Starbucks (with Howard Schultz)

Ben Gilbert 0:00 All right.

David Rosenthal 0:01 We rolling?

Ben Gilbert 0:02 We're rolling.

Howard Schultz 0:02 We get to see how you guys do this. It's kinda interesting.

Ben Gilbert 0:04 [laughing]

David Rosenthal 0:05 We usually have pump-up music, but- Mm-hmm.

Ben Gilbert 0:08 I feel pumped up.

Howard Schultz 0:08 We can do that! [upbeat music] We, we got a turntable here.

David Rosenthal 0:11 Ooh, I, I saw your turntable. That's beautiful.

Howard Schultz 0:13 What do you wanna hear?

Ben Gilbert 0:15 No, we're starting. [chuckles]

David Rosenthal 0:17 Ben's keeping us on track.

Speaker 0:18 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?

Ben Gilbert 0:35 Welcome to Season 14, Episode 5 of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

David Rosenthal 0:43 I'm David Rosenthal.

Ben Gilbert 0:45 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.

David Rosenthal 1:02 Whew, what were we thinking?

Ben Gilbert 1:03 [chuckles] Well, it actually was amateur hour back then, David.

David Rosenthal 1:07 Gotta start somewhere.

Ben Gilbert 1:08 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?

David Rosenthal 2:19 It really is incredible, one of the very, very small number of food and beverage establishments that has scaled to the entire world.

Ben Gilbert 2:29 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.

David Rosenthal 3:18 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.

Ben Gilbert 3:30 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.

David Rosenthal 3:52 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.

Ben Gilbert 4:05 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.

David Rosenthal 4:26 We do.

Ben Gilbert 4:27 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]

Howard Schultz 5:02 [chuckles] Oh, God. That's a great start.

Ben Gilbert 5:03 I also... Here's another stat that David-

David Rosenthal 5:06 Y- you've done the math on-

Ben Gilbert 5:06 I have done the math.

David Rosenthal 5:07 Yes.

Ben Gilbert 5:08 I exported all of my credit card transactions since 2011.

Howard Schultz 5:12 Of course you did.

Ben Gilbert 5:13 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.

Howard Schultz 5:20 [chuckles] Oh, God. Okay.

Ben Gilbert 5:22 So we wanna start with Starbucks 1.0, and listeners may know that there were three founders of Starbucks-

Howard Schultz 5:32 Yes

Ben Gilbert 5:33 ... none of which were named Howard Schultz.

Howard Schultz 5:35 Correct.

Ben Gilbert 5:36 So take us back, you know, in the Starbucks prehistory before you arrived.

Howard Schultz 5:42 Yeah.

Ben Gilbert 5:42 How did the company start?

Howard Schultz 5:44 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.

6:04 ... uh, which-

Host 6:05 Alfred Peet was the name?

Howard Schultz 6:06 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.

Host 6:46 Really?

Howard Schultz 6:46 No one knows that. That's new.

Host 6:49 Wow!

Howard Schultz 6:49 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.

Host 6:58 So it was Peet's Coffee in Starbucks bags?

Howard Schultz 6:59 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-

Host 7:24 Mm-hmm

Howard Schultz 7:24 ... 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.

Host 8:02 Was Starbucks buying it for use in their-

Howard Schultz 8:05 They were selling it in their store. Now, but here's the thing-

Host 8:07 'Cause this was a consumer device.

Howard Schultz 8:09 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.

Host 8:23 Yeah, of course.

Howard Schultz 8:24 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.

Host 9:56 Still just selling beans?

Howard Schultz 9:57 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?

Host 10:12 [chuckles]

Howard Schultz 10:12 Remember, so it was a tiny company.

Host 10:14 It was a grand ambition.

Howard Schultz 10:15 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.

Host 10:27 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-

Howard Schultz 10:37 Right

Host 10:37 ... 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?

Howard Schultz 10:45 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?"

Host 11:49 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-

Howard Schultz 11:56 Yeah, and Starbucks had a growing mail order business

Host 11:58 ... because I don't have anything like it in my city."

Howard Schultz 11:59 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.

David Rosenthal 12:21 But this couldn't have been, like, a great business. [chuckles] You're shipping small amounts-

Howard Schultz 12:26 No, it was a-

David Rosenthal 12:27 The, the logistics costs, you know, the scale, like... [chuckles]

Howard Schultz 12:31 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.

Ben Gilbert 12:54 Okay, so before the Italy trip, I just wanna-

Howard Schultz 12:57 Yeah

Ben Gilbert 12:57 ... 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-

Howard Schultz 13:13 Specialty coffee.

Ben Gilbert 13:14 Specialty coffee.

Howard Schultz 13:14 Which was, which was tiny, and I think what you've just described, the reason for that is that coffee was terrible. It was instant coffee, stale coffee, and primarily Robusta beans, which is the low-grade coffee that Starbucks was never involved in.

David Rosenthal 13:29 Yeah, walk us through the two types of beans.

Howard Schultz 13:32 There's mainly two types of agricultural coffee grown for commercial use: Robusta beans, low-end coffee, primarily in instant coffee, and high-grade Arabica coffee. But even within the Arabica coffee, there's significant segments of quality and integrity, and Starbucks was- has always played from 1971 to today at the highest level.

David Rosenthal 13:56 And my understanding from our research is that the Robusta market really developed, as you say, with the instant coffee market, and that was kind of a product of World War II, right? It was like, "Hey, we gotta get the troops this product to survive, and so we just need a lot of beans, and we need to ground them up and create this instant product." I believe Maxwell House was involved in inventing?

Howard Schultz 14:16 Yeah, you're exactly right. I mean, it was just fuel and bitter, acidic, and yeah. And that's, I think, World War II and the GIs were kind of the impetus for that kind of quality coffee or not quality coffee to exist and have any kind of run after the war.

Ben Gilbert 14:36 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.

Howard Schultz 14:47 Yeah.

Ben Gilbert 14:47 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.

Howard Schultz 14:59 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-

David Rosenthal 15:41 [chuckles] Wow!

Howard Schultz 15:41 ... 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.

Ben Gilbert 15:59 And does it have a screen, or is it like a typewriter?

Howard Schultz 16:01 It has a... No, it has... It's a typewriter, no screen.

David Rosenthal 16:02 It's like a typewriter with, like, a, with a little bit of cache, right?

Howard Schultz 16:06 Yes, yes, exactly.

David Rosenthal 16:07 So that you could, like, fix-

Howard Schultz 16:07 Yeah

David Rosenthal 16:07 ... mistakes for one line, right?

