Building Starbucks

Chapters 13-24 from “Pour Your Heart Into It: How Starbucks Built a Company. One Cup at a Time” by Schultz and Yang (1997)

Chapters 13 to 24 cover the period from June 26, 1992, Starbucks’s Initial Public Offering (IPO) date, to 1997, the year the book was published.  Howard Schultz is the Chairman and Chief Executive Officer of the Starbucks Coffee Company.

Schultz applied his instinctive hiring philosophy of choosing people, including an investment banker, with values and principles that matched his own.  Becoming a public company had a downside: the obsession with stock price behavior to satisfy Wall Street expectations was emotionally stressful and distracting.  If management leadership is strong and focused on achieving goals, making decisions based on what’s good for the company will be, in the long-term, also good for the stock price (Schultz and Yang 179-189).

A growing mail-order business helped Starbucks decide where to expand after its successful IPO.  Fast paced growth led Schultz to realize [197-198] that for the company to maintain its competitive edge without taking a toll on the company’s values, he had to reinvent himself and go back to his entrepreneurial roots.  Schultz appointed someone else to take care of day-to-day operations so he could be the leader and pathfinder looking into the future, whose job was to help Starbucks keep its marketing edge by providing a stimulating and challenging environment for dreamers, entrepreneurs, professional managers, and leaders [190-204].

The success of the Frappuccino, a cold coffee drink ideal for hot weather, was the result of Schultz’s reinvention.  A cold drink was not part of the Starbucks vision, but customers loved it, so Schultz allowed it.  It was a hit!  Starbucks entered the music business as customers loved the music playing in the stores.  Music sales lifted over-all store sales as customers were delighted to find a good product they liked and because good music added to the Starbucks experience and sense of esthetics [205-214].  Related to this, Starbucks will release on November 22, 2005 the Rolling Stones CD  Rarities: 1971 – 2003, a collection of remixes, exotic B-sides and hard-to-find live recordings, another way for customers “to discover, experience and acquire great music through CD compilations and music programming” (Lombard).

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Having proven that sustained growth is linked to self-renewal, Schultz took risks when things were going well to bring the company to the next level.  After thinking of ways to refresh and invigorate various elements of the Starbucks experience – store design, merchandise, coffee blends, and jazz CDs – they reinvented the coffee bean with state-of-the-art research and technology.  By capturing the essence – flavor and aroma – of coffee, they opened up new ventures that offered a wider range of new products like coffee-flavored beer, coffee ice cream, and bottled beverages.  Its first product with Pepsi, a cold lightly carbonated coffee drink named Mazagran was a flop, but their next, bottled Frappuccino, was a hit.  The failure was due to loss of focus, but their success in taking risks helped Starbucks get into supermarkets, the ready-to-drink beverage business, and a successful tie-up with Dreyer’s, moves against conventional marketing wisdom that “every brand has limitations, and slapping it into anything cheapens it beyond recognition.”  Starbucks kept its brand equity growing as more products are associated with it because the brand is put only on best-of-class products that take advantage of Starbucks’s recognized expertise in coffee [215-229].

The 1994 coffee crisis in Brazil led to a values crisis in the company.  Should Starbucks raise prices, or should Starbucks buy cheaper but poor quality coffee?  They decided to stick to expensive premium coffee and raised prices slightly, passing a part of the cost increase on to the consumer, and only after fully explaining the situation.  Profits were not affected much because customers’ spending patterns didn’t change, teaching Starbucks the lesson that customers were willing to pay higher prices for a great coffee experience.  By not compromising their values, and looking for ways to cut costs by improving systems and productivity, they met profit targets without passing the full price increase to the customer.  Starbucks knows [234] that having low coffee prices is not good, and that it is in the coffee industry’s best interests to make sure prices are at the right level where it is profitable for farmers to grow the crop [230-242].  This explains Starbucks’s recent decision to pledge $2.5 million in loans to cooperatives in Latin America and Africa as part of buying Fair Trade Certified or FTC high-quality coffee at higher prices.  FTC asks large buyers to grant loans of up to 60% of purchases (Mochari).

