international sales, vs. PepsiCo's 29% - was a disaster. Enrico took a painful round of write-downs in 1996. Coca-Cola would soon embark on a trajectory that would dazzle Wall Street and turn up the heat in the PepsiCo boardroom.

As Enrico's strategy chief and head of M&A, Nooyi restructured the company out of the wilderness. She went into suburban America and decided that the fast-food marketplace was saturated and the real estate was a hard investment to maximize - Pizza Hut had no breakfast traffic. So PepsiCo spun off the restaurant business in 1997 - no small step, since it would shrink the $31 billion company by a third. She championed the acquisition of Tropicana for $3.3 billion the following year and later the $14 billion acquisition of Quaker, both of which gave PepsiCo some brand names that could help change its reputation. As she explained later in India's Economic Times: "If you want to make a healthy product, you could not use any other Frito brands. To call them the Lays bar or Ruffles bar and expect to use it for breakfast would be crazy." (That didn't stop PepsiCo from coming up with an equally oxymoronic product, Quaker Breakfast Cookies.)

Nooyi also gave a pivotal presentation to the board in 1998 - just as the heat from Coke was becoming unbearable - that dissected the rival's business model and made a persuasive case that its double-digit growth was not sustainable. "It was a tour de force," says Enrico, who is convinced that "at that moment the PepsiCo board understood Coke's business model better than Coke's board did." Four months after the presentation Coke stock peaked at $88 and began a long downward slide.

In the mid-1990s, Nooyi says, Enrico asked her to devise a strategy that could make PepsiCo the "defining corporation for the 21st century." (He remembers saying he wanted PepsiCo to be more like GE.) She drew up scenarios of what that might look like via path A, B, or C. "We picked a particular path, and Quaker Oats was part of that path," she says, along with three smaller "tuck-in" acquisitions. Enrico made Nooyi his CFO, and to this day, he says, she is "the best negotiator I've ever seen in my entire life." Still, he didn't think she was on track to be CEO because "I constantly felt she needed to go do an operating job." His successor, Reinemund, made Nooyi his president and came to feel differently after she successfully integrated the Quaker acquisition. She proved herself both analytical and visionary. She also shared his conviction that the health movement was for real and demanded true innovation - though when fitness freak Reinemund told her he wanted her to run the New York City marathon with him for PepsiCo, she replied, "Well, Steve, I can run it in over a month: a stop here, some shopping there ..." Very early on she made the right calls on the green issue as well. She so readily loosened the capital expenditure requirements for water- and heat-related conservation projects in a Frito-Lay meeting eight years ago that executives remember being stunned by it. "Was that a yes? Can we do that?" sustainability VP David Haft recalls asking his boss immediately after. Those kinds of projects now save Frito-Lay $55 million annually.

As CEO she's been able to stick to her plans for change, which call for gradually shifting the percentage of "better for you" and "good for you" snacks to 50%, up from 30%, and widening the product portfolio with grains, nuts, and fruits. Nooyi has helped shape a model that enabled PepsiCo to pump out new products. Last year the company offered potato chips in 150 different flavors and 55 different variations on orange juice. In December she recruited Dr. Mehmood Khan from the top R&D job at Takeda Pharmaceuticals to be PepsiCo's first chief scientific officer. That may sound dramatic, but in the area of food research, says Morgan Stanley analyst Bill Pecoriello, U.S. food companies are actually falling behind. Switzerland's Nestlé, for example, outspends PepsiCo on R&D (1.6% of sales to 1%) and is calling itself a nutrition company while trying to figure out whether food can prevent disease. Last year PepsiCo bought or partnered with a Bulgarian nut packager, an Israeli hummus maker, and Naked Juice, which makes nutritional beverages like smoothies. "Is Naked Juice a beverage or is it a snack?" Nooyi muses. "I think we can liquefy snacks or snackify liquids."

One of Nooyi's most stunning talents is the art of suasion. She can rouse an audience and rally them around something as mind-numbing as a new companywide software installation. Her new motto, "Performance With Purpose," is both a means of "herding the organization" and of presenting PepsiCo globally. Because these days, she knows, you can't take even an emerging market for granted. Says Zein Abdulla, president of PepsiCo Europe: "People still tend to think of the emerging markets as, Oh, well, just do your core portfolio and then sometime in the future when they catch up with the West, you'll do the rest." Well, guess what? They've already caught up. Fully half of PepsiCo's Russian beverage business is noncarbonated drinks - juice, water, tea, energy drinks. Global brands like Pepsi don't play the way they used to. "They work," Abdulla says, "but they are not monolithic."

Nooyi sells her ideas with a famous intensity. Her colleagues say she "brings her whole self" to the office. She insists that everybody's birthday is celebrated with a cake ... and everyone is forever 35. Her karaoke machine is the ubiquitous party game at every PepsiCo gathering. She talks about being a mother. In December one executive recalls how Nooyi described to her whole team what it felt like to be a soccer mom whose week it was to bring the treats. You get a very specific list. You can't have nuts. You can't have wheat. The situation confounds the CEO mom, she confesses, urging them to "make it easy for me so I don't have to think. We can do this. We already have the products."

Just as she was held to very high standards in her youth, she expects everyone around her to measure up. She has red, green, and purple pens and uses them liberally to mark up everything that crosses her desk. "My scribbles are legendary - legendary," she says with a twinkle. Like "I have never seen such gross incompetence." Or "'This is unacceptable,' and I underline 'unacceptable' three times," she says. She's joking, but she gets her point across. One of her so-called love letters once scared some secretaries so badly that she had to go assure them that their bosses were not about to lose their jobs.

"She challenges you," says Tim Minges, president of the Asia Pacific region. When his team couldn't find an inexpensive alternative to palm oil for its products in Thailand last year, she kept pushing and pushing, saying, "I hear you, I hear you, so what's the right solution?" until they came up with one: rice bran oil. "But don't try to delegate up, because she will bounce it right back in your face," he says.

She is decisive, sometimes in ways that appear capricious, and impervious to the effect it can have. In December she ducked out of giving a keynote speech at a major soft-drink industry conference at the last minute, sending what many considered a lame excuse and dispatching a subordinate to give the speech instead. Nooyi sent word she wanted to yield the spotlight to Coke CEO Neville Isdell, who had recently announced his successor, Muhtar Kent. This drew a statement from Coke: "Neville came here this morning to hear Indra's presentation, so it's unfortunate that she decided not to attend. It would seem to us that if Indra really wanted to pay her respects to Neville, she could have done it in a very classy way from the podium." Her absence contributed to the impression that she can sometimes be temperamental, if not "brittle," as an industry analyst called her.

And she has sometimes been slow to alter her position in the face of changing facts. Nooyi says she wishes she had reacted differently to allegations in India five years ago that traces of pesticide had been found in both Pepsi and Coke. The company denied the claims and did scientific analysis to support its position. At the time it was not her direct responsibility (she was president, and White ran international), "but I was the face of India. I should have hopped on a plane right away and said, 'Guys, I assure you, these products are the safest," she says now. "At that point it didn't occur to me. That's the thing I regret. Now if it happened - man, I would be there in an instant."

With her team, there's nothing remote about Nooyi. She is part schoolmarm, part mother hen. She once told Hugh Johnston, who worked for her in corporate strategy, that he was dressed like a bum. At the time he was helping roll out the company's IT program, and he replied, "Indra, these are IT people; this is what we do. We don't go out of the building." When he moved to headquarters, she told him where to shop, and he has acquired a whole new wardrobe. She knows she is demanding, and she worries about it. She throws dinners for members of her team and their spouses, including Q&A sessions in which she insists on getting questions from the spouses and won't sit down until she does.

She appreciates the support from families, she says, because her career has been tough on her own family. For a long time, Nooyi says, she woke up each morning feeling "guilty about everything." Her career caused her husband, Raj, a University of Chicago MBA with degrees in electrical and industrial engineering, to leave a career at Hewlett-Packard (HPQ, Fortune 500) that he loved; he's now a consultant. "He helps me. He supports me. He's a man with a big heart," she says. Her incessant travel took a toll on her oldest daughter, and Nooyi regrets it. So she was overjoyed when she heard Preetha, now 24 and "my biggest critic," tell a friend recently, "Well, big companies are bad, but I beg to differ about PepsiCo." Nooyi has worked hard to be around for 15-year-old Tara. On long trips, Nooyi calls frequently to keep in touch. On domestic trips she'll do practically anything to get home at night to be there for breakfast. During an especially tough week last month she received the following e-mail at work from Tara: "You need to sleep Mom! This is ridiculous! If you plan to do well in Davos then you need to sleep!"

