EVERY SPOKEN WORD
150 min read · 30,046 words- 0:00 – 0:35
Intro
- BGBen Gilbert
All right.
- DRDavid Rosenthal
We rolling?
- BGBen Gilbert
We're rolling.
- HSHoward Schultz
We get to see how you guys do this. It's kinda interesting.
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
We usually have pump-up music, but- Mm-hmm.
- BGBen Gilbert
I feel pumped up.
- HSHoward Schultz
We can do that! [upbeat music] We, we got a turntable here.
- DRDavid Rosenthal
Ooh, I, I saw your turntable. That's beautiful.
- HSHoward Schultz
What do you wanna hear?
- BGBen Gilbert
No, we're starting. [chuckles]
- DRDavid Rosenthal
Ben's keeping us on track.
- SPSpeaker
Who got the truth? Is it you, is it you, is it you? Who got the truth now? Is it you, is it you, is it you? Sit me down, say it straight. Another story on the way. Who got the truth?
- 0:35 – 5:22
Why revisit Starbucks now: scale, same-store sales, and the “third place”
- BGBen Gilbert
Welcome to Season 14, Episode 5 of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
- DRDavid Rosenthal
I'm David Rosenthal.
- BGBen Gilbert
And we are your hosts. Seven years ago, David and I did an episode on the Starbucks IPO, just the IPO. That episode was a mere one hour and 24 minutes, and Starbucks is a $90 billion institution in our world that deserves the full Acquired treatment.
- DRDavid Rosenthal
Whew, what were we thinking?
- BGBen Gilbert
[chuckles] Well, it actually was amateur hour back then, David.
- DRDavid Rosenthal
Gotta start somewhere.
- BGBen Gilbert
Well, today we have a very special third co-host to discuss this third place, Howard Schultz. Howard started working at the small chain of three Starbucks stores in 1982, eventually buying it and becoming CEO. As you probably know, he is effectively the founder of the Starbucks we know today that exists on every corner of the earth. I come to you, David, and listeners, as an unabashed Starbucks fan. In this tumultuous time for the company, I am absolutely pulling for them in every way possible, and that is going to come through in our conversation. You may have seen the news recently that they had a very rough last quarter, with a key metric that you may remember from previous episodes as same-store sales. These dropped, and their stock price plummeted as a result. This is on top of a tumultuous pandemic era and some of their stores unionizing and a change in leadership. We thought that this would be the perfect time to sit down with Howard and unpack: Why did Starbucks work in the first place, and how did it work at such grand scale? What can other founders and business leaders learn from what got them here? And although he is no longer CEO, where do they go now?
- DRDavid Rosenthal
It really is incredible, one of the very, very small number of food and beverage establishments that has scaled to the entire world.
- BGBen Gilbert
Yeah, most of those types of concepts do not work in different countries and continents, but Starbucks is different. Today, they're in over 80 countries, with 39,000 stores across the world. They're even huge in China, a country that didn't consume very much coffee until Starbucks arrived. They are a bank-scale financial institution as well. At any given time, Starbucks holds $1.7 billion that customers have loaded onto gift cards but not yet spent. So how did they go from one store selling beans, not even drinks in cups, just beans, to the default meeting place in communities everywhere? Today, we tell that story. And listeners, this episode has video. We recorded it in person in Seattle at the Schultz Family Foundation, and you can watch it on YouTube. All right, well, listeners, we have a gigantic announcement for you.
- DRDavid Rosenthal
Yes, save the date. If you love Acquired, you are going to want to be physically in the city of San Francisco on Tuesday, September 10th, 2024.
- BGBen Gilbert
And we can't say much, you know, about every detail of it just yet, but it will be the biggest thing that Acquired has ever done. It'll be in partnership with our good friends at J.P. Morgan Payments, so mark your calendars now. Save the date. And if you wanna be first to know details, you can sign up at acquired.fm/sf, or click the link in the show notes.
- DRDavid Rosenthal
Speaking of J.P. Morgan Payments, just like how we say every company has a story, every company's story is powered by payments, and J.P. Morgan Payments is a part of so many companies' journeys from seed to IPO and beyond.
- BGBen Gilbert
And if you want more from David and I, you should check out our second show, ACQ2, where we interview founders, investors, and experts, often as deeper dives into topics that we covered on the main show. Recent episodes have been awesome, with the CEO and the founder of Synopsys, of Starfish Space, further exploring the space industry, and we've got some great stuff in payments coming up next, too.
- DRDavid Rosenthal
We do.
- BGBen Gilbert
All right, so with that, this show is not investment advice. David and I may have investments in the companies that we discuss, and this show is for informational and entertainment purposes only. On to our episode with Howard Schultz. Well, I do have to tell you, and I think I've told you this off camera, for the last almost ten years, every single day starts with a spinach and feta wrap. I assume there are other people like me in the world, but it's always an iced almond milk latte with whipped cream and a spinach and feta wrap, and so thank you for, uh, powering approximately a third of the cells in my body. [laughing]
- HSHoward Schultz
[chuckles] Oh, God. That's a great start.
- BGBen Gilbert
I also... Here's another stat that David-
- DRDavid Rosenthal
Y- you've done the math on-
- BGBen Gilbert
I have done the math.
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
I exported all of my credit card transactions since 2011.
- HSHoward Schultz
Of course you did.
- BGBen Gilbert
Um, and I wish I had more history than that, but that was the oldest I could get. I've spent $23,000 at Starbucks since 2011.
- HSHoward Schultz
[chuckles] Oh, God. Okay.
- 5:22 – 7:24
Starbucks 1.0 origin story: Peet’s influence and the early Seattle bean-only era
- BGBen Gilbert
So we wanna start with Starbucks 1.0, and listeners may know that there were three founders of Starbucks-
- HSHoward Schultz
Yes
- BGBen Gilbert
... none of which were named Howard Schultz.
- HSHoward Schultz
Correct.
- BGBen Gilbert
So take us back, you know, in the Starbucks prehistory before you arrived.
- HSHoward Schultz
Yeah.
- BGBen Gilbert
How did the company start?
- HSHoward Schultz
Well, since I wasn't there, this is what I know. There were three founders: Jerry Baldwin, Zev Siegl, and Gordon Bowker. And the story that was told to me is that one or both of them were going to school in California, in the Bay Area, and they became enamored with Peet's Coffee Company.
- HSHoward Schultz
... uh, which-
- SPSpeaker
Alfred Peet was the name?
- HSHoward Schultz
Yeah, Alfred Peet was, you know, more than anyone else in the history of coffee in America, was the true pioneer. He brought specialty coffee, Arabica coffee, to Northern California. And Jerry Baldwin and Zev became so interested and intrigued with what Peet's was doing, and given the fact that they were from Seattle, decided they would try and bring Starbucks coffee in the form of Starbucks to Seattle, Washington. Now, what is not known is that when Starbucks opened in the Pike Place Market in 1971, they were using Peet's Coffee.
- SPSpeaker
Really?
- HSHoward Schultz
No one knows that. That's new.
- SPSpeaker
Wow!
- HSHoward Schultz
Because they, they were not roasting coffee, so they were bringing coffee from San Francisco to Seattle. They were not calling it Peet's, they were calling it Starbucks.
- SPSpeaker
So it was Peet's Coffee in Starbucks bags?
- HSHoward Schultz
Yeah, yeah. Again, I wasn't there, but that's kind of the folklore. After the three founders built that store, opened that store, uh, I, I get the sense that there was some kind of fallout between the three of them, and Zev Siegel eventually left the company. That brings us to 1979, 1980, around that time-
- SPSpeaker
Mm-hmm
- 7:24 – 14:36
Howard’s path to Starbucks: Hammarplast, first Pike Place visit, and Seattle’s coffee landscape
- HSHoward Schultz
... when I came to Seattle, Washington, for the first time. So I was working for a Swedish housewares company based in Sweden called Hammarplast. That company had a beautiful non-electric coffee maker, kind of a thermal unit, and we had a big customer in Macy's in Northern California. And I was in California on a sales call, and I had heard that there was a small company in Seattle, Washington, that was buying a lot of this product. So given the fact I'd never been to Seattle, I was already on the West Coast, I figured I'd come to Seattle and see what was going on.
- SPSpeaker
Was Starbucks buying it for use in their-
- HSHoward Schultz
They were selling it in their store. Now, but here's the thing-
- SPSpeaker
'Cause this was a consumer device.
- HSHoward Schultz
Yeah, yeah, but re- you have to remember, Starbucks Coffee Company, from 1971 until around '85, '86, only sold pounds of coffee. There was no beverage. That's... You know, we're gonna get into the epiphany of that.
- SPSpeaker
Yeah, of course.
- HSHoward Schultz
And so I walked into the Pike Place store for the first time on a beautiful day just like this. The sun was out, there was snow on the mountains, the clean, fresh air, and I walked into the Pike Place Market, and I walked into the Starbucks store, and I was blown away by the experience, the, the romance of coffee, the education, and it just spoke to me. I had never met Jerry Baldwin, the founder, who was the CEO at the time, and I became interested and intrigued with what Starbucks was doing and asked if I could meet Jerry. One thing led to another, I met Jerry Baldwin, we really hit it off, and we established kind of a vendor-customer relationship over a course of a year or so. Starbucks had three stores at the time, only three, and over the course of the next year or so, I became more and more interested and intrigued with the possibility of leaving New York City. Sherry and I were dating, we're not married, and I kind of maneuvered my way into a job working for Starbucks. And so Sherry and I drove to Seattle, Washington, on Labor Day weekend, in our old Audi car with a golden retriever, and we came here because I was offered the job as the head of marketing for Starbucks when they were getting ready to open their fourth store in 1982.
- SPSpeaker
Still just selling beans?