Starbucks never set out to build a global brand.  Their goal was to build a great company that valued the authenticity of the product and the passion of its people.  They succeeded without any formal brand strategy by believing that “the best way to meet and exceed the expectations of customers was to hire and train great people who loved coffee passionately.”  The secret of the Starbucks brand power is the personal attachment between partners, as Starbucks employees are called, and their customers [245]. Its marketing philosophy is product-driven, people-driven, and values-driven, different from that of big-name brands (P&G, Pepsi and Coke) which is market-driven (grab market share with ad campaigns).  Starbucks built the brand one person and one coffee cup at a time by making the experience unique, special, and delightful so customers come back.  They do, spending $3.50 on each of eighteen visits a month.  Building a brand from the heart, on the strength of the human spirit, makes it strong and endure [248].  Schultz defined [249-254] the Starbucks experience as the result of romancing the bean (great coffee), romancing the customer (being served by baristas passionate about great coffee), and romancing the store experience (an enriching, comfortable, accessible, stylish, and elegant environment) [243-266].

Starbucks’s risky ventures succeeded by making sure only good quality coffee was brewed and associated with the brand.  The company entered new markets: stores, fine dining restaurants, cruise ships, hotels, and bookstores.  They addressed the usual problems (Will we lose control over quality?  Will increased exposure help or hurt our retail stores?) by picking the right partners, training people thoroughly, and monitoring closely and regularly the adherence to company standards [267-274].

Schultz was concerned about keeping the Starbucks experience intimate to avoid becoming another soulless big chain [276].  How can people see Starbucks as a small corner business when it is a huge global corporation?  Attacked in the media as ruthless, profit-minded, and scheming, Starbucks responded by making people aware of their benefits to the community and deciding to go only to places that eagerly welcome them [280].  Starbucks stays small by caring for the barista, leading Schultz to claim that human resources, not marketing, is the most important department in the company because “success depends entirely on the people they hire, retain, and promote [282].”  What keeps partners satisfied is enjoying the Starbucks experience daily and the emotional benefits from the job – camaraderie, interaction with customers, pride in a new skill and knowledge, respect, and working for a company that treats them well [287].  The company grew as its people learned to grow and take on more responsibilities [275-291].

Starbucks takes good care of the people who do the work and showing concern for the communities where they live by caring for the places where stores are located and the countries where their coffee is grown, supporting school programs and giving to CARE, a worldwide relief and development group whose beneficiaries are the same countries where Starbucks gets its coffee.  In the face of calls to boycott coffee from Guatemala, Starbucks developed a framework outlining beliefs and aspirations and specific short-term goals to improve quality of life and working conditions in coffee-origin countries.  Schultz explains how using paper cups, instead of cheaper plastic cups that could have saved the company millions of dollars a year, solved an ethical dilemma related to environmental issues [292-305].

Starbucks can avoid becoming a cookie-cutter chain by making store design an important part of the romantic coffee experience.  Stores share a sophisticated yet approachable personality that reflects the character of its neighborhood and maintains the edge of surprise and delight.  Having standard design modules that optimized store space allowed creative expression, cut down store development time, and significantly reduced the average cost of opening and operating stores, helping them sell coffee in locations they never considered, yet another case of an innovative and elegant solution to a problem [306-317].

Disappointing 1995 holiday season sales helped Schultz see the value of planning and forecasting.  He confronted the mistake honestly and openly, making everyone feel responsible and showing that management can be trusted to be open in solving problems.  The problem was they lost their focus on the long-term in the face of short-term concerns.  He learned that moves to cut costs or raise efficiency will add value only if these are consistent with the company’s overall long-term goals.  He also learned to be both farsighted (long-term thinking) and nearsighted (pay close attention to details).  As it becomes more difficult to delight and surprise customers, he has to continue pushing his R&D and marketing teams to look for new products and far-sighted projects to retain customers’ interest and loyalty [318-329].

The last chapter contains Starbucks’s audacious but achievable vision and mission, Schultz’s thoughts on managing people, and his style of leading from the heart.  His job is to clarify core values and articulate long-term goals to support the vision.  Starbucks will endure because everyone working in it share their success with one another [330-338].