Her entire life has been an intricate web of tradeoffs and self-deprivation. Growing up, she was dying for an electric guitar; eventually her father bought her an acoustic "with a pickup." It wasn't until three years ago that she indulged herself. "I went out and bought Fenders, a Gibson acoustic, a Martin acoustic, a Yamaha 12-string," she says proudly. Does she get to play much? For a rare moment, she's wistful. "I play the guitar when I want to relax. But to play the guitar, you cut the nails," she says, looking at her manicure. "So one day I'll cut the nails off. Now, when I bite my nails, I play the guitar."

There will be more tradeoffs to come. Good deeds are expensive. Healthier ingredients can be too. "I'll be honest with you. We did have the wind at our backs, and it's much harder to sustain great performance [in a slumping economy]," she said recently. But "you give the team of people a set of objectives and goals and get them all to buy into it, and they can move mountains." The company wowed the market with its recent year-end earnings results by boosting volume in the face of a second year of rising commodity costs. PepsiCo did it through a combination of new products, productivity improvements, higher prices, and packaging tweaks. (It calls that "weight-outs" - charging more for less.) Analysts expect this year to be even more challenging. Healthier new products are pricier than Pepsi and Lays. And PepsiCo, with snacks and all that Gatorade, is way more exposed to inflation than Coke, which peddles mostly concentrate to bottlers who sweeten the soda. PepsiCo expects a 6% increase in raw material costs next year, says Morgan Stanley's Pecoriello, while Coke expects none. Commodity costs make up about 25% of PepsiCo's total revenue, compared with 11% of Coke's, says Beverage Digest's John Sicher.

At a time when she'd like to be focusing on foods of the future, suddenly she's back in the cola wars, a resurgent Coke on her flank. With lower costs and its newly acquired Vitaminwater, Coke could be a real problem again. (PepsiCo hopes to counter with a new, lower-calorie Gatorade called G2.) Revived talk of the corporate rivalry makes Nooyi touchy: PepsiCo's revenues now come more from food than from beverages. "From my perspective, we are a different company ... different from a business makeup, different culturally, in the way we think, the way we act. We are different every which way," she says. "So if people want to compare us, go right ahead. Is Coke going to have some tailwinds because of [the weak dollar] and the beverage business? Sure. But more power to them. The point is, we are in businesses that give you more good-for-you products, and that means closer to crops. When you're closer to crops, you're going to have some inflation. Am I going to regret it? No, I'm proud of the fact we made the transition."

She has told Wall Street she expects the company to continue to meet growth targets. She acknowledged to analysts earlier this month that "this level of price increase is uncharted territory, because for many, many years both snacks and beverages were in a deflationary environment. So we have to navigate through this thing carefully." For now she knows she'll have to adjust the pace at which she makes PepsiCo the "defining corporation." She's toned down the rhetoric. "The fact of the matter is we operate within the stock market, which has a certain psyche, which has a certain approach to everything, and we can't ignore that."

Yet the tactical fight for market share is not likely to engage her for long. At some point, that role in government will beckon. Asked about the prospect in January, she brightened immediately. Ever the strategist, she has more than just thought about it. "After PepsiCo, I do want to go to Washington," she said. "I want to give back - to work for no money for four or five years." Not now, she says firmly, but after the next presidential term sounds like a possibility. For now her job is to run PepsiCo. You can bet she'll be looking for an acquisition if the opportunity presents itself. That would keep her challenged. Nooyi said last year that part of her plan was to grow PepsiCo by M&A. PepsiCo reportedly approached Nestlé last year about a merger with the larger Swiss company, which would have created a behemoth with a market value of more than $250 billion. Nooyi won't comment except to say that anything like that is out of the question right now. It's safe to say, though, she'll be focused on the future. Her biggest test may be how well she's able to calibrate her visionary thinking to a tougher climate, when resources cost more, customers are cautious, and the long-running cola wars are far from settled.

Research associate Patricia A. Neering contributed to this article.

Head Barista

Who had thought a few years ago that such a simple drink like coffee would turn into such a profitable INDUSTRY!!!! Thanks to Starbucks, people are finally realizing coffee's true value.

These and other articles pose a very good question which is: Will Coffee ever be able to replace Cola??!! I think it will especially since people are becoming more "health conscious" & since coffee has been able to establish itself as a Gourmet drink. Therefore, whether one is rich or poor, old or young they will be able to Enjoy Coffee.

Head barista
Sep 28th 2006 From The Economist print edition

If there were only Armani, there wouldn't be an Italian fashion industry—just Armani. But because there are competing Italian fashion brands, there is a whole industry, and Armani itself is bigger. So says Andrea Illy, who looks every inch an Italian fashion executive, but is in fact the boss of the family coffee firm his grandfather founded in Trieste in 1933. His Armani analogy is by way of praising the Starbucks coffee chain—an act that many of his fellow Italians would surely regard as treason.

“Starbucks has done an excellent job of raising consumer interest in coffee, especially in premium coffees,” says the 42-year-old Mr Illy of his rival. Today's booming market for gourmet coffee is the product of vigorous “co-opetition” between various kinds of firm—Starbucks and similar retail chains, big conglomerates such as Nestlé, and upmarket coffee brands such as Illy. “Eight years ago, people talked of coffee as a commodity; now, nobody does,” he says.

Illycaffe had revenues of €227m ($282m) in 2005, and is dwarfed by Starbucks, a public company. The two firms have fundamentally different business models. Starbucks is a vast global retailer, and the ambience of its stores matters as much as the taste of its coffee. Mr Illy is opening “Espressamente Illy” cafés with Italian styling in 18 countries, but these are chiefly intended as advertisements for the brand. Its main business is roasting and distributing a single blend of arabica coffee. Its customers are individuals and professional caterers, and the company reaches them by mail and through upmarket retailers.

Taking to heart his fashion analogy, Mr Illy has just been in New York to launch a promotion called “Beauty has a taste” at the Time Warner Centre. The event opened during the city's fashion week, and featured a range of collectable cups designed by leading artists, a book launch for the style editor of the New York Times—and, of course, free espresso. There was also a display of pictures of smiling workers in the various countries that grow Illycaffe's beans. The photographer was Sebastião Salgado, a Brazilian who is well known for his painful images of exploited workers in the developing world. The message was clear: like Starbucks, Illycaffe is keen to reassure customers that its coffee is produced according to the highest ethical standards.

Despite this, Mr Illy is sceptical about the influential Fairtrade movement, which tries to ensure that farmers in the developing world make a reasonable profit regardless of fluctuations in prices on international commodity markets. Mr Illy complains that Fairtrade certification gives farmers a premium no matter what the quality, whereas to him, quality is everything. He does buy directly from growers, however, and to help them raise standards and earn more he has introduced an educational programme, devised by his University of Coffee in Trieste. More than 1,000 growers a year attend a one-day course at its São Paulo branch, and a team of nine agronomists travels the world providing training. Starbucks, which does sell lots of Fairtrade-branded coffee, similarly complains that there is not enough of it and that it is not available through long-term contracts.

Full of beans
Mr Illy, like his counterpart at Starbucks, Howard Schultz, is convinced that the growth of the market in gourmet coffee has only just begun. (Lest anyone think there are enough Starbucks outlets already, Mr Schultz expects the global total to rise from just over 12,000 today to at least 30,000, and probably many more.) Mr Illy says that his firm has quadrupled in size in the past ten years, not least by becoming a global brand. In the mid-1990s it exported to 12 countries, which accounted for about a fifth of sales; now Illy goes to 144 countries, which together account for 52% of revenues.

Mr Illy is optimistic for three reasons. He says that his firm is inching ever closer to delivering “perfection in every cup”. His particular obsession is with technical innovation. He claims (though some espresso-lovers dispute this), that Illycaffe has been responsible for three of the seven big innovations in coffee-making in the past century, as a traditional Italian craft has become an industrial process. The firm standardised espresso-making, and developed the paper pod containing a single dose of pre-ground coffee for an espresso machine. (Others invented decaffeination, instant coffee, multiple packets and liquid coffee.) Mr Illy is a chemistry graduate—at university he wrote a thesis on the “Quality of Espresso from a Chemical Perspective”—and is as enthusiastic about the science of coffee as he is about its taste. Now Illycaffe is implementing what it regards as its third big innovation. This is a two-stage espresso-making process involving “hyper-fusion” (which intensifies the drink's aroma), and “emulsification” (which makes it smoother).