- HSHoward Schultz
Only beans. That's the whole s- yeah, still the beans. The interest that the company had in me at the time, I think, was they were really interested in expanding, but their, their dream or the, or the plan at the time was: could we expand to Portland, Oregon?
- SPSpeaker
[chuckles]
- HSHoward Schultz
Remember, so it was a tiny company.
- SPSpeaker
It was a grand ambition.
- HSHoward Schultz
Yeah, and I never had any idea, of course, that what was about to happen and unfold over the subsequent years, but that was... I arrived in 1982 as the head of marketing.
- SPSpeaker
So when you and Sherry arrive here, like, what was the coffee landscape? I mean, there were these three, soon to be four, Starbucks beans stores-
- HSHoward Schultz
Right
- SPSpeaker
... here in Seattle. Alfred Peet was down in the Bay Area. But w- what was coffee culture? I mean, it was, it was like Folgers and Maxwell House, right?
- HSHoward Schultz
Yeah, it was, uh, it was de minimis. There was another coffee company, which was Seattle's Best Coffee, which was another retailer that was kind of at the same size and scale as Starbucks, both equal at the same time. But you couldn't even get a New York Times in Seattle in 1982, '83. It was not... N- no good food to speak of, and Starbucks was a true pioneer, where they were educating customer after customer about what good coffee tastes like. And the Pike Place Market gave them an interesting vehicle because of, of the tourists. And so Starbucks actually started establishing a mail order business as a result of all the people who were coming into Seattle. And I think, if I remember, there were so many points that I can remember where people were talking about Starbucks way outside of Seattle, as if it was some kind of iconic big company. [chuckles] I think people came to Seattle, "Is this it? This is," you know, "the 800, 900-square-foot store in Seattle, Washington, in Pike Place Market. This is the Mecca?"
- SPSpeaker
And so tourists would come, they would buy a bag, and then they would fill out some kind of information, say, "I'd like to, uh, I'd like to have this mailed to me-
- HSHoward Schultz
Yeah, and Starbucks had a growing mail order business
- SPSpeaker
... because I don't have anything like it in my city."
- HSHoward Schultz
Yeah, that's what happened. And because coffee has a shelf life of basically a week to 10 days, and we didn't have a vacuum bag at that time-... We were shipping small amounts because, to Jerry Baldwin's credit, he had such a fastidious point of view about quality and freshness, and I think that had a huge impact on me.
- DRDavid Rosenthal
But this couldn't have been, like, a great business. [chuckles] You're shipping small amounts-
- HSHoward Schultz
No, it was a-
- DRDavid Rosenthal
The, the logistics costs, you know, the scale, like... [chuckles]
- HSHoward Schultz
This was a small business, but the equity of the brand, even back then, was much larger than the size of the business. And the opportunity that I saw, even when we had four or five stores, was well beyond Portland, Oregon, and I was always kinda pushing, "We could do so much more," and then the whole thing blew up for me when I went to Italy in '83.
- BGBen Gilbert
Okay, so before the Italy trip, I just wanna-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... really contextualize coffee in America. I think coffee had been declining since, like, 1940. It's still part of the American culture, but it's not that it's on the way out, but there's nothing new or interesting except for this little segment of-
- HSHoward Schultz
Specialty coffee.
- BGBen Gilbert
Specialty coffee.
- 14:36 – 19:47
Salesmanship, rejection, and ambition: Xerox lessons and personal motivation
- BGBen Gilbert
So you show up at Starbucks, you know. You know a little bit about the market 'cause you've been a, a supplier of theirs, but you happen to be a pretty talented salesman from your, your time at Xerox.
- HSHoward Schultz
Yeah.
- BGBen Gilbert
And I wanna make a tie here. Our previous episode was the Microsoft episode, or at least Microsoft Volume I. You were selling word processors made by Xerox. Tell me what word processors were in the mid-'70s.
- HSHoward Schultz
Yeah. So my territory was 42nd to 48th Street from 5th Avenue to the river, and I had to make 50 cold calls, physical cold calls, a day. That was the job. The Xerox job taught me incredible amounts about not only selling, but humility. [scoffs] Humility, because the rejection every day was so significant, and you put on your suit and tie, and you go in an office building. There was no security at that time. Just go in, and you go from the top floor to the bottom, and then there are other people selling other products who are doing the exact same thing-
- DRDavid Rosenthal
[chuckles] Wow!
- HSHoward Schultz
... and you had to get by the receptionist. I was making $1,000 a month and living at home when I started. Okay, the word processor was a big machine [chuckles] in which you are editing on that machine to basically create a letter.
- BGBen Gilbert
And does it have a screen, or is it like a typewriter?
- HSHoward Schultz
It has a... No, it has... It's a typewriter, no screen.
- DRDavid Rosenthal
It's like a typewriter with, like, a, with a little bit of cache, right?
- HSHoward Schultz
Yes, yes, exactly.
- DRDavid Rosenthal
So that you could, like, fix-
- HSHoward Schultz
Yeah
- DRDavid Rosenthal
... mistakes for one line, right?
- HSHoward Schultz
Yeah. The job at Xerox at the time was like working for Google. I mean, Xerox and IBM were the two pillars of technology and high-tech companies. You tell somebody you're working at Xerox, you had a whole different patina, that you were, "Wow, that's working for Xerox. Wow!"
- BGBen Gilbert
And so you quitting, well, Hammerplast, but, you know, quitting what seemed like a-
- HSHoward Schultz
I hated it
- BGBen Gilbert
... stable of pretty good jobs-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... to drive across the country to provincial little Seattle, I mean, that's, that's nuts.
- HSHoward Schultz
I knew after a couple of years, if I stayed at Xerox for a l- a longer period of time, I was gonna be locked in there. But I'll tell you the story that got me to realize I've got to get out of here. At the end of the year, the performance appraisal at Xerox was basically a scorecard from one to five. So you'd have a qualitative discussion with your manager, and then he would give you a number, and when I got a three, [chuckles] I said... I, you know, I was just saying to myself, "I worked all year. I just had an, a performance appraisal from my manager, and I'm a three."
- DRDavid Rosenthal
This is amazing. Howard Schultz got a three. [chuckles]
- HSHoward Schultz
I got a three. I got a three.
- DRDavid Rosenthal
This is inspiration for all entrepreneurs out there.
- HSHoward Schultz
I got a three, and as soon as I got the three, I swear, at that moment, I knew I've got to get out of here, and that's when I started putting myself in a position of meet other opportunities, and by and large, I was able to get the Hammerplast job, which was the general manager of the company, which was based in Sweden in the US. But I was a three.
- DRDavid Rosenthal
Do you think having that background at Xerox, did that give you a piece of perspective that helped build Starbucks to what it is today?
- HSHoward Schultz
When I hear the question, I, I have to go back to my childhood and think everything that I've experienced growing up in the projects in more or less a dysfunctional family because of the, the pressure of money-... getting the Xerox opportunity and having some level of success, but realizing I wanted more. The humility which came with rejection, the shame I had as a poor kid living in the projects, all of that, I think, crystallized in me, and I give Sherry so much credit in realizing that together we wanted to build a different kind of life and gave me the courage, the conviction, and, um, the drive to try and do something that I felt I was destined to do. I didn't know what it was. I certainly didn't know moving to Seattle was gonna create the opportunity of a lifetime, but I always felt I had to get out of that station in life where I was positioned not to get to the level that I thought I, I deserved to be.
- BGBen Gilbert
I don't think it is common with someone for your background, poor kid in the projects, coming from nothing, to get a great job, two great jobs, and be wildly dissatisfied and not feel like, "I've made it," but rather, "No, there's gotta be something more than this." There's something deep inside you that caused you to be willing to take a risk.
- HSHoward Schultz
I was really insecure about not succeeding, and I didn't view what I was doing as the success that I was not destined for, that, that's, that sounds wrong, that, that I had the appetite for.
- 19:47 – 22:59
The Italy epiphany and the internal conflict: why Starbucks should become a coffee bar
- BGBen Gilbert
All right, so we're getting to the big risk. So the year ticks over to nineteen eighty-three.
- HSHoward Schultz
Yeah.
- BGBen Gilbert
You are sent, or maybe you asked to go to an international housewares conference in Milan.
- HSHoward Schultz
Yeah.
- BGBen Gilbert
What do you discover?
- HSHoward Schultz
So I went to a trade show called Macha, uh, with a big convention center, and it's a giant houseware show with equipment and all kinds of stuff, and I, I was staying at a, a relatively cheap hotel in walking distance to the convention center. I get out of the hotel, I'd never been to Italy before, and I am all of a sudden being intercepted with the physical manifestation of one coffee bar after another in the business that I'm supposed to be in, but it wasn't the business that Starbucks was in. And I walk in like a normal person that's never seen this before, and I am just like... I'm in a black-and-white movie, and all of a sudden, everything was color, and it was so rich. I couldn't get enough of it. And I just went from one to the other, to the other, to the other, and I, I was just blown away and more or less raced back to America, sat down with Jerry and Gordon and said, "Holy shit!
- BGBen Gilbert
We gotta do this.
- HSHoward Schultz
"What's happening in, in Italy is the business that Starbucks has to be in." And they had seen it. They've been to Italy. And they said, "No, that's not what we wanna do."
- BGBen Gilbert
Hmm.
- HSHoward Schultz
And I just said, "Seriously?" And I banged on the door for two years, and in two years, they finally let me open up a coffee bar on the corner of Fourth and Spring in Seattle, and it was the sixth Starbucks store, and out of about twelve hundred square feet, I got a hundred feet. And I designed and opened the coffee bar, worked behind the counter as a barista, and Starbucks probably had two to three hundred customers a day selling whole bean coffee. We were at five hundred in a week with introducing lattes and cappuccino to the... and espresso.
