Howard Schultz, Starbucks+CDFIs

indivisible_itemsStarbucks Chairman + CEO Howard Schultz announced this week that he is changing his role at the coffee company. He plans to concentrate on a new high-end business, large stores that are retail roasteries. It sounds like the cafe equivalent of microbreweries.

The CDFI industry owes a lot to Schultz, who included CDFIs in Starbucks’ “Create Jobs for USA” program that raised more than $15 million for CDFIs supporting about $105 million in lending to small businesses during the Great Recession. More important, he led a cause-marketing effort that drew more than one billion “eyeball” impressions for CDFIs–probably more media impressions than CDFIs had experienced in their history to that time.

That raised unprecedented awareness of CDFIs but also caused many CDFIs to see themselves differently. It gave CDFI industry professionals new tools, new reference points (such as the Create Jobs for USA “Indivisible” products shown above, and new language to describe what CDFIs do and why they do it.) At the least, it made it easier to say, “You know, like those wristbands you see in Starbucks.”

Create Jobs for USA was a big boost for CDFI practitioners who were all too used to being hidden in plain sight.

It is easy to ignore the fact that “Create Jobs” was not meant only to create and retain jobs. It grew from Schultz’s frustration that lenders, particularly banks, were not lending much to small businesses at the time, including small businesses in Starbucks’ supply chain. In my conversations with him, he talked often about wanting to prove that banks and other conventional lenders could and should be lending to small businesses during the recession.

I have been writing about one instance that played an outsized role in the story of Create Jobs for USA: American Mug & Stein of East Liverpool, Ohio, which produced the Indivisible mugs pictured above. As it turned out, The Progress Fund, a quiet but innovative CDFI working in Western Pennsylvania and Eastern Ohio, stepped in to lend when no banks would.

Here is the story:

During the summer of 2011, Schultz grew increasingly worried about the fact that small businesses in America were stuck in a debt desert—most, if not all, sources of loans seemed to have dried up. The recession that set in in 2008 had scared conventional lenders and they were no longer lending much.

This worried him for two reasons:

First, he knew that small businesses are vital to Americans and to the American economy. Small businesses create and retain most of the jobs in the U.S., offer the best route to economic opportunities and mobility for low-income and moderate income people, and are fertile ground for innovation that helps spur growth for the economy.

Second, Starbucks relies on many thousands of small businesses, and Schultz had to be worried that Starbucks could run into trouble getting what it needed for its stores. He knew that the businesses Starbucks worked with were good borrowers even during the recession.

Schultz talks often about using Starbucks’ “Scale for good,” and he committed to do that. In late August 2011, he gathered top Starbucks executives at his home in Seattle to brainstorm on a Sunday evening over pizza. Starbucks needed to do something to help small businesses get the money they needed, he told them, urging them to be creative. They even discussed Starbucks lending its own money.

Across the country, near Philadelphia, I glanced one last time at my email before going to sleep that night. At the time, I was President & CEO of OFN. There was an intriguing email from Rodney Hines, one of Starbucks’ leaders in philanthropic giving: We are kicking around an idea, Rodney wrote, and we think you can help us. Can you talk in the next few days?

I wondered whether to probe Rodney for more details, but finally settled on a quick response: “Tomorrow?”

Rodney, Starbucks’ Chief Environmental Officer Ben Packard (who I sat on a nonprofit Board with), and a guy named Adam Brotman called me on Monday. At Starbucks, they work fast, and by Wednesday we had an agreement in place to collaborate on “Create Jobs for USA.” I was excited and a bit worried about partnering with a big corporation. 

Opportunity Finance Network had done similar projects, so I figured we could do this, too. We did, but I had no idea how remarkable and how different it would be working with Starbucks.

Based on a model we had used several times at OFN, we suggested that we could use grant capital from Starbucks to make investments in CDFIs to finance small businesses—both for-profit and nonprofit businesses… we called them “Community Businesses.”

Starbucks had a much bigger idea. We fastened our seat belts and held on.

Less than two weeks later I was at Starbucks’ headquarters in Seattle in a small, crowded room with about 10 Starbucks team members and at least as many outside consultants—web designers, public relations pros, and a lawyer or two. At the front of the room was Brotman, who introduced himself as the internal entrepreneur on the project.