He also points to the “massification of luxury”, a broad trend which should portend a boom in the number of people willing to buy expensive coffee. That could be reinforced by a growing belief that coffee is, in fact, good for you. As the chairman of the International Association on Coffee Science, a trade body, Mr Illy has just presided over a gathering of scientists which left him convinced that coffee is a powerful anti-oxidant, and can help in the fight against cancer, diabetes, Parkinson's disease and Alzheimer's disease. People used to think it was a poison, he says, and concern about its impact on health has hurt sales of coffee in the past. Now, he says, health is not an issue but an opportunity. Well, maybe.

Illycaffe's biggest challenge may be to produce enough high-quality coffee to meet growing demand. Reserves of beans are now at record lows: enough for less than four months' drinking worldwide, notes Mr Illy ominously. With oil prices falling, he predicts, hedge-fund speculators will soon be switching into coffee. Addicts should buy now, while stocks last.

Boomers vs. Xers

A follow-up of the gray ceiling article from Fortune..

Boomers vs. Xers: Can't we all just get along?
Of course we can, says a leading diversity coach. But first, the generations have to learn to respect what they can offer each other - and take it one relationship at a time.

By Anne Fisher, Fortune senior writer August 17 2006: 9:28 AM EDT

Often, the tensions are subtle and unspoken, but they're there: Baby Boom managers, those in their mid-40s and older, have a tough time understanding the group coming up behind them in the corporate ranks - Gen Xers, born between 1965 and 1979, the first generation to grow up with the Internet.

Accustomed to everything happening more and more quickly, they are an impatient bunch. Rather than pay their dues and work patiently toward promotions, they'd rather quit and go elsewhere: Xers change jobs, on average, every two years.

To Boomers who spent decades earning their stripes, Xers often look like spoiled brats. By Xers' lights, meanwhile, Boomers just don't get it - and when are they going to retire and get out of the way, anyway?

Enter Janet Reid, a managing partner at Global Lead, a worldwide diversity consulting firm that numbers Procter & Gamble, Walt Disney, Boeing, Johnson & Johnson, and Radio Shack among its clients. Reid specializes in teaching Boomers and Xers to find common ground at work. Some excerpts from our recent conversation:

By encouraging the generations to talk out their differences, companies are hoping to reduce turnover among Gen Xers, right? Does it work?

Employers have really only recently become aware of how big a problem Gen X turnover is. It's an enormous threat, when you consider that this is the generation corporate America is counting on to run things when Boomers retire.

So yes, companies are starting to try to address it. They want to reach those Gen Xers who are very talented, and who want to move up faster than most companies move anybody up, and keep those future leaders from quitting.

How do you do that?
Often, Gen Xers will approach their careers with the attitude, "I'm just going to keep changing jobs until I get the title I want and the pay I want, until I reach Nirvana." So employers who want to keep them have to offer them bigger responsibilities and interesting projects.

As long as they are involved and learning and contributing, they'll stay. Pay for performance works, too. Give them more money to go along with those bigger challenges.

But one thing we find is crucial is the bond between individual Boomer managers and their Gen X subordinates. If you work on improving that one-on-one relationship, you can eliminate a lot of problems that lead to high turnover.

Can you give us an example?
Sure. We try to give Boomers practical tools for coaching and managing Xers. For instance, one trait that is shared by almost all Gen Xers is, they like to explore and problem-solve on their own. So, to get the best results from them, you can tell them what you want them to do, but don't tell them how to do it. They want to figure that out themselves.

Any advice for Gen Xers on how to get along with their Boomer bosses?
First of all, understand that, to a Boomer, changing jobs every two years, or every six months or what-have-you, looks like instability and immaturity, an unwillingness to stick with something. So what? Well, most hiring managers are Boomers, so sooner or later you do have to settle down somewhere and stick it out for a while, or risk running out of places to go.

Most Gen Xers, as they go along in a relationship with a boss who is making a genuine effort to be a good mentor, will start to realize that, hey, this person's experience really does have something to offer me that I can use. Ideally what you get is a series of trades between two people, where each one gains something specific from the other.

In one of my client companies, I had a Boomer manager who gave her Gen X employee a lot of valuable advice about navigating the politics of the place to get something done. In exchange, the employee set the boss up with an iPod and taught her how to download business books on it, so now she uses that all the time.

When each person gets something he or she wants, there's a lot less emphasis on the problems and more on, OK, how can we make the best deal here?
And you know, to a large extent generations are really a state of mind anyway. My 85-year-old mom is a member of the generation we call Veterans - the parents of the Boomers - but she sends me silly jokes on her laptop all the time. She really acts more like an Xer.

Every workplace also has some people like that, who defy the generational boundaries, and they are great because you can enlist them to help bring other people together.

One last question. Since Global Lead operates all around the world, I'm curious: Do you see these generational differences everywhere, or is this mostly a U.S. phenomenon?
Oh, we see the same thing everywhere. In fact, the toughest training we do is for American companies doing business in China. The Chinese government's one-child-per-family policy means that each Chinese person now in his or her twenties has two obsessed parents and four doting grandparents. They are called the Little Emperors, and they expect you, their boss, to act like a doting parent, too. The attitude is, "Boss, you are here to advance me."

When U.S. managers complain to me about their young American employees' sense of entitlement, I have to laugh. Compared to the generation gap in China, what we have here is nothing.

Gray Ceiling

You'll must have read about the "glass ceiling" here's a new concept. The Gray ceiling. Good article in Fortune's Aug 21st issue

Are you stuck in middle management hell?

By Anne Fisher, Fortune senior writer -August 9 2006: 5:28 PM EDT

Jon Ciampi had always thought of himself as a rising star. A portfolio analyst for Wells Fargo in San Francisco, he had a solid job at a big company, pulled down an enviable salary, and scored top marks on his performance reviews.

Sure, he was stuck doing some grunt work, and, yeah, working till after midnight wasn't unusual. But he was only 29! He was doing everything his bosses asked him to! How long could it be before he'd be running the place?

Then he started doing the math. The head of his division was 50, easily a decade or more away from retirement. The six managers who reported to the division head were all in their mid-40s and had settled into their jobs for the long haul.

Below them was Ciampi's boss: an ambitious thirtysomething MBA who, even by Ciampi's standards, put in incredible hours. But even though he and his boss were killing themselves, neither seemed to be on a promotion track. There was simply nowhere to promote them to.

Then came the final straw: Wells Fargo (Charts) installed another fifty-something at his boss's level, who, Ciampi says, didn't know a thing about the business. "It really ticked me off," he says. "I realized I'm not going to move up until the people above me do."

How long would it be before Ciampi's star actually rose? "It looked like it was going to be never," he says.

He was far from alone. At Bank of America (Charts), Ryan Bristol, 30, was spinning his wheels. Though his boss praised his work for the company's private-banking group, it drove Bristol nuts that every move he made still had to be signed off on by an army of superiors.

"The people above me were all ages 45 to 65 and weren't about to leave. It was clear to me I wouldn't get promoted no matter how good I was."

On Madison Avenue, Brett Voris was similarly demoralized. As an account manager at TBWA\Chiat\Day, he and the other thirty-something's were coming up with the best ideas, and they were the ones fielding late-night client emergencies. Yet they had zero authority to make decisions on their own.

"In advertising - and I saw this at more than one agency - youthfulness is valued because it's seen as with-it and relevant, but it's a paradox," he says. "The senior managers in their 40s and 50s are paranoid about keeping their own jobs, so they do everything they can to keep you down."

The same goes for the media business. One 36-year-old finance manager at a broadcasting company got her last promotion four years ago. "Since then, I've just been stuck, and so has everyone else my age," she says. The next level up is vice president, and the six current VPs aren't retiring. "I'm under so much pressure here, but the rewards just aren't coming," she says. "I have to get out."

Twenty-, thirty-, and even forty-something managers are in trouble. Fifteen-hour days have become the norm. Un tethering oneself from one's BlackBerry is, in many fields, considered high treason.

And weekends? Those are for catching up on e-mail, right?

Stymied

All this might not be so terrible if that big promotion - the one that catapults an up-and-comer out of middle-management hell and into the senior ranks - were around the corner.