- BGBen Gilbert
And there's nowhere else in town-
- HSHoward Schultz
No one in Seattle had it. Well-
- BGBen Gilbert
-to get a caffe latte
- HSHoward Schultz
... Caffe Allegro had it, and that was Dave Olsen. And after a few months or six months or so, Jerry said, "I don't want to repeat this. I don't want to do it. I don't want to be in the restaurant business."
- BGBen Gilbert
Yeah, what was the objection? Was it the-
- HSHoward Schultz
He didn't... He just... He didn't think-
- BGBen Gilbert
-stigma of the restaurant business?
- HSHoward Schultz
I mean, I don't want to speak for Jerry. I have so much respect for him, but he didn't think it was clean. He didn't like it. Now, between eighty-three and eighty-five, Jerry Baldwin, because of his love of Peet's and his relationship with Alfred Peet, had an opportunity for Starbucks to acquire Peet's Coffee Company, and they did. Unfortunately, Starbucks buys Peet's, and they get into financial trouble.
- BGBen Gilbert
And so really, at this point, it was like their mentor was retiring, this person who was a steward of the industry. We're operating six stores points of retail distribution in Seattle for our beans. Why don't we just buy your effectively the same business, but in Northern California?
- HSHoward Schultz
Yeah.
- BGBen Gilbert
Keep them separate for now.
- 22:59 – 30:03
Il Giornale fundraising grind: investor rejection, zero salary, and the “third place” pitch
- HSHoward Schultz
Yeah. Well, it's important to know that between the opening of the Fourth and Spring coffee bar inside of Starbucks-
- BGBen Gilbert
Starbucks number six.
- HSHoward Schultz
Yeah, and Jerry and Gordon saying, "We don't want to repeat this," I was so frustrated. I said, "I'm gonna leave Starbucks." And what did I do? I had no money to open up a coffee store. So Jerry says, "Starbucks does not want to open up coffee bars, but we will invest in Il Giornale."
- BGBen Gilbert
Which was the company you started to-
- HSHoward Schultz
Yeah, so before they get into financial trouble, Starbucks is an investor. I've always thought he did that, so I would sell and market Starbucks coffee in the coffee bar, which I would have done anyway. So Starbucks makes an investment. A couple of people that we know make an investment, but I didn't have enough money, so I go to see two Italian companies. I've never told this. One is the espresso company, Faema, and one is the large Italian coffee company, Lavazza.
- BGBen Gilbert
Oh, yeah.
- HSHoward Schultz
Mm-hmm, and I asked them both to invest in my idea, and both of them turned me down.
- BGBen Gilbert
... So at this point, you're in Italy, and you're trying to get ideas and investors for what would become Il Giornale.
- HSHoward Schultz
For the first Il Giornale.
- BGBen Gilbert
And only Starbucks and a couple other people have committed.
- HSHoward Schultz
But I didn't have enough money. I still, I needed more money.
- BGBen Gilbert
Huh.
- HSHoward Schultz
And, uh-
- BGBen Gilbert
You were raising one point six million?
- HSHoward Schultz
About one point-- Yeah, one point six, one point seven million. And they said, "You know, no one is going to buy Italian espresso in Seattle or in America." Espresso-
- BGBen Gilbert
Which is stupid, 'cause you watched it happen. Like, I ran this store for six months, and, like, it was final, you know?
- HSHoward Schultz
Yeah, they didn't wanna do it. So they, they-- Lavazza and Faima, just get that on the record, turned me down. [laughing]
- BGBen Gilbert
[laughing]
- HSHoward Schultz
Okay? They'll deny it. That's a fact. [chuckles] So then I, you know, go back to the US. I'm trying to raise money, and I, I hit the three titans in Seattle: Jack Venaroja, Herman Sarkowsky, and Sam Strom. Three of the leading citizens of Seattle, Washington, at the time, and the three of them have a little bit of an investment together in other things, and they say, "We're gonna believe in you," and they take me over the, the hump.
- BGBen Gilbert
Wow!
- HSHoward Schultz
Okay, and we opened three Il Giornales, two in Seattle, one in Vancouver, BC, and all three are doing well. All three. But I didn't have enough money to expand.
- DRDavid Rosenthal
And needing the money to expand, just to pause on that for a minute, business-wise, obviously, coffee bars are a much better business long term than-
- HSHoward Schultz
Yes
- DRDavid Rosenthal
... coffee beans, but probably more capital intensive, right? You need more staff.
- HSHoward Schultz
Yeah, more labor, yes. But the stores weren't that expensive to open 'cause they were small, less than a s-- a thousand square feet, and we, we understood how to do it. And I was working as a barista with Dave Olsen and other people to keep the cost down. We were behind the counter, and I had no salary. I had no salary for almost two years-
- DRDavid Rosenthal
Wow!
- HSHoward Schultz
... while Sherry was working and pregnant with our first child.
- BGBen Gilbert
So looking increasingly worse from a traditional perspective of leaving a- [chuckles]
- HSHoward Schultz
Yes
- BGBen Gilbert
... a high-quality job, moving across the country, then just a couple years later, here you are, not making any money again, while-
- 30:03 – 38:32
Buying Starbucks: the 90-day race, a hostile bid, and Bill Gates Sr. intervenes
- HSHoward Schultz
Starbucks and Peet's gets into financial trouble, and the debt-to-equity was north of six to one for a company that was tiny. Jerry comes to me and says-... Jane and I, his wife, are gonna move to California, and we're gonna keep Peet's, and I'm gonna sell Starbucks." And, uh, my heart is pounding. I say, "Okay." And then he finished it, and he says, "I think you're the person to buy Starbucks." I said, "That's fantastic, but I don't have any money." [laughing]
- BGBen Gilbert
[laughing] You gonna give it to me?
- HSHoward Schultz
I have no money. I- "How much is it?" "Three point eight million dollars." Now we're in '86, '87.
- BGBen Gilbert
Mm-hmm.
- HSHoward Schultz
Now we get into a story I have told, but not a hundred percent-
- BGBen Gilbert
Hmm
- HSHoward Schultz
... 'cause I protected the guy, but I'm gonna tell it. I go out to raise money. I'm having a hard time. So Jerry gave me about, I think he gave me ninety days to raise three point eight million dollars. Around the second month, he just came to me and said: "Where are you with all this?" And I, I think I had about half of it raised. I might have fibbed a bit and said I had a little bit more, but I, I didn't. I had about half. And he lays a bomb on me and says, "Howard, listen, we're in a tight situation here, and one of your investors has put a cash, all-cash offer on the table with no due diligence and wants to close right away."
- BGBen Gilbert
For him to take it over, not you?
- HSHoward Schultz
Yeah. Yeah, I'm out. I'd be out. And I said: "Who is it?" And he told me. I'll save that. And I'm absolutely annihilated, crushed, because I didn't have the wherewithal, and I could just envision as soon as I heard that name, I knew it was over. I was in a basketball league at the Seattle Club. I'm playing basketball that night. My good friend, Scott Greenberg, who's an attorney at, uh, a prestige firm in Seattle, the Gates firm. I'm basically crying to him a- after the game and telling him the story. And he says: "You've got to come to the office tomorrow and meet our senior partner and tell him the story," Bill Gates Senior. I, I said, "Well-
- BGBen Gilbert
A titan.
- BGBen Gilbert
Incredible.
- HSHoward Schultz
The other titan-
- BGBen Gilbert
We foreshadowed this on-
- HSHoward Schultz
There were three titans
- BGBen Gilbert
... the Microsoft episode, but-
- HSHoward Schultz
There were, there were three titans there, but here is the titan. And I-
- BGBen Gilbert
And Bill was six foot seven?
- HSHoward Schultz
He's six foot seven. He's a mountain of a man and very imposing. So nine o'clock in the morning, I put a suit on. I must have been sweating through my shirt. I was just so anxious, so nervous, and at the same time, so scared about what's gonna happen. I go in there, and I, I, I must have been trembling. I, I, I was just so nervous. I tell him exactly what I just told them, and he interrupts me and says: "Howard, I'm just gonna ask you two questions. Is everything you told me true?" I said, "Mr. Gates, yes." "Have you left anything out?" "No." And he says: "Come back in an hour." I, I said, "Okay. W- uh, to do what?" He says: "I'll see you in an hour." And so we walk out, and walking around, I think we probably-
- BGBen Gilbert
Go get a cup of coffee
- HSHoward Schultz
... went, went to, went to Columbia Center to get a coffee and come back.
- BGBen Gilbert
[chuckles]
- HSHoward Schultz
I go back with Scott, and Mr. Gates says, "Scott, I'm gonna see Howard alone," and Scott leaves. Now I'm alone in his office. I hardly sit down, and he says: "We're going for a walk." And I said: "Where are we going?" And he says: "We're going to see the man," who was Sam Strom.
- BGBen Gilbert
Hmm. One of your investors.
- HSHoward Schultz
One of the investors. We walk across the street to the Rainier Tower, the old Rainier Tower. I think Sam had one of the biggest offices. We walk in there, and I swear, even though it's so many years later, I have a perfect, vivid account for what took place. Sam is sitting behind his desk, and this is what happened, 'cause it was five minutes. Bill Gates, remember, he's a huge guy, leans over to the desk with his hands on Sam's desk and says: "I don't know what you are planning, but whatever it is, it's not gonna happen." [chuckles]
- BGBen Gilbert
Wow!
- HSHoward Schultz
And he says: "Howard Schultz is going to acquire Starbucks Coffee Company, and he's never gonna hear from you again." That was it, and we walk out. That's it. That's the whole thing.
- BGBen Gilbert
And so did you hear from Jerry that the bid had been dropped?
- HSHoward Schultz
We walk out, and I say to Mr. Gates-
- BGBen Gilbert
There's one little problem: you still need the money, right? [chuckles]
- HSHoward Schultz
Yes, I say to Mr. Gates: "What, what, w- uh, what just happened?" And he said: "You're gonna buy Starbucks Coffee Company, and my son and I are gonna help you."