Howard Schultz 16:09 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!"

Ben Gilbert 16:24 And so you quitting, well, Hammerplast, but, you know, quitting what seemed like a-

Howard Schultz 16:30 I hated it

Ben Gilbert 16:31 ... stable of pretty good jobs-

Howard Schultz 16:32 Yeah

Ben Gilbert 16:32 ... to drive across the country to provincial little Seattle, I mean, that's, that's nuts.

Howard Schultz 16:38 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."

David Rosenthal 17:15 This is amazing. Howard Schultz got a three. [chuckles]

Howard Schultz 17:17 I got a three. I got a three.

David Rosenthal 17:18 This is inspiration for all entrepreneurs out there.

Howard Schultz 17:19 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.

David Rosenthal 17:42 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?

Howard Schultz 17:54 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.

Ben Gilbert 19:05 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.

Howard Schultz 19:29 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.

Ben Gilbert 19:47 All right, so we're getting to the big risk. So the year ticks over to nineteen eighty-three.

Howard Schultz 19:52 Yeah.

Ben Gilbert 19:52 You are sent, or maybe you asked to go to an international housewares conference in Milan.

Howard Schultz 19:58 Yeah.

Ben Gilbert 19:59 What do you discover?

Howard Schultz 20:00 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!

Ben Gilbert 21:05 We gotta do this.

Howard Schultz 21:06 "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."

Ben Gilbert 21:17 Hmm.

Howard Schultz 21:17 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.

Ben Gilbert 21:55 And there's nowhere else in town-

Howard Schultz 21:56 No one in Seattle had it. Well-

Ben Gilbert 21:57 -to get a caffe latte

Howard Schultz 21:58 ... 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."

Ben Gilbert 22:11 Yeah, what was the objection? Was it the-

Howard Schultz 22:12 He didn't... He just... He didn't think-

Ben Gilbert 22:14 -stigma of the restaurant business?

Howard Schultz 22:15 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.

Ben Gilbert 22:43 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?

Howard Schultz 22:58 Yeah.

Ben Gilbert 22:58 Keep them separate for now.

Howard Schultz 22:59 Yeah. Well, it's important to know that between the opening of the Fourth and Spring coffee bar inside of Starbucks-

Ben Gilbert 23:06 Starbucks number six.

Howard Schultz 23:07 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."

Ben Gilbert 23:31 Which was the company you started to-

Howard Schultz 23:32 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.

Ben Gilbert 24:05 Oh, yeah.

Howard Schultz 24:06 Mm-hmm, and I asked them both to invest in my idea, and both of them turned me down.

Ben Gilbert 24:13 ... So at this point, you're in Italy, and you're trying to get ideas and investors for what would become Il Giornale.

Howard Schultz 24:18 For the first Il Giornale.

Ben Gilbert 24:19 And only Starbucks and a couple other people have committed.

Howard Schultz 24:22 But I didn't have enough money. I still, I needed more money.

Ben Gilbert 24:25 Huh.

Howard Schultz 24:25 And, uh-

Ben Gilbert 24:26 You were raising one point six million?

Howard Schultz 24:28 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-

Ben Gilbert 24:37 Which is stupid, 'cause you watched it happen. Like, I ran this store for six months, and, like, it was final, you know?

Howard Schultz 24:42 Yeah, they didn't wanna do it. So they, they-- Lavazza and Faima, just get that on the record, turned me down. [laughing]

Ben Gilbert 24:49 [laughing]

Howard Schultz 24:49 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.

Ben Gilbert 25:22 Wow!

Howard Schultz 25:22 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.

David Rosenthal 25:36 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-

Howard Schultz 25:44 Yes

David Rosenthal 25:44 ... coffee beans, but probably more capital intensive, right? You need more staff.

Howard Schultz 25:49 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-

David Rosenthal 26:07 Wow!

Howard Schultz 26:07 ... while Sherry was working and pregnant with our first child.

Ben Gilbert 26:10 So looking increasingly worse from a traditional perspective of leaving a- [chuckles]

Howard Schultz 26:14 Yes

Ben Gilbert 26:15 ... a high-quality job, moving across the country, then just a couple years later, here you are, not making any money again, while-

Howard Schultz 26:21 Well

Ben Gilbert 26:22 ... raising millions of dollars to try to start your own business.

Howard Schultz 26:24 It gets worse. Sherry is six, seven months pregnant. She's working. Her parents visit Seattle. They're from Ohio. Her father asked me to take a walk.

David Rosenthal 26:37 Oh, no.

Howard Schultz 26:37 As God as my witness, true story. Take a walk, and he says, uh, "Whatever you're doing, I respect it, but it's not a job. It's a hobby. You need to get a job. My daughter's pregnant. She's working. You're not." I start crying.

Ben Gilbert 26:58 I bet. [chuckles]

David Rosenthal 26:59 Yeah.

Howard Schultz 26:59 So embarrassed, and, uh, I come home. It's three, four o'clock in the afternoon, whatever it is. I don't say a word, completely shaken by the whole conversation. Her parents go to bed after dinner, and I'm sitting with Sherry, and I said, "I gotta tell you something that happened." She was so angry at her dad and so upset, and she said, "There's no way we're turning around. We're-- We are going." So she is the glue to everything that's happened, and I don't know if she's ever had a conversation with her father. I'm sure she did. I don't... But the whole thing could've been over.

Ben Gilbert 27:35 And that would've been a very understandable response if Sherry-

Howard Schultz 27:38 Right

Ben Gilbert 27:38 ... had said, "I'm," you know-

Howard Schultz 27:39 Right

Ben Gilbert 27:39 ... "I, I wasn't gonna say anything, but-"

Howard Schultz 27:41 Yeah, well, we-

Ben Gilbert 27:41 ... "you know, look at our situation objectively here." [chuckles]

David Rosenthal 27:43 Putting ourselves in your father-in-law's shoes, how could you not feel that way for your daughter and her impending family?

Howard Schultz 27:49 Yeah, and, and her father was a great guy, and, uh, I understood, but I was embarrassed and, uh, u- humiliated. How could I not be?

David Rosenthal 27:59 Well, I guess that's another dimension here, too. This was not twenty twenty-four. It's not like, uh, being an entrepreneur was a, you know, glorified profession here. [chuckles]

Howard Schultz 28:07 In a business that he clearly did not understand, you know, a coffee store.