But increasingly, younger workers are finding that no matter how many hours they put in or how much their bosses rave about their work, they're just plain stuck. An entire generation is bumping against something no amount of youthful vigor can match. Call it the Gray Ceiling.

The Gray Ceiling is purely a function of mathematics. Jon Ciampi, for example, was born in 1973, when the birthrate hit a quarter-century low. Just ahead of him and his peers is the anomaly known as the baby boom, the 77 million Americans born between 1946 and 1964.

Just behind him are the boomers' children, known as Gen Y, who form a second bulge. And sandwiched in between is the baby bust, or Generation X. Known variously as the laziest generation and the most entrepreneurial, they are unambiguously the smallest generation since the Great Depression.

Though that worked to the benefit of Gen Xers when it came to slots in elite schools - and will once again work to their benefit when the boomers finally leave the workforce - right now it's holding them back.

For starters, the workplace makeup has changed dramatically from just a decade ago. In 1996 there were 64 million U.S. workers between the ages of 30 and 39 and only 43 million ages 40 to 59. Now the situation has reversed. As of June 2006 there were only 40 million ages 30 to 39 and 69 million workers 40 to 59, according to the Bureau of Labor Statistics.

Nobody is suggesting that all boomers have it easy.

For one thing, as Fortune reported last year in "50 and Fired," those tossed out the door in the latest recession are having a tough time getting back in. That problem and the Gray Ceiling - a term that has been associated with age discrimination in the past but is taking on a new meaning - share a common cause: In today's leaner companies, executive jobs are fewer, and boomers who have hung on to them are in no hurry to let go.

When Korn/Ferry surveyed 2,000 senior-level managers at global companies recently, they found that 44% said they plan to keep working past 64.

Consider the legal profession: In 1998 associates took an average of seven years to make partner, according to Vault.com's annual survey of 19,000 attorneys. By 2003 the average was 8½ years. Now it's 9½. "The reason is simple" says Vault.com co-president Sam Hamadeh. "Partners aren't retiring."

Generation X, it would seem, is in danger of turning into the Prince Charles of the American workforce: perpetual heirs apparent awaiting the keys to the kingdom.

Why we work longer

And that, oddly enough, is exactly what employers had in mind when they helped build the Gray Ceiling during the late '90s. Though at that time your 19-year-old neighbor was a dot-com entrepreneur and anyone over 35 was considered a dinosaur, forward-looking companies were starting to panic about the "brain drain" that could result if the boomers retired en masse.

So began the campaign to keep older workers kicking around. The Society for Human Resource Management reports that more than half (55%) of big U.S. companies are "giving managers the tools to increase retention of baby-boomers," including flexible or reduced schedules and retention bonuses.

Other factors are coming into play too. Thanks to federal and state laws against age discrimination enacted during the past 20 years, mandatory retirement has all but disappeared (airline pilots and CEOs are about the only employees who can still be compelled to stop working).

Then there's the financial squeeze: The age at which seniors can receive full Social Security is inching north (it's now 66) at the same time that employer retirement benefits are heading south.

Finally - as the squash-playing, real-teeth-possessing sixty-something down the hall can attest - having six or seven decades under your belt doesn't always seem that old.

But can't you just wait it out? After all, boomers have to retire eventually, right? Right?

"I'm not ever planning to retire," says Janelle Shubert, a professor of management at Babson College in Wellesley, Mass., who is turning 60 this October. "My little joke is, 'I'll try not to die in the classroom because it might upset the students.' "

Shubert is also the associate director for Babson's Center for Women's Business Leadership, and in that capacity she does wonder how the boomer logjam will affect younger generations.

"The glass ceiling is being replaced by a Gray Ceiling of baby-boomers," she says. "Those of us who've spent decades paying our dues are finally reaping the rewards, both psychological and financial, and we don't see any reason to step aside now." Result: "We're now the ceiling that our young colleagues are going to have to break through."

What's so wrong with that, boomers might ask? Quite a bit, actually, at least for companies that are thinking long term. Bosses who aren't focused on how to keep Gen Xers happy will inevitably find that somebody else is. So much for the "future of the firm."

Unlike the glass ceiling and other forms of discrimination, the Gray Ceiling has no obvious legal or legislative remedy. You cannot sue boomers for being too numerous.

Breaking through

But during interviews with several dozen managers, Fortune zeroed in on companies that are making a sustained effort to fast-track the careers of Gen Xers, as well as half-a-dozen strategies that employees can use to crack through the Gray Ceiling on their own.

"You'll never get ahead just by being really good at what you already do," says Michelle Peluso, who is now the CEO of Travelocity. "Top management will look at you and say, 'Hmmm, okay, just keep doing it.' " Peluso, Ciampi, Bristol, Voris, and others all managed to get out from under the ceiling, and what they've learned can help anyone who feels trapped.

Demography, it turns out, isn't destiny.

In a gray-walled conference room in Ridgefield, Conn., 26 employees of Boehringer Ingleheim, a German pharmaceutical firm, are sitting through a new type of diversity training. They're about evenly divided between boomers and Gen Xers, and the moderator, Yael Sivi of the FutureWork Institute, has asked for a list of adjectives that describe the younger set.

"Arrogant," one boomer offers.

Sivi bravely tries to turn the discussion in a more productive direction. "Let's say you're a Gen X manager, and you think your boss is totally incompetent," she says. "Are you going to respect him or her just based on a title alone? No. Is this different from your parents and grandparents? Yes." She looks around the room. "Anybody here who was a latchkey kid growing up?" A 30-ish man in khakis and a green polo shirt raises his hand.

"Okay, latchkey kid, what was your life like? What did you do when you came home from school?" He replies that he hung around the house waiting for his parents to come home from work.

"So you structured your own time," says Sivi. "Doing your homework, maybe making yourself a snack? Maybe you even started dinner?" She gestures to the group. "Fast-forward 20 years. How does this guy want to be managed? He doesn't want to be micromanaged. Hands off! Because he's been managing himself since he was 10 or 12 years old."

The fact that the Gray Ceiling even exists is news to many boomers, says Margaret Regan, who runs the FutureWork Institute and works with clients that include American Express (Charts), Citibank (Charts), PepsiCo (Charts), Pfizer (Charts), and Kraft Foods (Charts).

Gen Xers "don't talk to their boomer bosses about it," she says. "Instead, they just quit." Even boomers who have hit the acceptance stage aren't exactly eager to publicize it.

Says one HR chief, who asked to remain nameless: "Admitting to outsiders that you have lots of boomers taking up all the great senior jobs is like hanging out a sign that says, DON'T COME TO WORK HERE. YOU'LL NEVER GET PROMOTED."

Or if you do get a promotion, it might not mean anything. Title inflation, Xers say, is a strange new outgrowth of this era. For this story, Fortune asked Korn/Ferry International to poll its executive network. Among Gen Xers ages 30 to 42, the findings were telling.

More than half (51%) have been given a fancier title in the past two years. Yet almost half of those (47%) say they're still doing the same job. New job titles ranged from Chief Spiritual Officer to Process Change Manager to - our personal favorite - General Manager Reporting to the General Manager.

The addition of the word "special" or "specialist" to a title is particularly in vogue. "The title Special Projects Specialist," wrote one executive, "actually means, 'Keep the person in the fridge.'"

Gen Xers, whose career expectations were shaped during the '90s boom, are not, however, a patient bunch. That's why more and more employers are adopting "unsiloing" as their newest HR buzzword.

Following the lead of GE, UPS, Exxon Mobil, and others, more companies are rotating young talent throughout the organization: A Sibson Consulting survey shows that more than half of Fortune 500 companies say they've begun shuffling potential leaders around to give them broad experience.

Some companies have gone even further. Several years ago an internal Lockheed Martin survey showed that 70% of its workers were boomers or older. So the company began a four-pronged Gen X retention drive.

They developed a program to rotate promising employees (about 800 at a time) through six functions over two years. High-potential young managers now get to tackle a new challenge at least once every three years.

Lockheed made its tuition-reimbursement program so generous that many employees have earned multiple degrees on the company's tab. And the company made every boomer manager take on a Gen Xer to mentor and help with working out a career plan.

It's working. Since 2001 annual turnover has averaged 2.5% - far below the norm in the industries where the company competes. "Recruiters try to woo you by offering you more money, but it's really about a combination of things this company does, especially the emphasis on learning," says Ngina McLean, a 31-year-old systems engineering manager in Greenbelt, Md. "It's the only place I've worked where I can see spending my whole career."