- 38:32 – 49:08
Early combined company economics: no debt, 80% gross margins, and “lightning in a bottle”
- HSHoward Schultz
Yeah. August of 'eighty-seven-
- BGBen Gilbert
Yeah
- HSHoward Schultz
... we bought the six Starbucks stores. We had the three Il Giornali's, and there were two stores under construction. So at the end of the calendar year, we had eleven stores and a hundred employees in nineteen eighty-seven.
- DRDavid Rosenthal
All in the Northwest.
- HSHoward Schultz
Yeah.
- DRDavid Rosenthal
Meanwhile, the original Starbucks folks, they've now gone down to California.
- HSHoward Schultz
They, they went to California.
- DRDavid Rosenthal
When did Peet's open coffee bars?
- HSHoward Schultz
Uh, many, many years later.
- DRDavid Rosenthal
Ah, so they... You weren't competing-
- HSHoward Schultz
No
- DRDavid Rosenthal
-right away.
- HSHoward Schultz
No.
- BGBen Gilbert
But this is one of the great observations, David. Il Giornale buys the Starbucks stores, rebrands Il Giornale Incorporated as the Starbucks Corporation-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... and the original Starbucks buys, you know, had owned Peet's and now needs a new name, so it rebrands the company Peet's. So Peet's was actually Starbucks. Starbucks was actually Il's- Il Giornale.
- HSHoward Schultz
Yes.
- BGBen Gilbert
It's amazing. Some stats just for listeners to understand the gravity of the situation. Uh, for the initial one point six million that you raised for Il Giornale, you talked to two hundred and forty-two investors, two hundred and seventeen of which said no. So anybody who's griping about their fundraising journey, and, you know-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... those are rookie numbers- [chuckles]
- HSHoward Schultz
No, but you asked me a question earlier-
- BGBen Gilbert
... no [chuckles]
- HSHoward Schultz
-about what did the years at Xerox teach me? So y- the rejection I was going through, the Italians turned me down. People in the US turned me down. Nobody would believe in the idea. It was like I was cold calling again at Xerox.
- BGBen Gilbert
The other thing that, uh, is worth pointing out is the Starbucks company with the six stores, when they bought Peet's with that six-to-one debt-to-equity ratio, basically backed themselves into a corner, where now they had these big debt service payments to make. There was really no risk they could take or innovation that they could do because the whole business needed to spit out a certain amount of cash every month so they could pay down the debt. And so when you're in that situation, Starbucks, in the forty years ahead from this point in the story, has tried all sorts of crazy things to become the business that it is today, and when you first created this combined company, you were pretty religious about no debt.
- HSHoward Schultz
No debt. I don't-- I, I want any debt again because of my childhood.
- BGBen Gilbert
I was gonna ask you, w- was that informed by the, the-- what you had seen with the Starbucks situation-
- HSHoward Schultz
No
- BGBen Gilbert
... or more your childhood?
- HSHoward Schultz
No, it was totally my childhood. My parents were always in debt. Bill collectors were always calling, and, uh, no, there was... We never had any debt the entire time. Never.
- DRDavid Rosenthal
This is probably a good point in time to talk about the business model a little bit.
- 49:08 – 53:06
Brand as billboard: no marketing spend, iconic cup, and experiential brand at scale
- HSHoward Schultz
The intimacy with the customer and the barista became a very powerful component of the equity of the experience. And I've always thought, in so many ways, Starbucks became the first experiential brand at scale. We didn't spend any money on marketing, zero. There was no money for marketing, and the cup, the iconic cup, became a badge of honor because people were doing something that was new, and novel, and walking in the street with it, and people, "You know, what is that?" There was a lot of that kind of stuff.
- DRDavid Rosenthal
It's your free billboard-
- HSHoward Schultz
Yeah
- DRDavid Rosenthal
... that people are proud of.
- HSHoward Schultz
Perfect.
- DRDavid Rosenthal
Wow.
- BGBen Gilbert
Well, listeners, this entire episode so far, we have broadly been talking about the concept of customer experience with Howard, and we want to talk about another business that has been innovating on the customer experience, and that's J.P. Morgan Payments. When it comes to digital commerce, J.P. Morgan Payments is all about personalization and convenience, both for consumers and businesses.
- DRDavid Rosenthal
Right. So on the consumer side, technology has completely changed expectations for shopping and commerce. Whether it's a sneaker drop or a coffee order, customers expect functionality like ordering in an app but picking up in-store, getting real-time updates, and having our preferences and past orders synced and remembered.
- BGBen Gilbert
Yep. And importantly, we expect our payments to be simple, no matter where or how we want to pay, which creates real challenges for the business on the other side of that to create the magic. Even with super complex transactions, like a marketplace website, where you aren't just buying from one single retailer, but a merchant on the other side of that platform. You can imagine there are plenty of technical and regulatory complexities to make that frictionless across different countries and currencies, but with great embedded finance and innovative commerce solutions, you can delight customers without really taking that all on yourself.
- DRDavid Rosenthal
Yep. No matter how big or small your company is, you have to manage a complex technology ecosystem that now includes online payments, in-app payments, social payments, in-store payments, digital wallets, and much more in the future.
- BGBen Gilbert
Oh, yes, like biometric payments, which remarkably, research shows that will reach three billion users and five point eight trillion dollars in value globally by twenty twenty six. That is insane.
- DRDavid Rosenthal
Yep, and just like Howard pioneered many firsts in his industry, J.P. Morgan is doing the same with biometric payments. It's essentially a pay-by-face solution that allows you to complete transactions seamlessly and securely, removing the need for carrying a wallet or digging into your bag to pull out your phone.
- BGBen Gilbert
Yeah, if any of you were at the Formula One race in Miami last month, you may have even seen J.P. Morgan's biometric payments powering the fast lane checkouts in the merch store. In last year's pilot, literally every single payment was processed in under one second.
- DRDavid Rosenthal
Crazy. And for businesses, speed of payments is obviously great to shorten lines. To quantify that, biometric payment solutions have shown to decrease checkout times by up to thirty-five seconds per transaction and increase purchase value by four percent, driving incremental revenue and maximizing profitability.
- BGBen Gilbert
I can totally attest to this as a customer. I basically only use tap-to-pay with my watch or phone everywhere I go now, which, you know, just felt like sci-fi a few years ago. But unsurprisingly, that capability for merchants to accept contactless payments is now also being powered by J.P. Morgan Payments.
- DRDavid Rosenthal
Yep. So whether you want a full-stack, omni-channel service with biometric payments or streamlined online payments with the latest APIs, J.P. Morgan's commerce solutions work to drive your business forward with the foundation and security of a leading global bank and the innovation of a fintech.
- BGBen Gilbert
The very best of both worlds. That is why we here at Acquired work with J.P. Morgan. You can check them out, jpmorgan.com/acquired, to learn more and discover more payment solutions powering growth for your business across every industry, from startups to the Fortune five hundred.
- 53:06 – 1:03:28
Nationwide expansion and the H2O leadership era: Chicago lessons, LA leap, and operating systems
- DRDavid Rosenthal
So, uh, in this era, I mean, you must just be getting more and more excited every day.
- HSHoward Schultz
Oh, I was out of my mind. [chuckles]
- BGBen Gilbert
So David, Howard sent me... There's a nineteen eighty-eight-- I can't believe this was filmed-
- DRDavid Rosenthal
Yeah
- BGBen Gilbert
... but a nineteen eighty-eight shareholder and employee meeting where... It's great. The whole thing's, like, an hour and a half. It's- it- it's all there, and you are using all the same language that you use today back in 1988. "We focus on our people. Those people delight the customer. The customer, you know, de- delights the shareholder or then satisfies the shareholder." And the conviction that you have, it's like watching a preacher. You're up there, you've got, I think, eleven stores or something, and you're like: "You have no idea what we have here. We are on top of something that is gonna change," and you don't say the world, "America, and this thing can become America's coffeehouse."
- HSHoward Schultz
Mm-hmm.
- BGBen Gilbert
And it was interesting because I think the whole room was already scared of your ambition of, you know, going nationwide with this thing that there did not exist another example of a national coffeehouse chain. Everything was just these little cities-
- HSHoward Schultz
Right, right
- BGBen Gilbert
... these, these small markets. And there's this great quote that you have at the end of the meeting that says: "The company, since 1971, has been growing at a very, very slow pace. As a result of that, you combine Il Giornale and Starbucks together, we're gonna take your six stores that you've built in seventeen years, and we're gonna go to twenty-six in one year, and we're gonna go to over a hundred in five years."... And that must have just sounded bonkers! [chuckles] But that is literally what happened.
- HSHoward Schultz
That's what happened.
- BGBen Gilbert
Like, the pace of growth, approximately, you just doubled stores year over year over year. Was there some moment in '８８, '８９, '９０, where you're just, like, looking around, realizing, "We must expand as fast as we possibly can because this concept is the concept the world needs now, and if we don't pull out all the stops, someone else is gonna do it"?
- HSHoward Schultz
There were regional competitors who were making noise about doing what we were aspiring to do.
- BGBen Gilbert
Mm-hmm.
- HSHoward Schultz
And I was very mindful because one of them was franchising, and that was Gloria Jeans out of Chicago.
- BGBen Gilbert
Hmm.
- HSHoward Schultz
And at one point, I think they had more stores than we did because of the franchising opportunity, and that's one of the reasons why I went to Chicago as well in '８７, '８８.
- BGBen Gilbert
Because Chicago was the first market outside of Seattle and Vancouver, right?
- HSHoward Schultz
Yes.
- BGBen Gilbert
Even before L.A.
- HSHoward Schultz
Yeah, and it didn't work right away.
- BGBen Gilbert
Huh.