Ben Gilbert 28:12 The other interesting thing to point out around this time is, for the people who were seeking high-risk business investments, you know, this is the late '80s. It's time to look at tech. Like, we're now twelve years into Microsoft, Apple's four years past the Macintosh-

Howard Schultz 28:31 And I'm, I'm trying to-

Ben Gilbert 28:32 And you're trying to raise money for a coffeehouse chain.

Howard Schultz 28:35 With names that people couldn't pronounce and serving it in a paper cup to go.

Ben Gilbert 28:41 That does not sound innovative to me. I don't know why I'm putting my risk capital into your...

Howard Schultz 28:46 Yeah. You know, I would bring investors to the two or three stores, and I would make sure there was a fair amount of people in the space, and that's when I started-

Ben Gilbert 28:57 [chuckles]

Howard Schultz 28:57 ... talking about the language of community and the third place, and that's what I saw in Italy. The unlock and the epiphany, of course, it was the romance of espresso, but it was the sense of community, and that is what was happening very early on in the two stores in Seattle and the one in Vancouver. You could see it.

David Rosenthal 29:18 What would people do after they bought the coffee? I mean, you said these are very small places.

Howard Schultz 29:22 They would stand up, 'cause the two stores didn't have seating right away. They would stand up at the coffee bar at the window on Columbia Center, and it was at, at eight, nine o'clock in the morning, they were hanging out there, and then they... After-- Late morning, they were coming back, and you could just feel the relationship that people were having with one another around human connection. I know it sounds trite, but I, I could see it back then, and as I was talking to people about the investment opportunity, I was pointing out, like, "Look what's happening here."

David Rosenthal 29:54 Mm.

Howard Schultz 29:54 "There's something happening. There's some magic going on here. It's not just the coffee." The coffee was the conduit.

Ben Gilbert 30:01 All right, so we're at the pivotal moment.

Howard Schultz 30:03 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]

Ben Gilbert 30:35 [laughing] You gonna give it to me?

Howard Schultz 30:36 I have no money. I- "How much is it?" "Three point eight million dollars." Now we're in '86, '87.

Ben Gilbert 30:43 Mm-hmm.

Howard Schultz 30:44 Now we get into a story I have told, but not a hundred percent-

Ben Gilbert 30:49 Hmm

Howard Schultz 30:49 ... '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."

Ben Gilbert 31:30 For him to take it over, not you?

Howard Schultz 31:32 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-

Ben Gilbert 32:24 A titan.

32:25 Incredible.

Howard Schultz 32:25 The other titan-

Ben Gilbert 32:26 We foreshadowed this on-

Howard Schultz 32:27 There were three titans

Ben Gilbert 32:27 ... the Microsoft episode, but-

Howard Schultz 32:28 There were, there were three titans there, but here is the titan. And I-

Ben Gilbert 32:34 And Bill was six foot seven?

Howard Schultz 32:36 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-

Ben Gilbert 33:28 Go get a cup of coffee

Howard Schultz 33:28 ... went, went to, went to Columbia Center to get a coffee and come back.

Ben Gilbert 33:31 [chuckles]

Howard Schultz 33:31 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.

Ben Gilbert 33:56 Hmm. One of your investors.

Howard Schultz 33:59 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]

Ben Gilbert 34:43 Wow!

Howard Schultz 34:43 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.

Ben Gilbert 35:01 And so did you hear from Jerry that the bid had been dropped?

Howard Schultz 35:05 We walk out, and I say to Mr. Gates-

Ben Gilbert 35:08 There's one little problem: you still need the money, right? [chuckles]

Howard Schultz 35:09 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."

Ben Gilbert 35:19 Wow.

35:20 Hmm.

Howard Schultz 35:22 And we raised the money, and that's the story. I never spoke to Sam Strom again. I've never mentioned his name publicly. I never mentioned his name in this book, and I say it respectfully. I'm not trying to... But that's the story.

Ben Gilbert 35:36 And, and Sam, I mean, for, for anyone who doesn't live in the Seattle area, his name is on buildings and community centers. I mean, this revered philanthropist, I actually don't know his business background. How did he become the titan that he was?

Howard Schultz 35:48 He was involved in real estate and also in those auto stores.

Ben Gilbert 35:53 How did you get him off the Il Giornale cap table? Like, wasn't he an investor in your existing business?

Howard Schultz 35:57 Uh, he was, yeah, he was still invest- Uh, he, he was in- he and his family were investors to the end until they got out.

Ben Gilbert 36:01 Oh, wow!

36:02 Wow.

Howard Schultz 36:02 Till they got out.

Ben Gilbert 36:03 Wow.

36:03 Looking back now, what do you think happened? Did he have any legitimate criticisms of you as running the company or-

Howard Schultz 36:10 No, he had, he had a henchman who was his money guy, who figured out we, we could just take this company, and what do we need Howard Schultz for?

Ben Gilbert 36:17 Mm.

Howard Schultz 36:18 He... Who, he's this young kid.

Ben Gilbert 36:19 Hmm.

Howard Schultz 36:20 ... and he, and Sam had experience with retail, with those auto stores.

Ben Gilbert 36:24 I see.

David Rosenthal 36:24 Mm-hmm.

Ben Gilbert 36:24 So he could install some professional management-

Howard Schultz 36:27 Yeah, for sure.

Ben Gilbert 36:27 -from some other venture.

Howard Schultz 36:28 Yeah.

David Rosenthal 36:28 Run the playbook.

Howard Schultz 36:29 Yeah, it would've been over. But the thing about Bill Gates is I saw him socially a hundred plus times. He never ever said anything public about what he did. He never took credit for it.

Ben Gilbert 36:45 So for listeners, uh, Howard's told us el-elsewhere, but you spoke at the Microsoft CEO Summit. You recounted this story to, you know, the Fortune Five Hundred CEOs, and, um, Bill Gates III, you know, Microsoft founder, comes up to you afterwards and says, um, "Yeah, who was the guy? "

Howard Schultz 37:01 But Bill did not know the whole story. He didn't know any of it! He didn't know what his father had done for me. He's hearing it for the first time.

Ben Gilbert 37:10 And this is, you know, twenty fifteen or something, so Starbucks, like, you would think-

Howard Schultz 37:14 No, he didn't know.

Ben Gilbert 37:15 -someone would wanna tell their family, "I played some significant role in this," but that's not the type of guy he was.

Howard Schultz 37:20 Bill Gates Senior never told a soul what he did for me.

David Rosenthal 37:23 Wow.

Howard Schultz 37:23 Again, humility. Incredible lesson about humility.