Of course, developing younger workers is expensive, and what if they leave anyway? Many companies just choose not to do it, as Gen Xers trapped under the Gray Ceiling well know. In that case the only way through the Gray Ceiling is to bust through it yourself.

"My father was a loyal corporate soldier who worked at the same company for 32 years," says Ryan Bristol. "But my generation is more interested in opportunities for fast growth than in security." On the day we're talking, he's speaking from his airy, glass-and-brushed-aluminum office building near the beach in Santa Monica. Oh, and his new title is CEO. It's a far cry from his old gig toiling for Bank of America.

The fastest way out from under the Gray Ceiling, he realized, was to ditch the corporate ladder entirely. He met Brett Voris, the refugee from TBWA\Chiat\Day, in the MBA program at UCLA's Anderson School, and earlier this year they started PropPoint, a real estate investment firm.

Their first investor was an acquaintance of Bristol's - they met at a Little League game where Bristol was coaching. He in turn brought in a friend who runs a venture capital fund. "It's great to get away from all the corporate politics," says Voris, even if "mistakes don't get absorbed, the way they do when you work for a big company."

Perhaps the easiest thing has been finding talented young hires: One of their first employees is a 26-year-old financial whiz from Bank of America who had also hit the Gray Ceiling there.

Not everybody has the stomach for a startup. Even so, sometimes opportunity is lurking much closer than you imagine. A few years ago, Denise Prince was just one of many thirtysomething senior vice presidents at Geisinger Health System in Pennsylvania.

She thought Geisinger's state-of-the-art system for electronic record-keeping of patient data could radically change the way new drugs are developed and tested. She also saw a market for a new kind of quick, convenient medical care for minor injuries that could be delivered by nurse practitioners working out of retail stores.

"I had a lot of informal contact with our CEO, and I gradually talked him into letting me do it," she says. With her boss's blessing, she started a new venture capital unit called Geisinger Ventures and has so far launched two businesses, with several more on the drawing board. Prince, 43, is Geisinger Ventures' CEO.

Another strategy is to find a really big mess. "If you really want to move up, you have to get out of your comfort zone," says Michelle Peluso, 34, from her office near Dallas, where the roaming gnome from Travelocity's TV commercials looks down on her desk from a high shelf.

A dot-com vet whose Site59 was acquired by Travelocity in 2002, Peluso joined the company but was eager to expand her role from senior vice president of product strategy. So she dug into the hotel-booking business, which "was such a big mess that no one else wanted to touch it."

First she found out what hoteliers hated about the way travel sites were run. Then she built a new, hotel-friendly system to address their gripes. "Think about what keeps your boss awake at night. Is there something you can do to help?" she says.

Her strategy worked so well that she got promoted to chief operating officer within a year, and then to CEO. "When I'm deciding whom to promote, I look for people who see the company as if they were wearing my hat," Peluso says.

It may not sound strategic, but other Gen Xers have found that the route to the top sometimes heads, well, sideways. In 2003, Kurt Knackstedt, now 34, was working for a Philadelphia travel-services provider.

In casual chats with people at Cendant, Knackstedt learned that the company wanted to hire someone to move to Hong Kong and pull together a scattered collection of Asian marketing efforts and new-product launches. He recommended himself for the job. Cendant hired him with his old title - "a lateral move in that sense," he says - but with a staff three times bigger and a budget five times the size.

From there, it took Knackstedt just under two years to be promoted to his present job as senior director of corporate travel services worldwide, based at Cendant's headquarters in London.

If you're jockeying for a job overseas, Knackstedt and others say it helps enormously to be willing to go as a so-called local hire. Rather than ask for a contract that guarantees you can come home in, say, two years, be ready to pull up stakes and assume you'll be living abroad indefinitely. The open-ended approach can help persuade higher-ups that "this isn't just a notch in your belt," says Knackstedt.

Finally, being brutally honest about your industry is vital too. Remember Jon Ciampi, the guy who was trapped under a veritable boomer army at Wells Fargo?

Once he decided to start job hunting, he quickly realized he was looking in the wrong industry. He had to make a leap. Ciampi had just enough computer experience to get hired by Oracle, and now he works for SumTotal Systems, which makes online-learning software for clients including Microsoft and American Airlines.

Although he's had to scramble to develop new skills (he once took Harvard Business School's online course on new-product launches "two days before we were going to market"), he has scored four promotions and is now SumTotal's vice president of marketing. "If you want to get a bigger job," he says, "you have to go where the growth is."

Each of these strategies - be it jumping into a different industry or a foreign market or starting a new venture - takes an appetite for risk. But here's what many people forget: Staying put in a going-nowhere job may be an even bigger gamble.

Think about it. Before long, Gen Xers will be competing for promotions with a whole new batch of fresh faces - 70 million of them, in fact. Generation Y, after all, is growing up fast.

Kate Bonamici, Doris Burke and Christopher Tkaczyk contributed to this article

Coke v. Wal Mart Supply Chain

Interesting article that appeared in WSJ. Shows how one giant can strong arm & intimidate the other.

Coca-Cola Feared Wal-Mart Pressure In Delivery Shift

By CHAD TERHUNE June 8, 2006; Page B6

Coca-Cola Co. said in a court filing that it faced a "serious risk" Wal-Mart Stores Inc. would launch a private-label rival to the Atlanta company's Powerade if Coke didn't agree to ship the sports drink directly to Wal-Mart warehouses.

The disclosure, made in a lawsuit filed in U.S. District Court in Atlanta against Coke and its largest bottler by 55 smaller bottlers, suggests Coke felt pressure from Wal-Mart to alter its century-old system of having Coke bottlers deliver drinks to individual stores within their exclusive territories and stack those drinks on store shelves.

Wal-Mart, the world's largest retailer, asked Coke last year to switch to the straight-to-warehouse delivery method, and Coke's largest bottler, Coca-Cola Enterprises Inc., began doing so across much of the U.S. in April. The smaller bottlers who brought the suit claim the distribution change violates their distribution contracts with Coke, but the beverage giant and CCE have argued that the plaintiffs aren't entitled to "claim nationwide veto rights" over how another bottler serves its territories.

Coke and Wal-Mart declined to comment on the June 1 court filing.

"This is no mere idle threat," Coke said in the filing. A Wal-Mart sports drink could hurt Coke, even though some beverage-industry analysts question the feasibility of private-label brands in that category given limited production capacity.

Coke has struggled to build Powerade into a viable competitor to Gatorade, which had an 82% market share based on U.S. volume in the first quarter, compared with 16% for Powerade, according to industry newsletter Beverage Digest. At Wal-Mart stores last year, Powerade had a market share of 11.8%, according to CCE documents filed in the suit. PepsiCo Inc., Purchase, N.Y., acquired Quaker Oats Co. and Gatorade in 2001 after Coke rejected a deal.

Internal CCE documents filed as part of the suit show that Wal-Mart officials criticized the traditional Coke distribution system for failing to keep Powerade in stock on store shelves and for taking too long to introduce products throughout the Bentonville, Ark., retail chain. "If Powerade continues at the current trajectory -- it will be irrelevant in Wal-Mart," Steve Broughton, a Wal-Mart vice president, told CCE officials at a November meeting.

Spokesmen at Coke and CCE said the new distribution system at Wal-Mart is working well but there are no current plans to expand warehouse deliveries to other drinks or retailers.

Financial Risk Management at Goldman Sachs

Though a pessimist view by the Brit magazine, interesting article, especially the last statement.

On top of the world
Apr 27th 2006 From The Economist print edition

BY ANY measure, Goldman Sachs is a formidable company. The bank knocks the spots off its competitors, whether in pure “investment banking”, the traditional craft of underwriting and mergers and acquisitions in which it made its name, or in its new focus, trading for customers and its own account. Even compared with leaders in other industries, Goldman makes spectacular returns. Among its latest record-busting yardsticks was a 40% quarterly return on equity. The average pay-packet of its 24,000 staff last year was $520,000—and that includes a lot of assistants and secretaries.

This makes the bank an easy target for populist politicians and tabloid newspapers. The real reason why Goldman should matter to outsiders is not because it is a manufacturer of millionaires (good luck to it); but because it stands at the centre of a two-decade-long transformation of the financial markets and a new approach to risk.