- HSHoward Schultz
Howard Behar should be credited with so much of the cultural texture and the tapestry of the humanity of the company, said, "I will go to Chicago and fix it." He went to Chicago and stayed in Chicago through the winter and recalibrated the mistakes we were making. And of course, he and Orin were so instrumental into the loneliness that exists as a entrepreneur and their ability to help me build the company that you know today.
- BGBen Gilbert
Yeah, so I have in my script here, this is literally labeled the, uh, H2O era, and-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... for anyone who was a partner at Starbucks sort of knows what I'm talking about, and anybody else outside has no idea. But there's two Howards. There's Howard Schultz and Howard Behar, and Howard Behar joined in 1989. Orin Smith joined in 1990. And the way that it looks to me from the outside, and you can tell me if this is right, you were sort of the vision and ambition that would almost, like, take any ambition that anybody else had and force them to think bigger and faster.
- HSHoward Schultz
Okay.
- BGBen Gilbert
And then Howard Behar was, in many ways, the soul. Like, he brought the idea of servant leadership. He brought the idea of, "Nothing else matters if we aren't people first," and obviously, that became a huge tenet of Starbucks as we knew it through the '90s and 2000s, but that seems like it really arrived with him. And then Orin is, like, a numbers god.
- HSHoward Schultz
No, he was the adult in the room.
- BGBen Gilbert
Hmm.
- HSHoward Schultz
More than the numbers. He had the style. He was quiet. He was a gentleman. He was the only MBA in the company, but he was the wise man who, behind the doors, could say to me and Howard, "You're both full of shit. We're not doing that."
- 1:03:28 – 1:08:16
People-first flywheel: Bean Stock, healthcare, and Costco-inspired retention
- DRDavid Rosenthal
Yeah. Can you tell us about the people? This is such a huge-
- HSHoward Schultz
Yeah
- DRDavid Rosenthal
...pillar to our minds of building Starbucks.
- HSHoward Schultz
Again, we started this conversation talking about childhood. I really wanna build a different kind of company, and, and how do I do that in a way that provides respect and dignity? Because I was so imprinted with how my st-- my father felt disrespected, devalued, and kind of vilified as a uneducated, blue-collar veteran working in a series of jobs that he just never made it, and living through the dysfunction of, of a poor family, always under pressure with money. And so I, I wanted to kinda crack the code on how do we create benefits that would, in a way, uh, take the company in a direction no one's ever been in before. And so early on, we started talking about exceeding the expectations of our people so they can exceed the expectations of the customer. And the first time we actually were able to manifest that was a year before the IPO, and, and that was an incredible struggle because I had on my board two venture capitalists, and I was proposing something that had never been done before, and that was I wanted to give equity in the form of stock options to every single employee in the company. And they just said: "What? What are you talking about? We're not doing that." And so the fight became... Ultimately, we gave fourteen percent of everyone's base pay in the form of stock options at the end of the year, based on the strike price. And I had to do it the year before the IPO. Had to, so everyone wouldn't miss it. And I think the, the, the turning point of the culture of the company was the day we announced that, and we became partners. And to the credit of Craig Foley, who was the VC, and Jamie Shannon, they believed that performance would be enhanced, attrition would be lowered, and that the brand would just elevate as a result of that. And it was true, completely true. That was-- That, that changed Starbucks for decades, and along with some other events, based on doing the right thing.
- BGBen Gilbert
I mean, the, the healthcare for part-time workers.
- HSHoward Schultz
So then, you know, healthcare, I think twenty-five years before the Affordable Care Act, what we did was company for health insurers, and that also, I grew up in a family with no health insurance, and, uh I saw what happened. So all of that is that origin story of mine, of, uh... And the tragedy is my father passed away and never saw what we're able to do.
- BGBen Gilbert
Do you want the stats on that initial employee stock grant?
- HSHoward Schultz
I'd love to hear it.
- BGBen Gilbert
So the program was called Bean Stock.
- HSHoward Schultz
Yeah.
- BGBen Gilbert
Listeners, that, uh-
- HSHoward Schultz
Another great name
- BGBen Gilbert
...Howard was alluding to. Amazing name. So in nineteen eighty-eight, the, uh, health benefits roll out even to part-time employees, including gay couples in domestic partnerships. I believe the first of its kind. That was a thirty-three store company at that point. A few years later, you had grown to fifty-five stores. You did the LA expansion, and then in nineteen ninety-one, which is the year before the IPO, Bean Stock happens. Equity in the form of stock options goes out to everyone working twenty-plus hours a week. There were thirteen hundred employees at the time.... and, uh, I believe it was the first time in history that part-time employees were offered a program like this. So those initial grants, the strike price was $6 per share. Today, as we speak, the share price is $77, but there have been six splits since then, which comes out to a sixty-four X. So that initial grant has eight hundred X'd since even the part-time employees and baristas were offered the opportunity to buy Starbucks stock.
- HSHoward Schultz
Yeah. A lawyer, I think Scott Greenberg at the time, came to me and said, "We can't do this unless we get approval from the SEC," because we were over five hundred shareholders.
- DRDavid Rosenthal
So, you know, we've studied, um, lots of amazing companies on this show who have lots and lots of different business models, but one thing that just kept striking us as we were preparing for Starbucks are the similarities to your neighbor here in the Northwest in Costco.
- HSHoward Schultz
Costco, right.
- DRDavid Rosenthal
And how you treat your people, specifically.
- HSHoward Schultz
Mm-hmm. That's not by accident.
- BGBen Gilbert
Both from a, uh, it's the right thing to do perspective, and the amazing business model benefit of the retaining employees. I mean, it's so expensive to train a new employee. It's not expensive to keep an existing employee, and so you can just pay people more if you keep them for longer.
- HSHoward Schultz
Yeah.
- 1:08:16 – 1:16:43
Distribution partnerships that scaled awareness: Costco beans, United Airlines, grocery, Barnes & Noble
- BGBen Gilbert
You know, you just basically have extra money lying around, is what, what, uh, Costco discovered. There's so much about Starbucks, to David's point, that's similar to Costco. Did you ever speak with Jeff Brotman or Jim Sinegal or any of those guys about this concept?
- HSHoward Schultz
Do you know the answer to that? That's why I asked-
- BGBen Gilbert
I actually don't.
- DRDavid Rosenthal
No, we don't know the answer.
- BGBen Gilbert
I assume the answer to this, but I don't know it.
- HSHoward Schultz
First, Jeff Brotman invested in Starbucks in the round to buy Starbucks.
- DRDavid Rosenthal
No way! [chuckles]
- HSHoward Schultz
Yeah. He-- In that '87 round. That's when I met Jeff for the first time. Jeff became a board member of the early imprinting of Starbucks, and clearly a mentor, mentor of mine, and then he introduced me to Jim Sinegal. And so there were many moments of me sitting with Jeff and Jim, including the huge decision to put Starbucks coffee in Costco, which there was a revolt inside the halls of Starbucks saying-
- DRDavid Rosenthal
[chuckles]
- HSHoward Schultz
... "No effing way!"
- DRDavid Rosenthal
Wow.
- HSHoward Schultz
And we did it. And Jeff and Jim took me to a parking lot in Kirkland when I said, "I don't know if we can do this. I don't know if I can sell it inside. I don't know." They, "Okay, meet us on a Sunday morning," whenever it was. "Look at the cars. These are your customers." In fact, putting Starbucks in Costco, we were able to measure directly the increase in volume in the stores on the East Side as a result of the proximity to the Costco store.
- BGBen Gilbert
You sold beans-
- HSHoward Schultz
We sold beans.
- BGBen Gilbert
-in Costco.
- HSHoward Schultz
Yes.
- BGBen Gilbert
And that brand awareness of, "I buy Starbucks beans at home," meant that that group of people went to the stores more often.
- DRDavid Rosenthal
Coffee bar business.
- HSHoward Schultz
Because we, we introduced thousands of beverage customers to Costco through the beans.
- DRDavid Rosenthal
Wow!
- HSHoward Schultz
So Jeff and Jim were instrumental in so many things and, and were so kind to me as a young kid. Then we went nationwide with Costco.
- BGBen Gilbert
So this is a thing that I think many people don't realize now that Starbucks is ubiquitous. We sort of forget about this time when it wasn't, and where people had to find some way to experience Starbucks. You know, you only get a few stores in each of these cities, you're only in a few cities, but there are ways to scale brand awareness, and so you can do things like become the official coffee of United Airlines or, you know, be in, uh, Costcos all over the US. You did this a number of times, and I feel like the rest of the world did not catch on to what you were doing, was just finding little billboards everywhere where you could put the Starbucks logo and, and sort of create that ubiquity.
- HSHoward Schultz
Yeah. If you thought the Costco revolt was high, you can imagine when I said, "We have an opportunity for United Airlines," people thought that was absolutely blasphemy. "Don't do that!" And again, the exposure and the opportunity to surprise and delight customers in places that they've never had anything close to good coffee. All these things, when you consider we didn't spend a dollar, a dollar of marketing dollars, ever. And so the, the, the reputation of the company was built basically word of mouth, both inside our stores and exactly right in places that we could surprise the customer. And then we also started putting Starbucks coffee in grocery stores, which was the other thing, because, remember, we were building a beverage business.
- BGBen Gilbert
Right.
- HSHoward Schultz
And we were then going back to our core business in new channels of distribution.
- BGBen Gilbert
It's like the ultimate goal is to capture those margin dollars from selling cups of coffees in the stores that you operate, but there's all these other things that you can do that actually might spit off some profit dollars, but at the very least, it's a break-even way to do customer acquisition and brand building in the rest of the world.
- HSHoward Schultz
I don't know what our cost of customer acquisition was back then, but it was low.
