Starbucks' Tuition Plan Is Good Business

 | Jun 16, 2014 | 1:25 PM EDT  | Comments
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Cynical marketing ploy or just good business? I am talking about the revolutionary plan that Starbucks (SBUX) announced today, to provide a free online college education for those who work at the company.

I think a lot of my colleagues and people on Wall Street would immediately leap to the conclusion that CEO Howard Schultz and his team are just creating a big splash, just one more public relations gambit from a publicly traded company.

Now of course, it does help the image of Starbucks, there is no doubt about it. There is good publicity value. Second, we don't know how much it costs or how many of the tens of thousands of people at Starbucks will apply for the online degree at Arizona State University, so we don't know out-of-pocket costs, and no projections were disclosed.

Third, Starbucks has 280,000 people working for it, and you could argue that many people won't avail themselves of the opportunity or can't because of time or geography, so the program might be more chimerical than actual, although I heavily debate that question.

But I think this is just plain old good business. It reflects something that most people do not understand about the interrelations between education, retention and earnings per share.

As Howard Schultz said today in a partners' meeting in New York that was filled with grateful employees, many of whom were highly emotional in their effusive love for the company, a company with a conscience does better in creating value than one without. Given the performance of the stock of Starbucks compared with its peers, that's empirically true.

This is not a new theme. United Technologies (UTX) paid for 35,000 degrees for its employees in 50 countries at a cost of more than $1 billion. But is that the actual cost? George David, as hard-bitten a former CEO as I have ever come across, always explained to me that the program helped retain the best and the brightest at the firm.

I think the exact same thing will happen at Starbucks, as many more people will use the online Sun Devil program to advance themselves at Starbucks than to use it as a launching pad for other careers.

I am also reminded of something Jim Sinegal, the former Costco (UTX) CEO, has reminded me time and again, anything that retains high-quality employees is something that falls right to the bottom line, because you much more than make up for it in not having to train new people. Training people is a dead-weight loss to earnings per share, and Sinegal has often attributed his company's best-in-class profitability to the fact that the average turnover in retail is about 30% a year, and Costco has just a fraction of that kind of turnover.

Finally, this program can only improve the retail experience at Starbucks. Knowing your barista, liking your barista, builds loyalty and keeps you from switching brands, something that's so important in the incredibly competitive restaurant market.

Danny Meyer, the great restaurateur and creator of the incredibly successful Shake Shack, once expressed concern to me about the ability of Starbucks to continue to recruit the best and the brightest in the country to work in an increasingly complex store setting that includes ever-changing menus and a heavy use of technology. Starbucks' Howard Schultz has answered this, first with comprehensive healthcare long before it was mandated by the government, then with a 401(k) that compensates in shares that's a lot more generous with employees than most, and now the most aggressive plan to offer free tuition en masse of any company.

I can't say, "Raising numbers, Starbucks," after the presentation. I can say, however, that the long-term value of the shares has just increased, and for those who own the stock, that's perhaps all that matters. 

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