Ben Gilbert 37:28 It's amazing.

Howard Schultz 37:29 Yeah.

Ben Gilbert 37:30 And so were Bill Gates Senior and Bill Gates III investors in that three point eight million dollar round?

Howard Schultz 37:36 Bill Senior was, but I don't know if it was part of Bill or, you know-

Ben Gilbert 37:39 But yeah, Microsoft infl... Interesting. Um, so I asked Sherry about this when I was preparing for the episode, and her recollection was, it was something like one to two weeks before the three-month exclusivity for you was gonna be up, and so you're basically like, this event happens, but now you need to come up with the money, and you have this unbelievably short period of time to do so. And so she said that you were calling everybody you knew. She was calling her clients, 'cause she's a designer, calling her clients, trying to just, you know, find pockets of fifty K here, a hundred K there, anywhere you could-

Howard Schultz 38:14 Yeah

Ben Gilbert 38:14 ... to make it happen.

Howard Schultz 38:15 But I had another angel who helped me by the name of Jack Rogers, who became a lifelong friend, who passed away a couple years ago.

Ben Gilbert 38:25 Hmm.

Howard Schultz 38:26 He was part of an investor group, and he brought them along.

David Rosenthal 38:29 So the acquisition goes through.

Howard Schultz 38:32 Yeah. August of 'eighty-seven-

Ben Gilbert 38:34 Yeah

Howard Schultz 38:35 ... 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.

David Rosenthal 38:50 All in the Northwest.

Howard Schultz 38:52 Yeah.

David Rosenthal 38:53 Meanwhile, the original Starbucks folks, they've now gone down to California.

Howard Schultz 38:57 They, they went to California.

David Rosenthal 38:58 When did Peet's open coffee bars?

Howard Schultz 39:01 Uh, many, many years later.

David Rosenthal 39:02 Ah, so they... You weren't competing-

Howard Schultz 39:05 No

David Rosenthal 39:05 -right away.

Howard Schultz 39:05 No.

Ben Gilbert 39:06 But this is one of the great observations, David. Il Giornale buys the Starbucks stores, rebrands Il Giornale Incorporated as the Starbucks Corporation-

Howard Schultz 39:14 Yeah

Ben Gilbert 39:15 ... 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.

Howard Schultz 39:26 Yes.

Ben Gilbert 39:26 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-

Howard Schultz 39:44 Yeah

Ben Gilbert 39:44 ... those are rookie numbers- [chuckles]

Howard Schultz 39:46 No, but you asked me a question earlier-

Ben Gilbert 39:48 ... no [chuckles]

Howard Schultz 39:48 -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.

Ben Gilbert 40:03 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.

Howard Schultz 40:48 No debt. I don't-- I, I want any debt again because of my childhood.

Ben Gilbert 40:52 I was gonna ask you, w- was that informed by the, the-- what you had seen with the Starbucks situation-

Howard Schultz 40:57 No

Ben Gilbert 40:57 ... or more your childhood?

Howard Schultz 40:58 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.

David Rosenthal 41:09 This is probably a good point in time to talk about the business model a little bit.

Howard Schultz 41:14 Okay.

David Rosenthal 41:15 You've alluded to kind of a stigma, at least among s-- potential investors and the original Starbucks founders of, like, the restaurant business. What did the economics of the business, of the coffee bar business, look like-

Howard Schultz 41:25 Yeah

David Rosenthal 41:25 ... when you bought the Starbucks stores?

Howard Schultz 41:29 So what did we buy? We had the stores, we had the brand name, and we had a roasting facility on Airport Way in Seattle. The ability to source and roast coffee and put that through the supply chain of a beverage gave us probably, at the time, an eighty percent gross margin.

David Rosenthal 41:51 Wow! Yeah, that is not the-

Howard Schultz 41:53 Yeah

David Rosenthal 41:53 ... the, quote-unquote, "restaurant business-

Howard Schultz 41:54 Yeah

David Rosenthal 41:54 -that people are imagining."

Howard Schultz 41:56 And I could begin to see, even early on, the accretive nature of frequency.

David Rosenthal 42:03 Hmm.

Howard Schultz 42:03 Where I could see what was going on here is people were not coming for coffee in the morning anymore. They were starting... The morning rush was getting bigger, the need for more labor, and I could sense that the business that Starbucks was in was going to be significantly in the back, and the beverage and the romance of the theater and the third place was the hero.... It didn't take us long to realize we had the beginning of lightning in the bottle.

Ben Gilbert 42:34 Even the best, most successful restaurant you could possibly imagine, how many times are their most loyal customers gonna come there in a week?

42:41 Yeah, twice.

Howard Schultz 42:41 Well, there was- I think there was a time in the Northwest, when we were really at our peak, where the average customer was coming 18 times a month. I should rephrase it. Maybe the most loyal was coming 18 times a month.

Ben Gilbert 42:55 There's some magic to this idea that it's not a terribly expensive item. I think I saw some research that said that it's, you know, sub one percent of someone's house- household income, and often far less than that, but it is repeat, and it is high gross margin. And so when you say lightning in a bottle, there's a cultural lightning in a bottle, but there's also this, like, ridiculous business model, where the way it shows up is your stores-- Basically, from this point forward, for all of Starbucks's life, you build a new store, and the profits from that store would totally cover the cost within two years, and often a year and a half.

Howard Schultz 43:29 But I'll tell you, the economic model that we, we applied to every single store we were opening... You know, by the way, I chose the first five hundred locations myself, so I was in it in so many ways. But the, the economic model in Wall Street-- When we went public in '92, now I'm just... When they, when they heard the model, they said: "Well, they-- We've never seen a model like that." And the model basically was a sales to investment ratio of two to one and a operating profit of twenty percent.

Ben Gilbert 43:58 So what does that mean, sales to investment ratio?

Howard Schultz 44:00 So if the sales were a million dollars, the investment was five hundred thousand. Now, just the sales to investment had to be a two to one.

Ben Gilbert 44:07 Wow!

44:08 In year one of operation?

Howard Schultz 44:09 Yeah. Yes, and the, and the, and the, the operating profit was, was north of twenty percent.

Ben Gilbert 44:14 Wow.

Howard Schultz 44:14 So the cash on cash return was just-

Ben Gilbert 44:16 So, yeah, you get that-

Howard Schultz 44:17 Yeah

Ben Gilbert 44:17 ... two years or less payback.

Howard Schultz 44:18 Yeah, yeah.

Ben Gilbert 44:18 The retail world had never seen a model like this before.