Business risks that were once seen as a lumpy fact of life are now routinely sliced up and packaged into combinations that generally suit issuers and investors alike. At the heart of the change has been the development of huge markets in swaps, derivatives and other complex and often opaque instruments that allow the transfer of risk from one party to another. From small beginnings in 1987, the face value of contracts in interest-rate and currency derivatives is now more than $200 trillion—16 times America's GDP. A further $17 trillion is outstanding in (even newer) credit-default swaps, which allow bond investors to lay off the risk of issuers defaulting.
Led by Goldman, investment banks have innovated at a furious pace and changed the mix of their own businesses. They have taken on more risk as they have moved from more transparent markets, in which margins are slim, to more profitable portfolios of derivatives and direct private-equity investments. The face value of Goldman's derivatives exposure is more than $1 trillion, although the bank says that its net exposure, once you offset all its positions, is $58 billion, against shareholders' funds of $28 billion. The bankers' innovations have brought huge rewards to their industry. In the past decade it has garnered revenues of more than $125 billion, more than three times the level in the previous decade.

Simply the best
This huge new risk industry has produced gains for people far away from Wall Street and the City of London. Car companies have been able to hedge away many risks that once were seen as an incurable part of the business—and thus focus on what they do best. Pension funds have been able to shape their portfolios to fit their appetite for risk. Friction is bad for economies; the risk industry reduces it to all our benefits.

Yet the sheer size of the numbers involved does mean it is worth raising three questions. How exactly has Goldman and its industry achieved this? Can it be sustained? And what should happen if something goes wrong?
Like most of its rivals, Goldman is a difficult institution for outsiders to understand. Until 1999 it was a private partnership. With public ownership came greater reporting responsibilities, but precisely what Goldman is up to remains obscure. The bank likes to say that it still relies a lot on traditional investment banking, but Goldman's accounts show that its profits come increasingly from trading. The sharp-suited investment bankers act as a sales force for less-well-dressed colleagues who work out how to make money from swaps, options and direct investments.

Goldman was not the first to realise that new financial techniques had the potential to alter risk management for companies of all kinds. Bankers Trust, now part of Deutsche Bank, was arguably quickest off the mark. But once it joined the risk-management game, Goldman steadily accumulated market nous. It applied this by building a proprietary technology system, shunning the off-the-shelf products used by many of its competitors. People who have left Goldman say that this system is unmatched at rivals. One consequence is that Goldman seems confident that it can take more risks than its competitors do. Its trading revenues are the most volatile among big investment banks and it has the most days when it loses money. Overall, however, it makes the most money.

Inside the black box
But for how long? The market doubts the run of huge profits can last. Goldman's shares are valued less richly than those of competitors it so obviously outwits. Moreover, investment banks are less highly valued than less glamorous commercial banks and retail brokerage firms.

This could be because investors think Goldman will struggle to sustain the breakneck innovation that keeps it ahead of others. Goldman's ascendancy is already showing stresses—most recently the struggle to manage conflicts of interests across its business lines. Hank Paulson, Goldman's boss, recently chastised its London team of investment bankers for appearing too aggressive in their offers to buy companies, thereby threatening the bank's reputation for being an adviser. In

Japan, for just this reason, some of Goldman's M&A customers have deserted it for rivals.
These kerfuffles show that conflicts of interest can probably be solved by market pressure rather than intervention by regulators. A bigger problem for both investors and regulators has to do with risk itself. Outsiders—and perhaps even insiders—find it hard to judge whether Goldman's business is sustainably good or has thrived thanks to a dose of unsustainable good luck and skill. In addition, the very improvements in risk management that have spread risk far and wide make it harder to know where risk is concentrated or how risks might combine to threaten the system's overall health.

So far central banks have concluded that the system is more robust than it was. But the trading models that have propelled Goldman will be tested one day. At worst, the bank itself—or, more likely, a second-tier rival or a hedge fund—might fall into the kind of dramatic spiral that killed off Long-Term Capital Management (LTCM), a hedge fund, in the late 1990s. Financial markets have always been subject to crises.

Any crisis would affect Goldman, because it is so intertwined with the system. The bank says it keeps plenty of liquid reserves against the dread day. It might well profit from any crisis (it did from LTCM). But the chances are that some banks, somewhere, will get into serious trouble.
If that happens, the losses of any bank will be for its shareholders; they should not expect any bail-out. The wider question has to do with systemic risk. If the much vaunted systems do not work, then the central banks will have to step in (as the Federal Reserve did with LTCM). In the past, though, such collapses did less damage to the financial system than the regulatory over-reaction that followed them. If policymakers were to respond to the next crisis by ushering in a more conservative regime that severely limited financial risk-modelling and risk-management, the global economy would be the poorer for it. That is what should stick in people's minds when the day comes. Until then, why not do something too often forgotten? Love Goldman or hate it, you ought to admire it and the system it epitomises. And hang on tight

Steel Management from BW

This is an example of a co. as Solid and as Flexible as STEEL. An excellent B-School Case Study!

The Art Of Motivation
What you can learn from a company that treats workers like owners. Inside the surprising performance culture of steelmaker Nucor It was about 2 p.m. on Mar. 9 when three Nucor Corp. electricians got the call from their colleagues at the Hickman (Ark.) plant. It was bad news: Hickman's electrical grid had failed. For a minimill steelmaker like Nucor, which melts scrap steel from autos, dishwashers, mobile homes, and the like in an electric arc furnace to make new steel, there's little that could be worse. The trio immediately dropped what they were doing and headed out to the plant. Malcolm McDonald, an electrician from the Decatur (Ala.) mill, was in Indiana visiting another facility. He drove down, arriving at 9 o'clock that night. Les Hart and Bryson Trumble, from Nucor's facility in Hertford County, N.C., boarded a plane that landed in Memphis at 11 p.m. Then they drove two hours to the troubled plant.

No supervisor had asked them to make the trip, and no one had to. They went on their own. Camping out in the electrical substation with the Hickman staff, the team worked 20-hour shifts to get the plant up and running again in three days instead of the anticipated full week. There wasn't any direct financial incentive for them to blow their weekends, no extra money in their next paycheck, but for the company their contribution was huge. Hickman went on to post a first-quarter record for tons of steel shipped.

What's most amazing about this story is that at Nucor it's not considered particularly remarkable. "It could have easily been a Hickman operator going to help the Crawfordsville [Ind.] mill," says Executive Vice-President John J. Ferriola, who oversees the Hickman plant and seven others. "It happens daily."In an industry as Rust Belt as they come, Nucor has nurtured one of the most dynamic and engaged workforces around. The 11,300 nonunion employees at the Charlotte (N.C.) company don't see themselves as worker bees waiting for instructions from above. Nucor's flattened hierarchy and emphasis on pushing power to the front line lead its employees to adopt the mindset of owner-operators. It's a profitable formula: Nucor's 387% return to shareholders over the past five years handily beats almost all other companies in the Standard & Poor's 500-stock index, including New Economy icons Amazon.com, Starbucks, and eBay. And the company has become more profitable as it has grown: Margins, which were 7% in 2000, reached 10% last year.

Nucor gained renown in the late 1980s for its radical pay practices, which base the vast majority of most workers' income on their performance. An upstart nipping at the heels of the integrated steel giants, Nucor had a close-knit culture that was the natural outgrowth of its underdog identity. Legendary leader F. Kenneth Iverson's radical insight: that employees, even hourly clock-punchers, will make an extraordinary effort if you reward them richly, treat them with respect, and give them real power.

Nucor is an upstart no more, and the untold story of how it has clung to that core philosophy even as it has grown into the largest steel company in the U.S. is in many ways as compelling as the celebrated tale of its brash youth. Iverson retired in 1999. Under CEO Daniel R. DiMicco, a 23-year veteran, Nucor has snapped up 13 plants over the past five years while managing to instill its unique culture in all of the facilities it has bought, an achievement that makes him a more than worthy successor to Iverson.

Nucor's performance, propelled by a red-hot steel market, has been nothing less than sensational. It has grown into a company with 2005 sales of $12.7 billion, up from $4.6 billion when DiMicco took over in 2000. Last year net income was $1.3 billion, up from $311 million in 2000. In 2005 the company shipped more steel in the U.S. -- 20.7 million tons -- than any other company. "In terms of a business model," says Louis L. Schorsch, president and CEO of Nucor rival Mittal Steel USA, "They've won in this part of the world."

