Howard Schultz built Starbucks into one of the most successful companies in the United States. Indeed, Starbucks has joined such other iconic American corporations as Disney and McDonald’s in spreading its brand across the globe. Indeed, Schultz has come to symbolize a new breed of high successful entrepreneurs. His 2000 memoir, Pour Your Heart into It: How Starbucks Built a Company One Cup at a Time, became an instant best-seller. People can be forgiven if they believe Schultz was the company’s founder, but this is not the case.
Starbucks, in fact, was founded in 1971. It was already a thriving, albeit small, coffee bean market in Seattle’s Pike Place Market when Schultz first dropped in. At the time, he was selling kitchenware for a Swedish manufacturer. It was, he claims, love at first smell. In 1982, he moved to Seattle and joined the company as director of retail operations. A visit to an espresso bar in Milan convinced him that he had stumbled onto a viable business model that could be brought back to the Unites States. “There was nothing like this in America. It was an extension of people’s front porch. It was an emotional experience. I believed intuitively we could do it. I felt it in my bones.” Current Starbucks’ owners resisted Schultz’s urgings to expand from the bean business, so he left the company. After opening his own espresso bar, Schultz raised $3.8 million to buy the company. Starbucks was now his, and he was ready to expand, first beyond a coffee bean market and then beyond Seattle.
Under Schultz’s leadership, Starbucks became “the fastest-growing retail story of all time. ‘It has grown faster than McDonald’s ever did.’” From nine stores in 1987, Starbucks grew to over 10,000 stores in 30 countries by 2006. In 2005, revenues reached $6.4 billion. Growth, in fact, became a particular passion of Schultz’s. He expressed concern that if Starbucks did not grow rapidly, it risked being cannibalized by another chain. Revenues from his stores climbed above 20 percent annually with same store sales growing at over 10 percent. International expansion began in 1996 in Japan and has continued through Europe. By 2004, the green, familiar Starbucks’ logo could be seen in over 7,500 stores worldwide. It is considered to be “possibly the most dynamic new brand and retailer to be conceived over the past two decades.”
Schultz pursued a number of brand extensions as part of his strategy of growth. Some—Starbucks’ branded premium coffee ice cream, bottled coffee beverages (in partnership with PepsiCo), a Starbucks Visa credit card, and a CD music label (by purchasing Hear Music)—provided quite successful. Others—a magazine named Joe published with Time and a carbonated coffee drink—proved far less so. As the company grew to $1 billion in sales, Schultz brought in professional management from Wal-Mart, Dell, and PepsiCo. “I wanted to bring in people who had experience working at $10 billion companies,” he explained. Schultz’s vision is to grow to 25,000 stores worldwide (McDonald’s has 30,000). The stock market rewarded Starbucks’ growth in spectacular fashion: Between 1992, when Starbucks’ stock went public, and 2007, the stock price rose 5,000 percent.
In 2005, Jim Donald became CEO after spending 3 years as president of North America. Donald grew up in the supermarket business, having worked closely with Sam Walton to develop Wal-Mart’s supermarket expansion. Schultz had first ceded the CEO position to Orin Smith in 2000 so he could focus his own energies on global strategy. Donald announced his goal as “building stores, adding emerging growth drivers, and adding to the product pipeline. We’ll always be attempting to do things that are new. And if we stop doing that, then the whole entrepreneurial culture and spirit fails.” Donald established a long-term goal of 30,000 stores, compared to 9,200 in April 2005. “We’re going to open 1,500 this year. We’re looking at top line growth of 20 percent annually in the next three to five years—and bottom line 23 to 25 percent.”
In November 2006, Schultz told a CNBC reporter, “We’re headed to 40,000 stores.” Where will the growth occur? “We’re just now getting to smaller cities. And there are 165,000 miles of U.S. roadway that haven’t been tapped. I just got back from a four-market tour: Spain, Germany, Amsterdam, and Zurich. We’re just scratching the surface in China. We have 1,590 stores and the potential for more than 2,000 there. We’re not in India, but we’re looking at it. We’d love to be in Wal-Mart parking lots with company-operated stores.”
The “Third Place”
“We’re profitable because of the value system of our company,” insists Schultz. “American companies have failed to realize that there’s tremendous value in inspiring people to share a common purpose of self-esteem, self-respect and appreciation.” His stated goal was to create a culture that created a kind of partnership between employees and customers. The cozy environment of each Starbucks was meant to create what Schultz called a third place. “The first place is home,” he said. “The second place is work. We are the place in between. It’s a place to feel comfort. A place to feel safe. A place to feel like you belong.” And, of course, to buy coffee, pastries, books, and music.
To make sure the Starbucks’ culture was being maintained, the company conducted regular audits. Every 18 months, employees are asked to fill out a Partner View survey. Participation, which is voluntary, runs as high as 90 percent, because employees fill out survey on-line during company time. Plus, says the president of Starbucks Canada, “People have seen tangible results from providing us feedback.”
The Tensions of Growth
Donald recognized the inherent tension between rapid growth and maintaining the culture that had been so instrumental to Starbucks’ success. “I want to grow big and stay small at the same time. We want to run the company just like we did when we were one store in Pike Place Market in Seattle.” A February 14, 2007 internal memo titled “The Commoditization of the Starbucks Experience” written by Howard Schultz appeared on the Starbucks Gossip blog [the memo can be found in Exhibit below]. The trade-off between growth and culture, Schultz worried, had tilted too far toward growth. “Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”
Exhibit – Valentine’s Day Memo.
Schultz was especially concerned with the lack of in-store coffee scent and the cookie-cutter feel of the stores. Automatic espresso machines “solved a major problem in terms of speed and service,” but “eliminated the smell of beans being ground.” Those decisions, all of which had been approved by Schultz himself, were giving Starbucks the feel of a chain store rather than a third place. Schultz concluded with a call for Starbucks to “get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others.”
Throughout 2007 Starbucks’ stock plummeted (from $36.29 in January 2007 to 18.38 in January 2008). Coffee competition from both McDonald’s and Dunkin’ Donuts ate into same store sales. In January 2008, conceding that “we lost the focus that we once had, and that is the customer,” Schultz removed James Donald and placed himself in the CEO role. He would slow down domestic growth, Schultz promised, shift resources to international expansion. “Starbucks is not a broken company,” he said. “Just as we created this problem, we can fix it.”
In his first month, Schultz took a number of specific steps: closing 100 under-performing stores, scaling back on domestic expansion plans, and eliminating the sale of heated breakfast sandwiches whose aroma overpowered the smell of the coffee itself. His most dramatic step came in February 2008 when all 7,100 U.S. stores closed simultaneously for three hours to conduct an in-store training session for employees. Employees first watched a video massage from Schultz. “This is not about training,” he said. “This is about the love and compassion and commitment that we all need to have for our customers.” Employees then talked about new approaches to improve taste and texture and to improve the customer’s experience. One store manager commented immediately after the session, “It’s really inspiring to talk about the quality of our expresso when we’re here all in the same room.”
Rival Dunkin’ Donuts took advantage of the well-publicized shutdown of all Starbucks stores by offering $1 lattes during the same three-hour period.
Case Discussion
Read “Balancing Culture and Growth At Starbucks” and prepare answers to the following questions:
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