Howard Schultz 44:20 No, it was very new.

Ben Gilbert 44:21 There was no physical storefront that could have this business model-

Howard Schultz 44:24 Yeah

Ben Gilbert 44:24 ... before this.

Howard Schultz 44:25 Early on, it became clear to us that customers was also starting to customize the beverage on their own.

Ben Gilbert 44:32 Hmm.

Howard Schultz 44:32 So we were just... Barista was behind the counter, and somebody would say: "Can I-- Can you put something else in there?" "Yeah, what do you want?" And then, so that just started the... You know, the average ticket started growing as a result of the customers personalizing and customizing their beverage.

Ben Gilbert 44:49 And to be clear, like, the era of Starbucks we are in right now, you produce drip coffee, and you produce-

Howard Schultz 44:55 Espresso

Ben Gilbert 44:56 ... espresso.

Howard Schultz 44:56 Yeah.

Ben Gilbert 44:56 And you can put that espresso in frothed milk, and those-- That's basically your options.

Howard Schultz 45:00 Yeah, yeah.

Ben Gilbert 45:01 Like, none of this, you know?

Howard Schultz 45:02 Yeah, yeah, exactly. But can I tell you a mistake I made?

Ben Gilbert 45:04 Please.

45:05 Please.

Howard Schultz 45:06 When Il Giornale was getting ready to open, the standard cup in the world was that terrible Styrofoam cup that is used in diners in New York City. Remember that cup?

Ben Gilbert 45:18 Yeah.

Howard Schultz 45:19 Uh, I put boiling water into that cup. Five minutes later, the cup is starting to tur- turn, like, a golden color because of the chemical.

Ben Gilbert 45:28 That can't be good for your insides.

Howard Schultz 45:30 Or the taste of the coffee. [laughing]

Ben Gilbert 45:32 [laughing]

45:32 [laughing]

Howard Schultz 45:32 And so we had to find-- We had to ch- change the cup. This was such a smart move in retrospect, but we were just trying to figure out... Now, no one in America that is in the paper business had any kind of cup or lid that was compatible with what I was trying to do. In fact, they didn't understand it. "Why not just use the cup that exists?" I said: "No, because it doesn't taste good, and it doesn't feel right."

Ben Gilbert 46:00 Right. Why go to the trouble of, you know, this perfected roast of these beautifully sourced Arabica beans from all these farmers if you're gonna pour it into Styrofoam?

Howard Schultz 46:08 Yeah. Okay, so-

Ben Gilbert 46:09 Did people think you were a hippie, like, when you would tell these, the, the-- Like, are you an LSD or something like-

Howard Schultz 46:13 I think they just dismissed me. So we went to Chicago, to the International Paper Company, and they had a cup, but the cup didn't have a lid.

Ben Gilbert 46:25 [laughing]

Howard Schultz 46:26 A compatible lid, and so we found-- they found a lid, that beautiful sip lid, which is now ubiquitous in the world. Howard Schultz should have said to them, "I want an exclusive on that lid." [laughing]

Ben Gilbert 46:40 [laughing]

Howard Schultz 46:42 Because that lid became the standard for the world.

Ben Gilbert 46:45 Yeah.

Howard Schultz 46:45 If I would have just understood that. The other thing I didn't do is, we introduced caffè latte to the- to America. We didn't trademark it.

Ben Gilbert 46:52 Hmm.

Howard Schultz 46:52 You know, we trademarked Frappuccino later on, but we didn't trademark caffè latte.

Ben Gilbert 46:56 Hmm.

Howard Schultz 46:56 Just, you know, I wasn't thinking.

Ben Gilbert 46:58 Yeah, you got enough right. You don't need to get them all right. [laughing]

Howard Schultz 47:00 [laughing] No, I, I just-- I missed it.

Ben Gilbert 47:02 When, uh, the sizing, grande, venti-

Howard Schultz 47:06 Oh, that was, uh-

Ben Gilbert 47:07 The, the hidden trenta.

47:08 Yeah, right.

Howard Schultz 47:09 We, we-

Ben Gilbert 47:10 When did that start?

Howard Schultz 47:11 There was a brilliant, brilliant guy who was the architect of the name Starbucks, named Terry Heckler, in Seattle, and he's a fantastic design guy. And we're just sitting one day, and I'm just talking about the importance of language. "We gotta get the language right. We got the cup. Gotta get the language." And we just started talking about changing it from the pedestrian words of small, medium, large to what it became, which was short, tall, and grande. People made fun of it, but they loved it.

Ben Gilbert 47:46 Was venti not an original?

Howard Schultz 47:48 Venti, we didn't have that size when we started. That was later on.

Ben Gilbert 47:50 Wow!

Howard Schultz 47:51 Who, who would have thought somebody wanted a s-

Ben Gilbert 47:53 This is America.

47:54 Yeah, this is America. [laughing]

Howard Schultz 47:55 [laughing]

Ben Gilbert 47:56 So my one more question on this: writing the customer's name on the cup.

Howard Schultz 48:01 That didn't come from me. As the stores got busier and busier, the baristas were having a hard time with, "Whose cup is it? What are we gonna do?" And someone at Starbucks, I don't know who it was, started writing names on the cup, writing names, and it just became standard. So much of Starbucks' success came from customers asking for things we weren't doing, and Starbucks employees, who became partners in '91-... understanding the business better than me.

David Rosenthal 48:34 And this is all like, you know, to my mind, just starting to create this incredible flywheel, right? Of you've got this eighty percent gross margin business, where the key lever is repeat loyal customer visits. You've got customization that is making customers more loyal and increasing your margin at the same time, because you can charge more for it. You've got the interpersonal relationship with the baristas, sure, but also, even as you scale, I mean, the name on the cup, that's something that scales even as thousands and thousands of people come into the store.

Howard Schultz 49:08 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.

David Rosenthal 49:45 It's your free billboard-

Howard Schultz 49:46 Yeah

David Rosenthal 49:46 ... that people are proud of.

Howard Schultz 49:47 Perfect.

David Rosenthal 49:47 Wow.

Ben Gilbert 49:49 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.

David Rosenthal 50:10 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.

Ben Gilbert 50:28 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.

David Rosenthal 51:04 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.

Ben Gilbert 51:17 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.

David Rosenthal 51:29 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.

Ben Gilbert 51:47 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.

David Rosenthal 52:00 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.

Ben Gilbert 52:19 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.

David Rosenthal 52:34 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.

Ben Gilbert 52:50 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.

