The Starbucks Experience
BY MARK PENDERGRAST
Having conquered North America, Starbucks has invaded continental Europe, launching C-Day from a strong foothold in the United Kingdom, where it now has nearly 300 retail outlets. In March 2001, Starbucks opened its first store on the continent in the heart of Zurich. Switzerland now hosts six Starbucks outlets. In December 2001, the company invaded Vienna, the gemütlich home of the traditional European coffeehouse. This spring, Starbucks will descend on Germany and Spain.
The company is engaged in a veritable European blitzkrieg, planning to open 650 stores in at least six countries in the next two years. On average, the company is opening three to four stores a day, serving over 16 million customers a week. By 2005, the company projects a total of 10,000 stores worldwide, with an eventual goal of 20,000 some time in the unspecified future. A few years ago, Howard Schultz, who spearheaded the purchase of Starbucks in 1987 and took it national, predicted: “Starbucks is going to be a global brand, in the same genre as Coke and Disney.” He apparently meant it. In 2000, Schultz booted himself upstairs from the c.e.o. position, which he gave to Orin Smith, and is now the chairman and “chief global strategist” for the firm.
The major unanswered question is how Starbucks will fare in continental Europe over the next few years, particularly when it goes back to Italy, where Schultz had his first espresso revelation in the spring of 1983. Attending an international housewares show in Milan, Italy, the Starbucks salesman landed in a city with 1,500 espresso bars. “Buon giorno!” a barista greeted Schultz one morning, as he handed a demitasse of espresso to one customer, and then deftly created a cappuccino, topped with white foam. “The barista moved so gracefully that it looked as though he were grinding coffee beans, pulling shots of espresso, and steaming milk at the same time, all the while conversing merrily with his customers,” Schultz recalls. “It was great theater.”
But until Schultz arrived, Starbucks simply sold whole roasted beans to consumers who ground and brewed them at home. The charismatic Schultz changed all that, selling his vision of a Starbucks chain that would deliver espresso-based coffee drinks to upscale consumers in retail stores across the country. He cleaned up the Starbucks mermaid, covering her bare breasts, and went to work.
In 1987, during Schultz’s first year of ownership, Starbucks lost $330,000. The next year, $764,000, and by 1989, the firm dropped $1.2 million. There were then 55 Starbucks locations in the Pacific Northwest and Chicago. Investors simply had to have faith, delivering repeated infusions of venture capital. In 1990, the company turned the corner, building a new roasting plant and showing a small profit. The following year, Starbucks invaded Los Angeles, where many feared the warm weather would deter hot coffee sales, but it was an immediate hit. “Almost overnight, Starbucks became chic,” Schultz remembers. “Word of mouth, we discovered, is far more powerful than advertising.”
Schultz began to hire MBAs and corporate executives with experience running chain franchises, creating complex computer systems, and training employees nation-wide to deliver standardized consumer goods. He recruited many of them in the early 1990s from fast food companies like Kentucky Fried Chicken, Wendy’s, McDonald’s, Burger King, Pepsi, and Taco Bell, and they brought professional management to the pre-existing coffee idealism. By the end of 1991, there were just over 100 stores with $57 million in sales.
On June 26, 1992, in order to finance rapid expansion, Starbucks launched its initial public offering (IPO), going public at $17 a share with a market capitalization (the value of all shares) of $273 million. Howard Schultz had paid less than $4 million for the company only five years before. Within three months, the stock price had reached $33, making Starbucks worth $420 million.
Starbucks employees, called “partners,” were indoctrinated with 25 hours of course work that imprinted company rules. Among them: Thou shalt brew a double espresso shot between 18 and 23 seconds and serve within 10 seconds of brewing it, or throw it out. The courses, called Coffee Knowledge 101, Retail Skills, Brewing the Perfect Cup and Customer Service, were taught by ultra-earnest, peppy young instructors. “Lovely! Fabulous foam!” they would burble as students created lattes. Hip, young Generation Xers had to remove studs or rings from nose, lip, or tongue, nor could any employee wear cologne or perfume that might interfere with the roast aroma. For the same reason, smoking was forbidden.
Though Schultz could have quadrupled his expansion rate by franchising Starbucks, he chose to open only company-owned stores, except in airports or other odd spots that demanded licensure. That way, he could maintain strict control of quality and training. Similarly, he maintained close to vertical integration, sending his coffee buyers in search of the best beans, then roasting, grinding, and brewing them to strict specifications. The chain paid slightly above minimum wage - better than most fast food companies - and provided an innovative benefits package that included part-time employees who worked 20 hours a week or more. As a result, employee turnover at Starbucks was only 60% a year, compared to the industry average of 200% or more.
Starbucks also became the largest U.S. corporate donor to CARE, specifying that its contributions go to help coffee-producing countries such as Indonesia, Guatemala, Kenya, and Ethiopia, pledging $500,000 a year by mid-decade. The company sold a coffee selection package called a “CARE sampler,” donating a portion of the proceeds. The grateful charity responded by giving Starbucks its International Humanitarian award.
Schultz realized that he was selling a place to meet as much as he was selling coffee and biscotti. He read sociologist Ray Oldenburg’s book, The Great, Good Place, which specified the need for a “third place” beyond home or work. In fact, modern coffeehouses such as Starbucks do provide a much-needed space for friends and strangers to meet, especially in the U.S., which lacks the friendly pub or sidewalk cafe familiar to Europeans.
But Schultz was not in business primarily to provide community. He was in it to win. Starbucks spread across America following the initial public offering, growing to 165 stores in 1992, 272 in 1993, and 425 in 1994. By mid-decade, the company was opening an average of one store every business day, targeting appropriate locations by studying the demographics of mail order customers. In Boston, he bought out the Coffee Connection chain, converting the outlets to Starbucks.
On April 1, 1996, National Public Radio’s news program reported: “Starbucks will soon announce their plans to build a pipeline costing more than a billion dollars, a pipeline thousands of miles long from Seattle to the East Coast, with branches to Boston and New York and Washington, a pipeline that will carry freshly roasted coffee beans.” It is testimony to Starbucks’ ubiquity in the U.S. that many people initially believed that this April Fool’s hoax was a real news story.
That same year, Starbucks opened a retail store in the Ginza district in Tokyo, the first store outside North America, as a 50-50 joint venture with Japanese retailer/restauranteur Sazaby Inc. Although Japan is traditionally a tea-drinking nation, it was already experiencing a coffee renaissance. The Japanese are also noted for admiring and adopting American products and trends such as blue jeans and Coca-Cola. Still, critics warned that the Japanese would never buy take-out coffee in paper cups or accept the interior non-smoking policy. Starbucks proved them wrong. Some 30% of its customers drink take-out coffee in those throwaway cups. Japan now hosts over 300 Starbucks stores, and the Japanese company has gone public. The company has over 700 stores throughout the Pacific Rim.
Late in 1998, Starbucks made a deal with Kraft Foods (Philip Morris), owner of Maxwell House, for the giant multinational to distribute Starbucks in 18,000 grocery stores throughout the United States. At the same time, Starbucks introduced a lighter roast in addition to its traditional dark offering. Also in 1998, Starbucks bought the Seattle Coffee Company, a 63-store British chain founded by Seattle natives Scott and Ally Svenson.
And now Starbucks is invading continental Europe with the avowed intention of giving the “Starbucks Experience” to everyone on earth at some point during this century.
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