By the time we left that crowded room, we had scoped out what would become the most visible and one of the most successful innovations ever for CDFIs:

  • Through its stores and online, Starbucks would raise millions of dollars in donations from its customers, its business partners, and other motivated allies. Donors would receive a red, white, and blue “Indivisible” wristband as a thank you for a $5 donation. How ambitious was Starbucks? It was ready to produce (at its cost) millions of wristbands.
  • Starbucks and Schultz (personally) both made million-dollar-plus contributions to the effort.
  • Starbucks asked its business partners to join, adding their marketing reach to spread the word and to give more people opportunities to participate. Banana Republic joined first, then Google, Citi, and others. In addition, many lesser-known companies mailed in contributions unsolicited.
  • OFN put 100% of every donated dollar out to CDFIs in its network within days of receiving the money through Starbucks. It had a way of screening them to ensure that the money would be used for its intended purpose and a reporting system that later affirmed that they did what they promised.[i]
  • Starbucks and OFN worked together—Starbucks really did the heavy lifting—to tell the story of America’s community businesses and how they were creating jobs. Within months of launching Create Jobs for USA, it had reached more than one billion people, a number no one in the CDFI world had ever even fantasized about, via media.

Create Jobs kicked off in a short video that ran for the first time as a commercial during Game 7 of the 2011 World Series! But Starbucks and its media partners held back nothing, using prime counter space at its stores, the full weight of its marketing and PR capacity, its social media and web reach, and—most important—Howard Schultz’s time and voice to make one simple point: Small businesses in America needed loans to succeed and there was no good reason to deny them.

This was much more than a theoretical problem, as Schultz had feared.

The “Indivisible” wristbands were so successful that Starbucks added more products under the “Indivisible” brand message: plastic tumblers, an “Indivisible”-themed CD, even an “Indivisible” brew of Starbucks coffee!

Still not enough for Schultz. With his team, he committed to creating more jobs. Starbucks sells a LOT of mugs. Create Jobs led Starbucks to East Liverpool, Ohio and Clyde McClellan.

Once a major producer of ceramics, East Liverpool was struggling in 2012 when Starbucks approached America Mug & Stein, one of the few remaining factories left there. McClellan had bought the company in 2009 because he believed in American ceramics, the industry where he had made his successful career.

By 2012, McClellan was wondering if he was wrong. Maybe he’d have to give up and close American Mug & Stein.

 Starbucks approached him with a plan to order potential tens of thousands of mugs, starting with an “Indivisible” mug that Starbucks and OFN would use to promote and raise money for Create Jobs for USA. McClellan agreed, knowing that he would have to expand his factory and hire staff, but never thinking for a moment that he would have trouble getting a loan to pay for the expansion. After all, he had a big deal in hand from Starbucks!

 If ever there was an easy loan to make, even in the Great Recession, this was it. But McClellan struck out at every bank he approached. No one would lend him the money he needed to close the Starbucks deal.

“I know I’m bankable!” he told me when I reached to help. I had in mind that a local CDFI might be able to do the deal. Like most small business people, McClellan knew his business and expected the respect he had earned.

He was right—he WAS bankable. I called in favors from several national and regional banks asking them to lend to American Mug & Stein without success.

Time was running out. If McClellan could not get the loan he would not be able to expand and might lose the Starbucks relationship and American Mug & Stein.

At last, and just in time, McClellan relented, and I introduced him to David Kahley, a local CDFI leader. His CDFI, The Progress Fund, finances small businesses in Western Pennsylvania and had recently expanded to Eastern Ohio, covering East Liverpool.

I asked Kahley to do everything he could to expedite the deal, if he could do it at all. No one expected The Progress Fund to make a bad loan, and I did not pressure him.

It took less than a week, and Kahley told me later that it was a “slam dunk” deal for The Progress Fund. Not only did American Mug & Stein have the Starbucks deal, McClellan believed so much in his business that he was willing to put up an excess of personal property to guarantee the loan. The Progress Fund did not need and did not take the guarantee.

In addition to financing the factory expansion, it helped American Mug & Stein restructure its finances so that it could operate more flexibly and at lower costs.

American Mug & Stein got the loan, 17 local residents got or kept their jobs, Starbucks got its Indivisible mugs, CDFIs got capital to support more lending to small businesses across the U.S., and Howard Schultz was right: Small businesses in America were worthy borrowers.

Soon after Starbucks and OFN launched Create Jobs for USA, the White House and the U.S. Small Business Administration (SBA) called us and other small business lenders to a meeting at the White House. One result of the meeting is that the SBA expanded a pilot program called “Community Advantage” to involve CDFIs more in lending to small businesses.

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