David Rosenthal 53:06 So, uh, in this era, I mean, you must just be getting more and more excited every day.

Howard Schultz 53:12 Oh, I was out of my mind. [chuckles]

Ben Gilbert 53:14 So David, Howard sent me... There's a nineteen eighty-eight-- I can't believe this was filmed-

David Rosenthal 53:18 Yeah

Ben Gilbert 53:18 ... 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."

Howard Schultz 54:01 Mm-hmm.

Ben Gilbert 54:02 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-

Howard Schultz 54:16 Right, right

Ben Gilbert 54:17 ... 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.

Howard Schultz 54:42 That's what happened.

Ben Gilbert 54:43 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"?

Howard Schultz 55:07 There were regional competitors who were making noise about doing what we were aspiring to do.

Ben Gilbert 55:15 Mm-hmm.

Howard Schultz 55:15 And I was very mindful because one of them was franchising, and that was Gloria Jeans out of Chicago.

Ben Gilbert 55:22 Hmm.

Howard Schultz 55:23 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.

Ben Gilbert 55:32 Because Chicago was the first market outside of Seattle and Vancouver, right?

Howard Schultz 55:36 Yes.

Ben Gilbert 55:36 Even before L.A.

Howard Schultz 55:37 Yeah, and it didn't work right away.

Ben Gilbert 55:38 Huh.

Howard Schultz 55:39 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.

Ben Gilbert 56:17 Yeah, so I have in my script here, this is literally labeled the, uh, H2O era, and-

Howard Schultz 56:21 Yeah

Ben Gilbert 56:22 ... 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.

Howard Schultz 56:45 Okay.

Ben Gilbert 56:45 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.

Howard Schultz 57:06 No, he was the adult in the room.

Ben Gilbert 57:08 Hmm.

Howard Schultz 57:09 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."

Ben Gilbert 57:25 Hmm.

Howard Schultz 57:25 And we listened, more or less. [laughing]

Ben Gilbert 57:29 [laughing] And is it true that the three of you had, uh, dinner every Monday night for a decade?

Howard Schultz 57:35 More or less, that is true. M- sometimes more than once if we had a crisis or two, which [chuckles] generally we did, or we had a disagreement.

Ben Gilbert 57:43 Hmm.

Howard Schultz 57:43 There's a lot of creative conflict, especially between Howard and I-

Ben Gilbert 57:47 Hmm

Howard Schultz 57:48 ... because he had to operate what we were trying to do, and at times, he thought we were growing too fast or ahead of the resources.

Ben Gilbert 57:56 Hmm, because he was basically training all these operators, the, the, the sort of management fleet of the company.

Howard Schultz 58:03 Yeah, he was building the operating system for us to be able to open the store, design the stores, which more or less I had done, build them, operate them, train them, and create the system to handle the flow of customers. So he, he- his job-

Ben Gilbert 58:18 Big job

Howard Schultz 58:18 ... was much harder than mine.

Ben Gilbert 58:20 Speaking of system, what did your technology look like at this point?

Howard Schultz 58:23 Oh-

Ben Gilbert 58:24 Don't embarrass him. [chuckles]

Howard Schultz 58:25 No, we had... There was no, there was no technology. No.

Ben Gilbert 58:29 Were you running, like, a Oracle system?

Howard Schultz 58:32 Not at that time, no.

Ben Gilbert 58:33 Wow!

Howard Schultz 58:33 No.

Ben Gilbert 58:34 We're talking paper?

Howard Schultz 58:35 It was mostly manual.

Ben Gilbert 58:36 Wow.

Howard Schultz 58:37 Yeah.

Ben Gilbert 58:37 I mean, the- eventually, when they did get point-of-sale terminals, they were DOS-based all the way through-

Howard Schultz 58:43 Yes, yes

Ben Gilbert 58:43 ... like, 2008, right?

Howard Schultz 58:44 Yes, yes.

Ben Gilbert 58:45 Like, the iPhone was out, and you guys had DOS-based point-of-sale systems.

Howard Schultz 58:49 Sounds right.

Ben Gilbert 58:50 But obviously, technology would play-

Howard Schultz 58:51 Technology was not the secret sauce of Starbucks. [laughing]

Ben Gilbert 58:53 I'm, I'm foreshadowing here of the future of the company.

Howard Schultz 58:55 Yeah.

Ben Gilbert 58:56 Yeah.

58:56 So let's take it forward from this '８８, '８９, '９０. The first market after Chicago, after you sort of righted that ship, that you decide to enter on the West Coast-

Howard Schultz 59:05 L.A

Ben Gilbert 59:05 ... is L.A.

Howard Schultz 59:06 That's the big fight between Howard and I.

Ben Gilbert 59:09 I don't think I realized it was a big fight.

Howard Schultz 59:10 I just felt in my bones we had to go to, to L.A. And-

Ben Gilbert 59:14 Why?

Howard Schultz 59:15 And he said, "We're not ready for L.A. We're going to San Diego." I said, "San Diego?"

Ben Gilbert 59:20 Triple A.

Howard Schultz 59:20 "Who's in San Diego? No, we're not going to San Diego. We're going to L.A., and I've got the location."

Ben Gilbert 59:25 You wanted to play in the majors.

Howard Schultz 59:26 Yeah. So we had a meeting about it, and it, it, it erupted, erupted into a bad, a bad scene, and, uh, one thing led to another. We, we did go to L.A.

Ben Gilbert 59:41 I'm shocked.

Howard Schultz 59:42 [chuckles] We did go to L.A., and it was fine.

Ben Gilbert 59:45 And w- your conviction of, "We have to go to L.A."-

Howard Schultz 59:47 I just went out-

Ben Gilbert 59:48 Was that for-

Howard Schultz 59:49 I... The equity of the brand-

Ben Gilbert 59:50 Yeah

Howard Schultz 59:51 ... I could see, I could envision the warm weather and everyone walking around with our cups, and the media and the celebrities and just the iconic way, and there was nothing in the market, nothing at all, that even appeared to be in the business that we were in.

Ben Gilbert 1:00:07 Hmm.

Howard Schultz 1:00:07 And anyone who was doing it was not doing it well. We had to go, and even though we maybe were not ready, we just had to do it, and we did. And I think Howard would agree today that that ended up being a, the right decision. And L.A., the halo on Starbucks from Seattle to Vancouver and Chicago was nothing. When we went to L.A., it just exploded because celebrities embraced Starbucks.