- BGBen Gilbert
Well, you also did-
- DRDavid Rosenthal
Well, you weren't spending any money on marketing, so [chuckles]
- BGBen Gilbert
But United Airlines was paying you for coffee, I assume. I don't know exactly how-
- 1:16:43 – 1:28:54
IPO and product expansion: public markets education, Frappuccino, and the Pepsi JV
- BGBen Gilbert
Okay, let's talk about the IPO. So it seems like you knew the moment that you bought Starbucks from the founders, uh, this is gonna be a public company.
- HSHoward Schultz
I thought so.
- BGBen Gilbert
There was no-
- HSHoward Schultz
I, I think it... There was- There was so much about being a public company that meant something to me personally, that it validated the company, it validated me, my own shame and security as a kid. So that was, uh... I was d- I was a, a driving force all along. Certainly, the, the year before with Bean Stock is an indication what I was planning. If Bean Stock was turned down, I, I would've, I, I, I would've waited.
- BGBen Gilbert
Hmm.
- HSHoward Schultz
I just, I had to... That had to be done. I think we only had a couple of quarters of profitability, and I think we had about 130 stores.
- BGBen Gilbert
And what was the revenue at the time?
- HSHoward Schultz
Oh, God! [chuckles] Well, I don't remember exactly. I know what the market cap was the day we went public.
- BGBen Gilbert
I think, uh, you d- you ended up doing 93 million that year-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... but the, the year before, you know, was 50 million or something like that.
- HSHoward Schultz
Yeah.
- BGBen Gilbert
Like, you know, companies went public when they were smaller-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... back then, but-
- HSHoward Schultz
Well-
- BGBen Gilbert
But you were a small cap IPO.
- HSHoward Schultz
Yeah, we were, and, you know, we got turned down by Goldman Sachs. You know that?
- BGBen Gilbert
[chuckles] I did not know that.
- HSHoward Schultz
I couldn't believe it. I mean, I just... I, I wanted Goldman Sachs as, as the... I just... You know, they were the, the, the patina on the prospectus to have Goldman Sachs.
- BGBen Gilbert
It would be a very Starbucks thing for Goldman Sachs to be the, the lead left.
- HSHoward Schultz
Well, uh, Blankfein, I had a good friend who's, who w- was a senior partner there, who's since passed away. I thought I had it locked. I mean, there was just so many things about it, New York, everything, and they said, "No, you're too small."
- BGBen Gilbert
Well, the thing that Dan Levitan told us years ago when we did a, an episode on the Starbucks IPO was that, uh, you were really only considering smaller banks because it was going to be a smaller IPO.
- HSHoward Schultz
Well, I was considering it because [chuckles] Goldman Sachs-
- BGBen Gilbert
Because they told you, you- [laughing]
- HSHoward Schultz
I had no choice. I had no choice. And Brotman, at the time, uh, was not a big fan of Wertheim Schroer, which was D- Dan Levitan's thing, and so Alex Brown became the lead. But I also... You know, I had my own ego attached to this. I had so much fun on the, uh, you know, on the roadshow. I, I was just in my element, you know?
- BGBen Gilbert
I was looking up... I was trying to figure out, y- you know, your public comps at the time. I think there were zero publicly traded coffee companies, not bean companies, not retailers, not coffeehouse chains. I mean, truly unheard of. So when you're going on this roadshow-... I, I think people, of course, are mystified.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
There's like, there's literally no public companies like yours.
- DRDavid Rosenthal
You have a huge, you know, investor education problem, right?
- 1:28:54 – 1:41:12
International leap: Japan’s launch, China’s struggle, and Belinda Wong’s decentralization playbook
- HSHoward Schultz
Sure
- BGBen Gilbert
... you know, the, the Frappuccino began my journey to the good stuff. Uh, so that's the Frappuccino story. Uh, '96, '97, '98, I mean, this is, this is the international story. So I love the Japan story. Y- y- you've men- you've told this to me before, but, um, I'd love to hear it again.
- HSHoward Schultz
Okay, and there's a couple of things about this. I started taking a couple of trips, uh, to Europe and Asia just to get a sense of what the opportunity would be and how would we do it.
- BGBen Gilbert
Mm.
- HSHoward Schultz
I quickly wrote off Europe because coffee was there. I didn't think we could possibly enter as an American company, and so we just took Europe off the- David Rosenthal: This would be like a, uh, American luxury leather goods company coming in and competing with Hermès. Yeah, not gonna happen. And so we said... We just took it off the map, and then, uh, we, we narrowed our focus very quickly on Japan. Japan had a couple of thousand coffee stores named Doutor. You'd walk in there, and it was smoke-filled, mostly men, dark, but they were successful. And so I said to the board, "We want to go to Japan." The board was incredibly resistant to the idea. "Why? You've got all this white space in America." There's no need to do this at the time. And I just said, "Okay, well, we'll..." And so one thing led to another, and a board member said, "If you're gonna... If, if you're considering this, hire an outside resource to do a study." David Rosenthal: Oh, boy. I was livid about that, you know?
- BGBen Gilbert
Aren't there some consultants you could possibly pay to help-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... you know, this, uh-
- HSHoward Schultz
Yeah. And so we, we hired a consultant who came back with a, you know, big book, presented it to the board. I had a preview, and it basically was, "This is a non-starter. You can't possibly succeed there." And in the meeting, I was just... I could feel my blood just boiling, because with every statement, it was getting worse. Like, "The economics won't work. No one in Japan will ever walk in the street with a cup of coffee. They would lose face. Your no smoking policy," which we had from the beginning, "is a non-starter, and you can't afford the economics, the rent. Don't go."... Well, that only made me [laughing] more furious.
- BGBen Gilbert
It's like they've never met you.
- HSHoward Schultz
And more, more intentional. And so we were-- we kept thinking about this, and then one day we get a handwritten letter from a Japanese company, and the founder of the company, Yuji-san, had a LA restaurant, and he was enamored with Starbucks.
- BGBen Gilbert
Mm.
- HSHoward Schultz
We sit down with him, we fall in love with him, and, uh, we weren't ready, but we decided we're gonna give it a shot. We go to Tokyo, we meet him. We ended up forming a JV. And you know, the folklore at Starbucks, which is not that unrealistic, is the reason we went to Japan as an international market is because it had a direct flight to Seattle. [laughing] That was the extent of our understanding. Now, we open up in August. If you've been to Tokyo in August, it's hot. It's like ninety-five degree temperature and a hundred percent humidity. It's like getting out of a New York City subway in the middle of August. As soon as you walk out, you need a shower. It's gonna be a tough opening because of the hot weather. I'm very concerned about it. [laughing] I get back to my hotel room, and I have a message that CNN is covering the opening live, or they got cameras.
- BGBen Gilbert
High risk, high reward.
- DRDavid Rosenthal
Wow!
- HSHoward Schultz
I'm so nervous. At six AM, we get in the car. It's so hot. My-- the tie around my neck, it feels like a, a noose. We're driving up to the store in the Ginza, and there's like two hundred people on line. And I turn to the translator, and I said: "Did he hire extras?" I cut the ribbon, and a young man who slept over the night before to be the first person, is a college student, speaks no English. He rushes to the front of the line, and I follow him. No English, and he says, "Double tall latte." [laughing] As God is my witness, just like that. And I said: "Holy shit, how did they know?" And Japan was a extraordinary success from minute one. We got two thousand stores there. I was there like two months ago. Incredible. We have a roastery there.
- BGBen Gilbert
Why were there people lined up around the block? Why did it work so well instantly? Was it a strong co- coffee culture or-
- HSHoward Schultz
No, the coffee cu... No, it was the iconic reputation and anticipation of something that they had convinced themselves was unique, proprietary, not in Tokyo, not in Japan, that they wanted to have. And that cup-- And by the way, the research, that cup was all over Tokyo in months. Everyone was walking around with that cup.
- BGBen Gilbert
And this is nine years after you bought the six stores. It has turned into this icon. In all the events we just covered, Starbucks has already become Starbucks. It is already this, like, globally desirable brand-
- HSHoward Schultz
Mm-hmm
- BGBen Gilbert
... there by nineteen ninety-six.
- HSHoward Schultz
I honestly, I haven't thought about it in that way, but-
- BGBen Gilbert
That's so fast.
- HSHoward Schultz
Yeah.
- BGBen Gilbert
I mean, to build something that-
- HSHoward Schultz
Didn't seem fast to us.
- BGBen Gilbert
I bet.
- DRDavid Rosenthal
The parallels to the Microsoft story are just, like, so apt. You know, Japan was Microsoft's first international market.
- HSHoward Schultz
Did not know that.
- DRDavid Rosenthal
It was half their business, and it started in the same way. Bill and Paul got a cold call from Ken Nishi, who was a guy in Japan who had somehow gotten a hold of the basic interpreter, loved it, and said: "I'm so passionate about this. I want to bring it to Japan." Fifty percent of Microsoft's revenue for the first at least five years.
- 1:41:12 – 1:55:22
Stepping away and returning: leadership transitions, 2008 crisis, and the New Orleans turnaround
- BGBen Gilbert
And you step into the role of, is it executive chairman?
- HSHoward Schultz
Yes.
- BGBen Gilbert
Chairman?
- HSHoward Schultz
Executive chairman, with Orin as the CEO.
- BGBen Gilbert
In two thousand?
- HSHoward Schultz
Yeah.
- BGBen Gilbert
What was your-
- HSHoward Schultz
I was, I was-- I think I was physically and emotionally exhausted. Um, kids were getting older. I had missed a lot. Just think about all the things we're doing, and I had so much confidence in Orin, so it was no problem. And so that's what I did. But I was still engaged, but I was, you know, not running it day to day.
- BGBen Gilbert
And at this point, it's thirty-five hundred stores. The company's doing two point two billion in revenue. It kinda feels like, okay, I can, I can get some distance. I can do other things in life. It's, it's, you know, it's gonna work out. At some point, Orin transitions the CEO role to Jim Donald, which I assume you're also very involved in-
- HSHoward Schultz
Yes, yes
- BGBen Gilbert
... um, in working with him. Um, what was that transition about?