At Nucor the art of motivation is about an unblinking focus on the people on the front line of the business. It's about talking to them, listening to them, taking a risk on their ideas, and accepting the occasional failure. It's a culture built in part with symbolic gestures. Every year, for example, every single employee's name goes on the cover of the annual report. And, like Iverson before him, DiMicco flies commercial, manages without an executive parking space, and really does make the coffee in the office when he takes the last cup. Although he has an Ivy League pedigree, including degrees from Brown University and the University of Pennsylvania, DiMicco retains the plain-talking style of a guy raised in a middle-class family in Mt. Kisco, N.Y. Only 65 people -- yes, 65 -- work alongside him at headquarters.At times, workers and managers exhibit a level of passion for the company that can border on the bizarre. Executive Vice-President Joseph A. Rutkowski, an engineer who came up through the mills, speaks of Nucor as a "magic" place, representing the best of American rebelliousness. He says "we epitomize how people should think, should be." EVP Ferriola goes even further: "I consider myself an apostle" for the gospel of Ken Iverson. "After Christ died, people still spread the word. Our culture is a living thing. It will not die because we will not let it die, ever."
Strategic Highflier

Unusual? No Doubt. But Vijay Govindarajan, a professor at Dartmouth College's Tuck School of Business, teaches Nucor as an example of outstanding strategic execution, placing it alongside highfliers such as JetBlue Airways and eBay. "My students say: 'I thought Nucor created steel.' And I say: 'No. Nucor creates knowledge."'At a time when many observers are busy hammering the final nail into the coffin of American heavy manufacturing, Nucor's business model is well worth considering. It raises the question of whether troubled companies such as General Motors (GM ) and Ford (F ) -- not to mention nonmanufacturers such as Delta Airlines (DALR ) or Verizon Communications (VZ ) -- could energize their workers by adopting some version of this plan. But Nucor's path is hard to follow. It requires managers to abandon the command-and-control model that has dominated American business for the better part of a century, trust their people, and do a much better job of sharing corporate wealth.

Money is where the rubber meets the road. Nucor's unusual pay system is the single most daring element of the company's model and the hardest for outsiders and acquired companies to embrace. An experienced steelworker at another company can easily earn $16 to $21 an hour. At Nucor the guarantee is closer to $10. A bonus tied to the production of defect-free steel by an employee's entire shift can triple the average steelworker's take-home pay.

With demand for steel scorching these days, payday has become a regular cause for celebration. Nucor gave out more than $220 million in profit sharing and bonuses to the rank and file in 2005. The average Nucor steelworker took home nearly $79,000 last year. Add to that a $2,000 one-time bonus to mark the company's record earnings and almost $18,000, on average, in profit sharing. Not only is good work rewarded, but bad work is penalized. Bonuses are calculated on every order and paid out every week. At the Berkeley mill in Huger, S.C., if workers make a bad batch of steel and catch it before it has moved on, they lose the bonus they otherwise would have made on that shipment. But if it gets to the customer, they lose three times that.

Managers don't just ask workers to put a big chunk of their pay at risk. Their own take-home depends heavily on results as well. Department managers typically get a base pay that's 75% to 90% of the market average. But in a great year that same manager might get a bonus of 75% or even 90%, based on the return on assets of the whole plant. "In average-to-bad years, we earn less than our peers in other companies. That's supposed to teach us that we don't want to be average or bad. We want to be good," says James M. Coblin, Nucor's vice-president for human resources.

Compared with other U.S. companies, pay disparities are modest at Nucor. Today, the typical CEO makes more than 400 times what a factory worker takes home. Last year, Nucor's chief executive collected a salary and bonus precisely 23 times that of his average steelworker (page 62). DiMicco did well by any reasonable standard, making some $2.3 million in salary and bonus (plus long-term pay equaling $4.9 million), but that's because Nucor is doing well. When things are bad, DiMicco suffers, too. In 2003, as the company was dealing with an industry downturn and barely squeaked out a profit, DiMicco made $1.4 million. He gets few stock options, and most of his restricted stock and other longer-term bonuses don't materialize if the company doesn't beat the competition and outpace a sample group of other high-performing companies for good measure. Paul Hodgson, senior research associate at the Corporate Library, an organization that researches corporate governance issues, and an expert in the field who rarely has anything good to say about CEO compensation, calls Nucor's system a "best practice." Adds Hodgson: "Not too many companies get my vote of approval."

Executive pay is geared toward team building. The bonus of a plant manager, a department manager's boss, depends on the entire corporation's return on equity. So there's no glory in winning at your own plant if the others are failing. When EVP Ferriola became general manager of Nucor's Vulcraft plant in Grapeland, Tex., in 1995, he remembers he wasn't in the job two days before he received calls from every other general manager in the Vulcraft division offering to help however they could. (Vulcraft manufactures the steel joists and decks that hold up the ceilings of shopping centers and other buildings.) "It wasn't idle politeness. I took them up on it," says Ferriola. And they wanted him to, he notes. "My performance impacted their paycheck."
This high-stakes teamwork can be the hardest thing for a newly acquired plant to get used to. David Hutchins, a frontline supervisor or "lead man" in the rolling mill at Nucor's first big acquisition, its Auburn (N.Y.) plant, describes the old way of thinking. The job of a rolling mill is to thin out the steel made in the hot mill furnace, preparing it to be cut into sheets. In the days before the Nucor acquisition, if the cutting backed up, Hutchins would just take a break. "We'd sit back, have a cup of coffee, and complain: 'Those guys stink,"' he says. "At Nucor, we're not 'you guys' and 'us guys.' It's all of us guys. Wherever the bottleneck is, we go there, and everyone works on it."

It took six months to convince Auburn workers that they would do better under Nucor's pay system. During that time the company paid people based on their old formula but posted what they would have received under Nucor's formula. Pretty soon the numbers became a powerful argument to switch. Hutchins saw his pay climb from $53,000 the year before the sale to $67,000 in 2001 and to $92,000 last year. "It's like I got a second job, and I'm doing the same one," he says. Today it has become standard procedure for a team of Nucor vets, including people who work on the plant floor, to visit with their counterparts in any acquisition. They explain the system eye to eye.

The payoff for Nucor? In Auburn's second year of Nucor operation, with fewer people and no substantial capital investment, the plant saw a 14% improvement in total shipments. Other acquisitions have seen big jumps in production as well. A mill bought in Tuscaloosa, Ala., went from 800,000 tons a year to 1.2 million with Nucor in just two years. A bar mill in Marion, Ohio, acquired last year, has already pushed annual production from 400,000 tons to 450,000.But to focus only on pay would be to miss something special about the culture Nucor has created. There's a healthy competition among facilities and even among shifts, balanced with a long history of cooperation and idea-sharing. Rick Ryan, the shipping department supervisor at the Auburn mill, has taken trips to study plants in Nebraska and South Carolina. Ryan had always used wood blocks as supports beneath the bundles of steel the plant produced. But after seeing other Nucor plants use steel blocks, he switched. Because they can be reused, Ryan figures the move saves $150,000 a year.Since there's always room for improvement, plant managers regularly set up contests for shifts to try to outdo one another on a set goal, generally related to safety, efficiency, or output. Ryan says Nucor's Utah plant is the benchmark these days. It is the most profitable, with the lowest costs per ton. "They've got everything down to a science," says Ryan admiringly. "It gives you something to shoot for."

In-House Entrepreneurs
As Nucor grows, existing facilities making products that overlap with those of acquired plants may need to find new businesses to branch into. So Nucor employees have to innovate themselves out of tough spots and into more profitable ones. The Crawfordsville plant is among those that have felt the squeeze. It's famous as the place that pioneered the commercialization of the thin-strip casting of steel that made it possible for minimills such as Nucor to compete with the industry's Old Guard. But Crawfordsville is not on a large waterway, a disadvantage at a time of high fuel costs. As Nucor's oldest sheet mill, it can't make sheets as wide as many of Nucor's other mills, including a giant plant in Decatur acquired in 2002.