Ben Gilbert 1:00:36 Was there an intentional strategy to, uh, create sort of a luxury brand out of Starbucks, that, like, the cool people were carrying the Starbucks cup?

Howard Schultz 1:00:45 No.

Ben Gilbert 1:00:45 It might be a little bit expensive, but you can afford it.

Howard Schultz 1:00:48 ...No, there was no-- I can never remember a discussion about segmentation of the brand, because we, we wanted Starbucks to be accessible to all. You'd have a CEO of a company, and the person behind him was a blue-collar truck driver, because everyone could afford the affordable luxury of Starbucks at the time.

Ben Gilbert 1:01:11 When you say affordable luxury, what about it was luxury?

Howard Schultz 1:01:15 The quality of the coffee-

Ben Gilbert 1:01:16 Mm-hmm.

Howard Schultz 1:01:16 -the experience-

Ben Gilbert 1:01:18 Mm-hmm.

Howard Schultz 1:01:19 -and what it felt like to walk around with that cup at the time. It was a badge. It was like you were in the know.

Ben Gilbert 1:01:27 Yeah.

Howard Schultz 1:01:28 It wasn't a badge of luxury. It was just like something new.

Ben Gilbert 1:01:33 So it became a trope for decades now that, you know, it's, "Oh, it's a six dollar latte or an eight dollar latte or te-" Where does that come from? In your mind, is Starbucks premium priced? Is there actually a Starbucks gets to charge a little bit more because the brand has more cachet, or is that just completely a farce or myth?

Howard Schultz 1:01:55 I think the pricing of Starbucks was directly linked to the economic model that I alluded to earlier, and the rising costs of labor, rent, and the fiduciary responsibility that we all felt to achieving the promise we had to our shareholders. And now we're talking about as a public company. There certainly was a fair amount of discussion all the time about the sensitivity of the price points.

Ben Gilbert 1:02:27 Mm.

Howard Schultz 1:02:28 And I think in later years, maybe in the last couple of years, given the consumer inflationary time, I think it's become a bit of a, of a problem. And certainly, I've always said, as Starbucks was growing, that the ubiquity of Starbucks was an enemy to the company.

Ben Gilbert 1:02:52 Mm.

Howard Schultz 1:02:52 And the challenge was we have to figure out a way to ensure the fact that we are getting smaller as we're getting bigger. And specifically, how do we maintain intimacy and the currency of trust with our customers and our people? That unto itself is kinda the capsule of making sure that the growth doesn't become so intoxicating and so seductive that we lose sight of the really secret of the company, which was the internal culture and values, which built the brand and built a relationship with the customer.

David Rosenthal 1:03:28 Yeah. Can you tell us about the people? This is such a huge-

Howard Schultz 1:03:32 Yeah

David Rosenthal 1:03:32 ...pillar to our minds of building Starbucks.

Howard Schultz 1:03:35 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.

Ben Gilbert 1:05:51 I mean, the, the healthcare for part-time workers.

Howard Schultz 1:05:54 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.

Ben Gilbert 1:06:16 Do you want the stats on that initial employee stock grant?

Howard Schultz 1:06:21 I'd love to hear it.

Ben Gilbert 1:06:22 So the program was called Bean Stock.

Howard Schultz 1:06:25 Yeah.

Ben Gilbert 1:06:25 Listeners, that, uh-

Howard Schultz 1:06:26 Another great name

Ben Gilbert 1:06:26 ...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.

Howard Schultz 1:07:27 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.

David Rosenthal 1:07:39 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.

Howard Schultz 1:07:55 Costco, right.

David Rosenthal 1:07:56 And how you treat your people, specifically.

Howard Schultz 1:07:59 Mm-hmm. That's not by accident.

Ben Gilbert 1:08:01 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.

Howard Schultz 1:08:16 Yeah.

Ben Gilbert 1:08:16 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?

Howard Schultz 1:08:30 Do you know the answer to that? That's why I asked-

Ben Gilbert 1:08:32 I actually don't.

David Rosenthal 1:08:32 No, we don't know the answer.

Ben Gilbert 1:08:33 I assume the answer to this, but I don't know it.

Howard Schultz 1:08:35 First, Jeff Brotman invested in Starbucks in the round to buy Starbucks.

David Rosenthal 1:08:41 No way! [chuckles]

Howard Schultz 1:08:42 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-

David Rosenthal 1:09:17 [chuckles]

Howard Schultz 1:09:17 ... "No effing way!"

David Rosenthal 1:09:20 Wow.

Howard Schultz 1:09:21 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.

Ben Gilbert 1:09:55 You sold beans-

Howard Schultz 1:09:56 We sold beans.

Ben Gilbert 1:09:57 -in Costco.

Howard Schultz 1:09:58 Yes.

Ben Gilbert 1:09:58 And that brand awareness of, "I buy Starbucks beans at home," meant that that group of people went to the stores more often.

David Rosenthal 1:10:05 Coffee bar business.

Howard Schultz 1:10:05 Because we, we introduced thousands of beverage customers to Costco through the beans.

David Rosenthal 1:10:13 Wow!

Howard Schultz 1:10:13 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.

Ben Gilbert 1:10:24 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.

Howard Schultz 1:11:08 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.

Ben Gilbert 1:11:58 Right.

Howard Schultz 1:11:58 And we were then going back to our core business in new channels of distribution.

Ben Gilbert 1:12:03 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.

Howard Schultz 1:12:18 I don't know what our cost of customer acquisition was back then, but it was low.

Ben Gilbert 1:12:23 Well, you also did-

David Rosenthal 1:12:23 Well, you weren't spending any money on marketing, so [chuckles]

Ben Gilbert 1:12:25 But United Airlines was paying you for coffee, I assume. I don't know exactly how-

Howard Schultz 1:12:29 Yeah, they were

Ben Gilbert 1:12:30 ... the deal went down, but yeah-

Howard Schultz 1:12:30 Yeah, they were

Ben Gilbert 1:12:31 ... they're, they're, um, I have to assume the Barnes & Noble-

Howard Schultz 1:12:33 Barnes & Noble was-

Ben Gilbert 1:12:34 -basically the same thing.

Howard Schultz 1:12:35 Barnes & Noble was a different deal. I met Len Riggio, the founder of Barnes & Noble. Very interesting guy, very smart guy, great merchant, and we just started talking. He was from Brooklyn. I was from Brooklyn. We had a natural-

Ben Gilbert 1:12:48 Mm

Howard Schultz 1:12:49 ... kind of relationship, and I said, "What do you think about us opening Starbucks inside Barnes & Noble, given you are the ultimate third place, is what we are?" And it just, again, became a natural extension of our stores.

