It starts out like the classic American entrepreneurial success story. Three college friends get together from time to time and talk about what kind of business they could start.
In this case, the three friends were Zev Siegl, Gordon Bowker, and Gerald Baldwin. The business they decided to start was gourmet coffee. It gets interesting. The company they started was Starbucks. And the story goes like this.
Way back in 1971, coffee didn’t look like it was a great business. It didn't show signs of getting better, either. Coffee consumption in the United States had peaked in the 1960s, but by 1971 it was on the decline. Part of the reason was that the coffee we had was awful.
Most Americans drank something called “coffee” that came ground up very finely in vacuum-sealed tins. You scooped the stuff out of the can and put it in a percolator. Some coffee made this way was so weak you could read a newspaper through a carafe of the stuff.
Sigel, Bowker, and Baldwin had traveled together to Europe where they discovered the rich dark coffee that was very different from the percolated brown beverage that most Americans were drinking. But for a while they didn't connect that preference with any kind of business idea.
The story shifts now to Berkeley, California, where a fellow named Alfred Peet had started Peet’s coffee at the corner of Vine and Walnut Streets, just around the corner from the Walk Shop. Peet had come to this country from Holland, where he was a coffee roaster, and he thought that most American coffee was pretty vile. In 1966 he had started Peet’s to offer something better.
Somehow a bag of Peet's dark blend found its way North, into the hands of Jerry Baldwin. It convinced Jerry and his friends that a gourmet coffee shop would be a good business for them to start.
When they were pressed by their attorney for a name, their first idea was to call the place Starbo after an old mining camp. But after a bit of thought they settled on Starbucks to pay homage to Seattle's seafaring heritage.
They opened their first Starbucks in 1971. They weren't the only ones who thought a gourmet coffee business was a good idea, even in Seattle. Elsewhere in town Jim Stewart was starting The Wet Whisker, which later became Seattle's Best Coffee.
Alfred Peet thought they were pretty good guys. He taught them about coffee roasting in his unbendable European way. For the first year of their business he even roasted the beans for them. Starbucks started to grow.
In 1982 a young marketing manager for the Swedish kitchen equipment company, Perstorp, noticed that a small company in Seattle called Starbucks was buying a lot of special drip coffee makers. He stopped by to see what was going on. He stayed on to become a partner.
The fellow's name was Howard Schultz. Shortly after joining Starbucks Schultz took a vacation in Europe. One day, sitting in a coffee shop in Milan, he had a vision of what Starbucks could become. He imagined a place where the staff knew the customers and where the great coffee was only part of a totally wonderful experience.
When he got back to Seattle he worked hard trying to sell Bowker and Baldwin on his idea of the complete experience. They remained unmoved so Schultz decided to do it on his own.
He founded a company call Il Giornale to create the experience that he’d seen in that Milan café. By 1987 he had three locations. Things might have gone on like that with him competing against Starbucks, but that was about the time that Gordon and Bowker decided it was time for them to sell out. Schultz arranged financing and became CEO of the company. Starbucks then had 17 locations in Seattle.
By 1990 the company was profitable. By 1992 it was time for an initial public offering of 2.1 million shares of $17-a-share. There were 125 stores and 2,000 employees.
Starbucks now has 5,689 outlets in 28 countries. They employ some 60,000 people and generate 2.6 billion dollars in annual sales. Sales, in fact, have grown 20%-a-year since the company went public; and, in 2001 the company opened more outlets than McDonald’s.
You don't get growth like that unless you're doing a few things right. Most of them tie back to Schultz’s vision of “the experience.”
Schultz imagined that the customer's experience should be wonderful from the moment he or she walked in the door of a Starbucks. The Barista should recognize the customer and greet him or her by name. The Barista should also know the customer's regular order and start preparing it right away.
To make that kind of experience happen, you need to do a lot of training. Starbucks employees learn about making coffee, but they also learn how to remember customer names.
To make that kind of experience happen you want to have motivated employees. Starbucks gives even part-time employees full benefits and limited stock options.
To make that kind of experience happen you have to control what goes on in the stores. Starbucks holds that control by maintaining ownership of its stores. Starbucks stores are all non-smoking, even in places like Japan and Vienna.
Creating the experience is one thing, creating continuing growth is something else. If you want to grow, you can't rest on your laurels. You need to be looking for things to improve and trying out new ideas. Starbucks has done that, too.
Southern California employees got tired of folks asking them for blended drinks, and so they suggested the Frappuccino product. Schultz didn’t like the idea but went ahead with it anway. It’s been a big winner for Starbucks and Schultz calls it “the biggest mistake I didn’t make.”
There’s a parallel story in Japan. There employees came up with a green tea Frappuccino-like product that's sold only in that country. It’s a big winner, too.
Listening to your employees and customers is a way to generate a flow of ideas. So is having your executives read unedited customer comment cards for an hour or so a week. But no matter where you get your ideas from, you need to test them and refine them.
Starbucks is testing things all the time. Right now there’s Starbucks Express, where you can order to-go items on the phone or over the Net and have them available for pickup at your local Starbucks. There’s wireless broadband connections in Starbucks coffeehouses. And there's automatic espresso machines that will, hopefully, speed up service.
Not every idea works. Starbucks tried adding sandwiches and other fancy food to the menu. It sounded like a good idea. But it didn't work.
One of the ideas that really has worked is the Starbucks card. It was introduced in November 2001 and is a stored value card that a customer can use to pay for purchases. Customers like it because it makes their life easier. The company likes it because it speeds up lines, improves the experience for customers, and encourages loyalty.
Now Starbucks is trying ideas to make the card even better. They've announced a policy of replacing the value on "registered" cards that are lost or stolen. They've developed ways for folks to go online to add value to their card. It's a good idea getting better.
That's what Starbucks wants to continue to do. So far the company has cruised through the business waters like a majestic sailing ship from Seattle's past. But they're coming close to the edge of the map now and beyond that edge lies the legend, "Here be monsters."
First, there’s the generational monster. While lots of folks from Generations “X” and “Y” work at Starbucks, the company is not real popular with those generations. They may work there, but they don't feel at home there.
Focus groups of folks from Generation X and Y have told Starbucks that the only people they see at Starbucks like them are the ones behind the counter. They think Starbucks is for pretentious Yuppies. As one Gen-Xer put it, “I hate the Italian names for the coffee sizes, small, medium, and large are fine for me.” If upcoming generations don't want to become customers, growth will stall.
Generations are just one monster. Another is growth itself. The bigger you are, the harder it is to generate high-percentage growth. That's not all. When a company grows fast it's usually hard to maintain good service. There's a real question about whether Starbucks can continue to find and train and supervise the people who deliver the Starbucks experience to customers.
The last monster that’s out there is the Faustian bargain that public companies seem doomed to make with the stock market. The market loves Starbucks now, but what if growth starts to slow. Then there is bound to be pressure to cut corners, lower standards and change rules and practices.
Starbucks is not a perfect company. But it is a company who has managed to make the voyage to success without compromising key principles of the guiding vision. The voyage ahead is more treacherous. Will Starbucks be able to maintain the integrity of its vision. I hope so.
Copyright 2002 by Wally Bock
Author: Wally Bock
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