- HSHoward Schultz
Orin never wanted to be the CEO.
- BGBen Gilbert
Hmm.
- HSHoward Schultz
He's not a front guy.
- BGBen Gilbert
Hmm.
- HSHoward Schultz
Uh, in fact, he's shy and, uh, did-- never wanted to be on the stage as a CEO, so he said, "I'll do it for a couple of years." But he's always kinda knocking on my door, saying, "We, we need a new CEO."
- BGBen Gilbert
Hmm.
- HSHoward Schultz
And we didn't have anyone internally. Howard didn't want it. Um, and so we did a search. We met Jim Donald, great, great guy, had all this operational experience. Um, and then certain things started appearing, and we were just weren't hitting our stride the way we usually do. The economic environment was getting tougher, and, uh, things just kind of unveiled itself that we-- it wasn't gonna work out. By the way, but Jim is a great guy, like, a really good person, but it just wasn't the right fit.
- BGBen Gilbert
And so how long had he been in that role of CEO?
- HSHoward Schultz
I'd say less than three years, two years maybe.
- BGBen Gilbert
Okay. But basically, the, um, two thousand and eight happens, and-
- HSHoward Schultz
So the cataclysmic financial crisis is unfolding, and, uh, that plus the cracks that we were experiencing, uh, board meeting, and I don't think the board meeting was set up for me to return, but it just kind of happened in the meeting about, "Okay, we got all these problems. What are we gonna do? Do you wanna come back?" And, uh, "Yeah, I'm gonna come back."
- BGBen Gilbert
... And that wasn't, that was never your intent. When you stepped away, you thought you were really stepping away.
- HSHoward Schultz
It was not my intent to come back, and it was certainly not my intent that we're gonna run into problems. And so in the Christmas vacation of two thousand and seven, I knew I was gonna return in January. So I was on holiday, and I was starting to think through what I was gonna do. On that holiday, a friend of mine, n- not-- I didn't know he was there, but it was Michael Dell was there, and I must have talked to him almost every day about the transformation of Starbucks. And he was going through a similar thing at Dell-
- BGBen Gilbert
Yeah
- HSHoward Schultz
... almost at the same time. So we had so many things to talk about.
- BGBen Gilbert
Hmm.
- HSHoward Schultz
And we were comparing notes and everything. And so in early two thousand and eight, I spoke to Jim, and I came back in two thousand and eight.
- BGBen Gilbert
And when you came back in two thousand and eight, I mean, this is the whole crux of your book, Onward. There's an entire book's worth of material here, so we're not gonna do it all.
- HSHoward Schultz
Okay, okay.
- 1:55:22 – 2:10:56
Technology’s double edge: meeting Steve Jobs, mobile order & pay, and the “runaway train” problem
- BGBen Gilbert
Okay, before we get to today, I wanna talk about some other things that happened in 2008. 2008 was a big year.
- HSHoward Schultz
Yeah.
- BGBen Gilbert
So 2008, 2009, 2010, there's no way to put it other than a wildly successful turnaround. Your low point in 2008, profits were 315 million, and by 2010, they were 945 million. I mean-
- HSHoward Schultz
I don't know how we did that.
- BGBen Gilbert
That's, uh, well, we just went through a lot of the ways [chuckles] of how you did that. There's a couple other-... things here, one of which is technology, but I'm told there's a, a story you have about Steve Jobs-
- HSHoward Schultz
Yeah
- BGBen Gilbert
- around this point in time, too.
- HSHoward Schultz
Yeah, it's a funny story. Another story. And so in Hawaii, when I was on vacation, I'm talking to Michael Dell and Benioff.
- BGBen Gilbert
And you're, uh, cycling with Michael Dell.
- HSHoward Schultz
Yeah, cycling, cycling with Dell almost every day, and I'm talking to Benny- Michael introduced me to Benioff. Didn't know him. And so h- his-
- BGBen Gilbert
It's a pretty good Hawaii crew, okay?
- HSHoward Schultz
So I get back, and, um, Adam Brotman, who's a key n- person in all this in terms of mobile order and pay.
- BGBen Gilbert
Yeah. He ran digital for Starbucks for a long time.
- HSHoward Schultz
Yeah, he ran digital. I'm trying to g- make sure I get the sequencing of this right. I think there was a future meeting scheduled for Starbucks and Apple, uh, around mobile order and pay and other things, and I met Steve on a phone call. I'd never met him. I'm talking to him on the phone, and I'm, I'm telling him what's going on. He said, "You should come down," and he had a whole thing about walking. He would go out, and we'd walk around the building. Have you heard this before?
- BGBen Gilbert
This is-
- BGBen Gilbert
Yeah, of course
- BGBen Gilbert
... infinite loop at their old campus?
- HSHoward Schultz
Yeah, yeah.
- BGBen Gilbert
Yeah.
- HSHoward Schultz
And so I went down there, and, and, and basically went down, and we took a walk, and I just told him all my problems, everything that was going on, and he just stopped me, and he said, "This is what you need to do." Just looked at me, and he said, "You go back to Seattle, and you fire everyone on your leadership team." I thought he was joking. I said: "What do you mean, fire... What are you talking about, fire everybody?" He said, "I just told you. F-ing fire all those people!" He's, like, screaming at me in my face. [laughing] "You know, fire all those people. That's what I would do." I said, "Steve, I can't fire all those people. Who's gonna do the work?" He said, "I promise you, in six months, maybe nine, they'll all be gone." He was right, except for one, the general counsel. They were all gone.
- BGBen Gilbert
Your whole leadership team turned over after?
- HSHoward Schultz
Yes, they were all gone.
- BGBen Gilbert
Wow.
- HSHoward Schultz
That's the story about Steve Jobs.
- BGBen Gilbert
Wow.
- BGBen Gilbert
What a coincidence.
- BGBen Gilbert
Did you ever call him back and tell him?
- HSHoward Schultz
Oh, I talked to him since then-
- BGBen Gilbert
Yeah
- HSHoward Schultz
... and we were on stage together at an event, and I told him, "They're, they're all gone." He said, "Well, you're six months, nine months late, man, but think about all the things you could have done." [laughing]
- 2:10:56 – 2:27:06
Real estate and non-franchise scaling: corners, traffic counts, and culture control
- DRDavid Rosenthal
Moving on from technology and mobile order and pay, there's one more, to my mind, key pillar of the Starbucks tapestry, and that's real estate. And maybe this is a good time because I feel like around this era is when people started looking at Starbucks and scratching their heads and being like: "There's two Starbucks across the corner from one another. These guys must be insane." [chuckles] Uh, talk to us about-
- HSHoward Schultz
Yeah
- DRDavid Rosenthal
... real estate.
- HSHoward Schultz
Uh, the, the basic idea early on, uh, given the beverages' velocity in AM, uh, was to find a corner location in an urban setting where we could physically see pedestrian traffic in a significant way. And so we would go to cities and count, just physically count how many people were walking by, what hours they were walking by. And once we had a model of success, it became clear to us what we needed. And also, once we became aware of co-tenancies of certain tenants, that would be interesting to us. Um, we also were very intrigued with being next to a grocery store early on because of the frequency in which people were buying food. Anytime we were in an office building where there were three to four thousand people in a building, that was a home run. But then it became very clear that there were locations that we never imagined we could be in that became wildly successful and just opened up an aperture to us, that basically we had opportunities to do things that were not traditional for a retailer. Now, the other thing, which we haven't talked about, is a decision I made early on not to franchise, which you haven't-- surprised you haven't mentioned that.
- BGBen Gilbert
Oh, well, there were franchises.
- HSHoward Schultz
But I'll... Let me explain that, if I can-
- BGBen Gilbert
Yeah
- HSHoward Schultz
... which is all part of the real estate strategy. I, I never believed that we could build, maintain, and elevate the culture of the company, which I viewed as the thing in a franchise system, where we had individual franchisees who had their own subculture. And so even though there was pressure early on because of the cost of capital, and we didn't have a lot of money to franchise because we, we'd, we'd have no CapEx, I said no. We resisted that, and I don't think we'd be having this conversation if Starbucks was a franchise system. Because McDonald's, extraordinary company, but they're a, they're a commodity-based product.
- DRDavid Rosenthal
Well, as you've been saying, it's from the beginning, it was about elevating.
- HSHoward Schultz
Yeah.
- DRDavid Rosenthal
McDonald's, great company, but-
- HSHoward Schultz
Yeah
- DRDavid Rosenthal
... nobody would ever accuse them of elevating-
- HSHoward Schultz
Yeah
- DRDavid Rosenthal
... I don't think. [chuckles]
- HSHoward Schultz
Yeah, and that's why I, I, I don't want Starbucks to become transactional. Coffee is personal. The biggest magic and what, you know, the lightning in the bottle is when you go to Japan or Shanghai or Malaysia and you see the culture-... in a way that you just can't believe. Like, how did it happen that we were able to transfer this to another country, different language, different culture, different poli- how'd we do it?
- BGBen Gilbert
That's actually quite befuddling to me-
- HSHoward Schultz
Yeah, yeah
- BGBen Gilbert
... 'cause so many-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... food and beverage concepts do not transfer geographies.
- HSHoward Schultz
And, and I think it transferred because young people around the world, we all want the same thing. They want opportunity. They want to be respected. They want to be re- they want, they want dignity. They wanna make their parents proud. They wanna work for a company that they believe in, and when I see what we've done around the world, I'm moved emotionally because the humanity I speak of is universal. That's why when I came back from China, what I said was: "I just wanna say something about China and the US. I know all the rhetoric and the propaganda about our two countries, but what I see is that we have so much more in common than we have differences," and that should be the theme of the world right now.
- BGBen Gilbert
I wanna pick up the thread on China now that we're sort of into the 2010s.
- HSHoward Schultz
Okay.