So General Manager Ron Dickerson has focused more of Crawfordsville's output on types of steel that are harder to make, more profitable, and less threatened by imports. Now, Crawfordsville can make 160 different grades of steel. Those with a high carbon content, for example, are stronger and lighter and are particularly useful for steel ties for shipping and in car parts. It took a lot of work to figure out how to make this type of steel, which is prone to crack in mid-production, but workers agitated for the chance. They wanted more work for the plant so they could get more hours. Nucor's giant Berkeley mill has gone through a similar evolution, adding new machinery, including a $20 million vacuum degasser used for higher-margin ultraclean steels. The internal competition from Decatur "forced us to get better quicker," says Berkeley's general manager, Ladd Hall.Like many employees, Hall sometimes sounds like a walking advertisement for Nucor. Whisking a visitor out of his office and onto the factory floor, he mentions that he often walks through the plant on Saturday mornings at 5 or 6 a.m. to chat with the line workers before having breakfast with his children at 9 a.m. "I can give you all the rhetoric you want," says Ladd, "but the people in the mills, that's what makes it Nucor."

Starbucks on CBS 60 Minutes

This story is about an ordinary citizen who went from rags to riches. Besides, it also has some important management lessons!

To view the whole interview click here:

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At the Starbucks headquarters in Seattle, they don't drink coffee like you and me. Howard Schultz analyzes each slurp, as though he's letting you in on a secret.

"You taste that earthiness? Like a Bordeaux wine. That is pretty good," Schultz points out.

Here people called "coffee masters" talk about finding romance and passion in a cup like they were cream and sugar. Schultz has brewed up a coffee culture that's, sometimes, a little hard to swallow.

"One of our colleagues coined a phrase a long time ago and said, 'We're not in the business of filling bellies. We're in the business of filling souls,'" says Schultz.

"Oh now, come on," says Pelley. "No wait a minute. That's too … this is a company. This is a corporation. Come on."

"OK, it is a corporation," Schultz acknowledges.

"You're blowing smoke now," Pelley replies.

"No, I mean this is how we feel. You might say, 'OK, they're full of crap.' And you know, this is how we feel," says Schultz. "We're in the business of human connection and humanity, creating communities in a third place between home and work."

"I've got to tell you I've been kicking around your headquarters for the last couple of days and I'll admit if you'll let me use a different beverage metaphor … the people around here really seem to be drinking the Kool Aid, they really seem to be completely steeped, to use another beverage metaphor, in this philosophy bit," Pelley remarks.

"But it's not a cult, this is a corporation, it is a for-profit business. But our approach for 30-plus years has been unique and different, not better just different. Not better, just different," Schultz replies.

That approach created a market that didn't exist and a company that now doubles its sales every three years.

The company, Schultz says, currently has about 11,000 stores in 37 countries and they are opening an average of five stores per day.

"It's an unbelievable number to me to be honest with you," he says.

There really are Starbucks across the street from each other. They do that to cut down on the lines. Starbucks says it has 40 million customers a week and the company brews 227 million gallons of coffee a day.

The operation that feeds that monster is massive. At a roasting plant outside Seattle, green coffee beans are shipped in from 28 countries. This plant will go through up to two million pounds of beans in a week and there are four plants just like it. Starbucks has become so pervasive it, has spliced itself into the national DNA, being mentioned on programs such as Oprah, Jeopardy and even the Simpsons.

While Schultz acknowledges there is a bit of a Starbucks blowback, he doesn't think the company is crushing the life out of mom and pop coffee shops.

"We are so different and when people understand that, they welcome us," he says. "For example, first off, we created an industry that did not exist and in our wake, the momentum of Starbucks, so many local and regional companies and mom and pops have not only surfaced, but succeeded."


Still, Schultz has felt the wrath of anarchists, who trashed a Seattle store in an anti-globalization riot.

"There is a criticism, and you've heard it, that Starbucks is homogenizing the world; you're taking the culture out of places in China and Japan and Americanizing them," Pelley says.

Schultz says he has heard that and is not irritated by such criticism. He says "it's just off base."

"And when people say you're an evil empire bent on world domination, you say?" Pelley asks.

"I hate that. I hate that, but I realize you're always going to have critics," Schultz replies.

The original Starbucks opened in 1971 on Seattle's sea front. It was a small store with no big plans. "Starbuck" is the name of a character in the novel Moby Dick.

Schultz worked as an appliance salesman pushing coffee makers, when he stopped at Starbucks to make a sales call.

"When I walked in this store for the first time, I know this sounds really hokey, I knew I was home," Schultz says.

He quit his job and went to work in the store, which at the time was just selling beans and machines. Adding an espresso bar was his idea. A few years later, he was offered a chance to buy Starbucks, which by then had grown to six Seattle stores. He set out to find investors.

"If I came to you in 1987 and I said to you, 'Even though coffee consumption in America is down, I wanna build a company that was gonna sell coffee not in a porcelain cup, but in a paper cup, with Italian-saying words that no one could pronounce, for $3 a cup of coffee,' would you invest?" Schultz asks.

"Absolutely not," Pelley replies.

Schultz says Pelley would have had a lot of company. But had he invested $10,000 at the start, it would be worth more than $5 million today. How did Schultz do it? With marketing and salesmanship and even, he admits, a little hype.

"But please tell America and the rest of the world why the small drink is called the tall?" Pelley asks.

"Well, I think, you know, when you walk into a store, you don't wanna say, give me a small. You wanna say give me a tall. And, so, there's a little bit of marketing in there," Schultz explains.

Schultz likes to tell people that Starbucks is just a simple coffee company, but behind closed doors, there's a Starbucks laboratory inventing next year's drinks.

"It takes our beverages from the state of ideation to the actual development that you see going on right now," explains Jim Donald, the company's CEO, as he showed the 60 Minutes team around.

What is the state of ideation?

"State of ideation. Beverages have to be created. And they're created by looking at what trend is in say, the fashion industry, what color's hot right now," he explains.

They think green is hot and so they developed something called a "Green Tea Frappuccino." At Starbucks today, there are now 55,000 possible drink combinations.

"Cinnamon dolce latte. Vanilla white chocolate mocha? Caramel macchiato? Where does this stuff come from?" Pelley asks. "You're making this up."

"You walk into a retail store, whatever it is, and if there's a sense of entertainment and excitement and electricity, you wanna be there," Schultz says.

Starbucks is theater. That showmanship and salesmanship have made Schultz something close to a billionaire.

But that is something that he could never have imagined as a boy. Schultz grew up broke living in a public housing project in Brooklyn. There are bullet holes in the door leading to apartment 7G, in the building where he lived.


As a teen, Schultz says his dream was to get out. "It was, I never allowed myself to dream beyond that. I was afraid to dream beyond that."

Dreams, he told us, seemed futile after his father, Fred, was injured on the job.

"This is the hallway I walked down at the age of 7 and opened up that door and saw my father on a couch with a cast," Schultz recalls. "He broke his leg on the job. He was a delivery driver, picking up and delivering cloth diapers. Terrible job.

"When he fell on the job, he basically was turned loose. He was out of work. There was no hospitalization, no health insurance, no workman's compensation and we were done as a family and I saw the hopelessness, I saw the plight of a working class family, I saw the fracturing of the American dream first hand at the age of 7. That memory scarred me."

Schultz has organized his company around that memory. He provides health insurance to employees who work as little as 20 hours a week. He raised prices to do it. And now Starbucks spends more on health care than it does on coffee.

"What I've said to our own people is that we will not — you're never supposed to say never, but I said never — we will never turn our back on this benefit for our people," says Schultz.

When you pay $4 for coffee, you're funding Schultz's social agenda — the health care, stock options for employees and more. He even pays farmers higher than market rate for beans.

Schultz got out of the housing project but something about it never left him.

What was he thinking, visiting his old home?

"Just everything that's happened to me since standing here, how many times I walked through that door," he says. "I think there were many moments when people said, not to me directly, but I remember hearing things that, 'Don't aim too high.' Not my parents, but people. 'You're from Brooklyn, you're from the projects. Don't aim too high.' "

All these years later, Schultz is aiming to at least triple the number of stores to 30,000 worldwide. He thinks that China may be his biggest market and he has nearly 400 stores in the region already, including one in Beijing's Forbidden City.

What was once a coffee bar has become a marketing machine for an expanding entertainment business. It produces its own music and, this week, Starbucks opens its first movie. It's called "Akeelah and the Bee" as in spelling bee, a feel-good film about a poor kid who triumphs.

It's called "Akeelah and the Bee" as in spelling bee, a feel-good film about a poor kid who learns how to spell big words. Words like prestidigitation.

"Prestidigitation" means skill in pulling off illusions, like a magician. Howard Schultz admits there was more than a little sleight of hand in conjuring up Starbucks and turning the dullest, most common drink in America, into something mysterious.