- BGBen Gilbert
This decade saw huge, ridiculous growth in China store openings. So there were 500 stores in 2011, right, when you're sort of coming out of that, the, the rut. By 2017, there were 3,000. Today, there's almost 7,000, and there was a stat that was reported that a new store opened in China every fifteen hours in 2017.
- HSHoward Schultz
True.
- BGBen Gilbert
Now bring us to that seed that you planted earlier with Belinda being the single most important-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... employee.
- HSHoward Schultz
China presented the enormity of opportunity with the significant challenge of pioneering, and-
- 2:27:06 – 2:31:04
Starbucks today and how it expands globally: JVs, licensing, and consistency goals
- BGBen Gilbert
All right, I'm gonna take us to Starbucks today. I'll kind of m- map that out and give you the stats, and then we're gonna go into playbook, where we basically try to take all the lessons we just learned over the last few hours and figure out why did Starbucks work, um, and at such a grand scale that it did. So to catch listeners up on the business today, Starbucks does thirty-six billion dollars in revenue, four point one billion in net income. There are three hundred and eighty thousand employees. You gave me a stat-
- HSHoward Schultz
I, I think over four hundred, four hundred and fifty thousand-
- BGBen Gilbert
Four hundred and fifty thousand now.
- HSHoward Schultz
Globally.
- BGBen Gilbert
I must be using an old number. Um, and over the lifetime of the company, has employed over five million?
- HSHoward Schultz
Yes, five million alum.
- BGBen Gilbert
That a scale right there. Thirty-nine thousand stores globally in eighty-six countries, almost half of which are in North America, eighteen percent in China, and, uh, about half of those are licensed franchise and half are company-operated. And so while we're not... You know, you, you mentioned we don't franchise in the traditional McDonald's sense.
- HSHoward Schultz
Right.
- BGBen Gilbert
You do these joint ventures, and you do this, uh, this way of entering countries where you don't need to own and operate the entire store yourself.
- HSHoward Schultz
They're not franchises in the typical sense.
- BGBen Gilbert
Yeah, so tell us about that.
- HSHoward Schultz
And I think we should talk about that.
- BGBen Gilbert
Yeah.
- HSHoward Schultz
The joint venture relationships that we've established, and some goes back almost thirty years, in the Middle East, in Latin and Central America, now in Italy, in the EU, in India.
- BGBen Gilbert
And what does it mean to be your partner?
- HSHoward Schultz
So, uh, every country is different depending on the economics of that country, the political issues.
- BGBen Gilbert
Mm.
- HSHoward Schultz
Um, some countries have been an eighty-twenty, Starbucks owns eighty, they own twenty. Some are fifty-fifty, some are... Some of the eighty-twenty started out as o- eighty for us, and they bought it in over the way.
- BGBen Gilbert
Mm.
- HSHoward Schultz
Uh, it depends. So but the, the key thing is, whether it's Alberto Tirado in Latin and Central America, Mohammed Al Shai in the Middle East, the Tata Group in India, the Percassi family in, in, in Italy, they understand the culture and values of Starbucks.
- BGBen Gilbert
And so tactically, w- what... You know, you said it's not a franchise in the t- traditional way. What are Starbucks responsible for, and w- what is the partner responsible for?
- HSHoward Schultz
Starbucks is responsible for roasting the coffee-
- BGBen Gilbert
Mm-hmm
- HSHoward Schultz
... for all the recipes, which are consistent with Starbucks worldwide, a co-design of the store, where we're designing the store with the JV or the licensed partner-
- BGBen Gilbert
Mm
- HSHoward Schultz
... and they control all the operations.
- BGBen Gilbert
Hmm. And so all of Starbucks's franchise or licensed stores are done in this way, where there's a partner in a country-
- HSHoward Schultz
Yes
- BGBen Gilbert
... that-
- HSHoward Schultz
There are not, no individual licensed franchises of any kind-
- 2:31:04 – 2:41:10
Returning to Italy with Roasteries: Willy Wonka inspiration, Milan shrine, and espresso as #1 drink
- BGBen Gilbert
So one market that we haven't talked about that I, I wanna ask you about while we're in this, and then we'll get to playbook, is Italy.
- HSHoward Schultz
Yeah, yeah.
- BGBen Gilbert
The whole thing- [chuckles]
- HSHoward Schultz
[chuckles]
- BGBen Gilbert
... came out of Milan.
- HSHoward Schultz
Right.
- BGBen Gilbert
And yet, for decades-
- HSHoward Schultz
Fifty years
- BGBen Gilbert
... no Starbucks. Fifty years, no, no Starbucks in Italy.
- HSHoward Schultz
Yeah.
- BGBen Gilbert
And the belief, at least as I see it, is they've perfected the coffeehouse concept. Don't bring an imitation in here. W-
- HSHoward Schultz
Okay, yeah
- BGBen Gilbert
... W- but it's worked! It's, it's working phenomenally well. Why is Starbucks being so well-received in Italy?
- HSHoward Schultz
So I, I, I know I'm gonna be chastised for what I'm about to say- [chuckles] ... but it's true. The, by and large, coffee in Italy is not as good as it once was. There are certain coffee companies that have maintained the standard, but by and large, the coffee is not as good. I'm gonna be killed for that, but [chuckles] -
- BGBen Gilbert
[chuckles]
- HSHoward Schultz
... that's, that's, that's my truth.
- BGBen Gilbert
If you don't believe you have a better product, who does? [chuckles]
- HSHoward Schultz
Yeah, but I, I didn't think we earned the right to go to Italy until we were really ready to present ourselves in the best possible way. Because I knew the knives would be out for us in ways that we could- couldn't even possibly imagine, given the, the history and the cultural relevance of espresso and the coffee bar. And so we waited and waited and waited until the Roastery.... And so, I- before we get to Italy, I have to explain the Roastery for you.
- BGBen Gilbert
Please.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
I, I mean, the first time I went in there, you know-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... kid in a candy store, wide eyes.
- HSHoward Schultz
So there are six Roasteries starting in Seattle, Chicago, New York, Tokyo, Shanghai, and Milan. The Roastery itself is probably the most entrepreneurial, creative project that I could recall in my history of Starbucks. What is the experience we could create that just absolutely blows people away? So what did I do? As a kid, I've loved this movie, and so I invited the most creative people in the company to my house, and I said, "We're gonna watch a movie." Of course, they thought I was nuts, and I turned on Willy Wonka.
- BGBen Gilbert
I was gonna say-
- DRDavid Rosenthal
I was gonna say
- BGBen Gilbert
... that has to be.
- DRDavid Rosenthal
It's gotta be. [laughing]
- HSHoward Schultz
I turned on Willy Wonka, Wonka with Gene Wilder, and we went to work starting to design a space. Now, we realized early on-
- BGBen Gilbert
And this was what? 2013-
- 2:41:10 – 2:56:17
Playbook synthesis: the Starbucks “tapestry” and the core tension of ubiquity vs intimacy
- BGBen Gilbert
So now the, the question sort of becomes, what are the set of circumstances that had to be true in order for Starbucks today to exist? And the, the one thing we haven't talked about, or one of the things, is how much of what Starbucks has accomplished could have happened if it wasn't an addictive substance? Like, it's kind of this incredible thing, that it's a legal drug, that all the research anyone's ever done into caffeine is, by and large, it's neutral to helpful. And like every other drug that, you know, at, at some point people have enjoyed, whether it's smoking or drinking-
- HSHoward Schultz
Mm
- BGBen Gilbert
... and more as research comes out over time, we find out, shoot, that wasn't good for us. That's not the case for coffee.
- HSHoward Schultz
No.
- BGBen Gilbert
What an amazing thing to get to build a business on this delightful thing we have to consume every day 'cause we're addicted, and it's pretty good for us.
- BGBen Gilbert
And it gives you superpowers, [chuckles] yeah.
- HSHoward Schultz
I'd, I'd like to, to believe it's not based on what you are characterizing as an addictive beverage. I'd like to believe it's the experience that has been created around the enjoyment of the coffee and the experience that happens. Uh, I also think, and we d- we, we haven't really spoke that much about it, is I can't state enough over the last two decades what customization meant to the company-
- BGBen Gilbert
Mm.
- BGBen Gilbert
Yeah
- HSHoward Schultz
... and how customers created a personal beverage well beyond what the menu was. And I don't know any other business-
- BGBen Gilbert
Yeah
- HSHoward Schultz
... in which the, the incrementality of the price has been dictated by the consumer.
- BGBen Gilbert
Yep.
- HSHoward Schultz
The base price is X, but most people are doing something in addition.
- BGBen Gilbert
X plus Y, yeah.
- BGBen Gilbert
I, I have a, a very specific drink that I like, and when I go to coffee shops that are not Starbucks, I can't get it because it feels taboo to order. Like, I like-
- HSHoward Schultz
Hmm
- BGBen Gilbert
... an iced almond milk latte with whipped cream, and when I go to most coffee houses-
- HSHoward Schultz
They don't want to give you whipped cream?
- BGBen Gilbert
... I'm like, "I can't ask for whipped cream on top of it." But Starbucks, they're like, "Of course, that's what we do here." [chuckles]
- BGBen Gilbert
Uh, this is something that I think has translated incredibly well to the mobile app-
- HSHoward Schultz
Yes
- BGBen Gilbert
... and that no other-
- HSHoward Schultz
Yeah
- BGBen Gilbert
... food company has, really, the level of customization.
- HSHoward Schultz
And, and I think m- the mobile app actually added velocity to customization. It powered customization.
- BGBen Gilbert
Mm.
- BGBen Gilbert
Yeah.
- HSHoward Schultz
And I think the Starbucks barista deserves so much credit because they are dealing with so many different variations of beverages, some of which they're making for the first time on the fly.
- BGBen Gilbert
Yeah.
Episode duration: 3:15:40
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