David Rosenthal 1:13:03 We have a fun, uh, piece of trivia that you may know, uh, related to Costco.

Ben Gilbert 1:13:07 ... Do you know where Jeff Bezos and Jim Sinegal met for the first time?

Howard Schultz 1:13:14 Sounds like in a Costco.

Ben Gilbert 1:13:15 Not in a Costco, in the Starbucks in the Barnes & Noble in Bellevue. [chuckles]

Howard Schultz 1:13:20 Did not know that. [laughing]

Ben Gilbert 1:13:21 And that, you know, led to so many things, Amazon Prime among them.

1:13:25 Yeah.

Howard Schultz 1:13:25 Did not know that. And I still am friendly with Jim Sinegal today.

Ben Gilbert 1:13:30 I mean, y- your companies rhyme in so many ways.

Howard Schultz 1:13:33 Mm.

Ben Gilbert 1:13:33 I- it's, it's, uh... That's not surprising at all.

Howard Schultz 1:13:37 Yeah.

Ben Gilbert 1:13:37 I wanna talk a little bit, um, before we get to the IPO here, about what the strategy was when you expanded market by market. Did you try to sprinkle a few stores in and see? Did you try to move into a market with force and be the dominant coffeehouse chain in that city? Uh, and in particular, it, it could be worth talking about Boston.

Howard Schultz 1:13:57 Well, Boston's an anomaly because of the acquisition, but, and Behar was so strident in not expanding to multiple markets at once.

Ben Gilbert 1:14:06 Hmm.

Howard Schultz 1:14:06 And he was 100% right, and so we didn't- We went to Chicago, went to LA-

Ben Gilbert 1:14:13 Mm-hmm

Howard Schultz 1:14:13 ... and we stayed there for quite a while. Went to Portland. Uh, we weren't ready for New York City in terms of the issues there, and but we were very diligent.

Ben Gilbert 1:14:23 You went to DC first before New York City.

Howard Schultz 1:14:25 Went to DC. We were not expanding to multiple markets until we had enough evidence in the existing market that we had success, and we weren't gonna compound the growth in another market with problems that we were having in the existing one.

Ben Gilbert 1:14:40 Hmm.

Howard Schultz 1:14:40 And I think that's all Behar, 'cause he was, he was the managing all the operations. Boston was very different. We had a very strong, high-quality competitor called The Coffee Connection in Boston, with a owner-operator in George Howell, who was not unlike Alfred Peet, kind of a gospel of coffee culture on the East Coast. And we knew Boston was gonna be tough for Starbucks to enter. We also had Dunkin' Donuts there.

Ben Gilbert 1:15:12 Like, a lot of the good real estate was taken by The Coffee Connection-

Howard Schultz 1:15:15 Yeah

Ben Gilbert 1:15:15 ... right?

Howard Schultz 1:15:15 Yeah, and so George and I never saw eye to eye, and but it was clear that if we came to Boston in a significant way, we were gonna impact his business. And, uh, I think to his credit, he was willing to sell. So Coffee Connection was the first acquisition, and we, we had to tread very lightly after the acquisition because of the loyalty-

Ben Gilbert 1:15:40 Mm

Howard Schultz 1:15:40 ... and be careful with the name and, and, uh, you know, solicit George's help and advice, and also, w- we needed him to kind of validate for us what we were trying to do.

Ben Gilbert 1:15:50 Hmm.

Howard Schultz 1:15:51 And ultimately, it ended up being a very good strategy.

Ben Gilbert 1:15:55 Well, it seemed like... I think the numbers are, it was, uh, it's a little bit after IPO in, in '94, $23 million. They had 23 locations, and they were doing 16 million a year in revenue. So if you just look at, like, the purchase-

Howard Schultz 1:16:07 I think it was one-time sales. I think w-

Ben Gilbert 1:16:09 Or maybe a little over-

Howard Schultz 1:16:10 Yeah

Ben Gilbert 1:16:10 ... one-time sales. And the original Starbucks, ironically enough, was ex- exactly at one-time sales, right?

Howard Schultz 1:16:15 Yeah.

Ben Gilbert 1:16:15 That's what you bought it from the-

Howard Schultz 1:16:16 Yeah

Ben Gilbert 1:16:16 ... the founders for. If they had the lock on all the best real estate, and they had burned all the capital figuring out, you know, what stores we should be in, what stores we shouldn't be in, and then you just get to, like, move into that market for one-time sales, you know, 1.5, whatever it is-

Howard Schultz 1:16:30 Yeah

Ben Gilbert 1:16:30 ... uh, with all that already figured out, that's, that's pretty amazing.

Howard Schultz 1:16:33 It probably seemed high at the time, though.

Ben Gilbert 1:16:35 I'm sure it did. [chuckles] Well, isn't that the thing about valuations? And, uh, they, they always... It always seemed like in the good old days, you know, everything was undervalued and-

Howard Schultz 1:16:42 Yeah.

Ben Gilbert 1:16:43 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.

Howard Schultz 1:16:55 I thought so.

Ben Gilbert 1:16:55 There was no-

Howard Schultz 1:16:56 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.

Ben Gilbert 1:17:24 Hmm.

Howard Schultz 1:17:25 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.

Ben Gilbert 1:17:32 And what was the revenue at the time?

Howard Schultz 1:17:34 Oh, God! [chuckles] Well, I don't remember exactly. I know what the market cap was the day we went public.

Ben Gilbert 1:17:41 I think, uh, you d- you ended up doing 93 million that year-

Howard Schultz 1:17:44 Yeah

Ben Gilbert 1:17:45 ... but the, the year before, you know, was 50 million or something like that.

Howard Schultz 1:17:48 Yeah.

Ben Gilbert 1:17:48 Like, you know, companies went public when they were smaller-

Howard Schultz 1:17:51 Yeah

Ben Gilbert 1:17:51 ... back then, but-

Howard Schultz 1:17:52 Well-

Ben Gilbert 1:17:52 But you were a small cap IPO.

Howard Schultz 1:17:54 Yeah, we were, and, you know, we got turned down by Goldman Sachs. You know that?

Ben Gilbert 1:17:56 [chuckles] I did not know that.

Howard Schultz 1:17:59 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.

Ben Gilbert 1:18:08 It would be a very Starbucks thing for Goldman Sachs to be the, the lead left.

Howard Schultz 1:18:12 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."

Ben Gilbert 1:18:28 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.

Howard Schultz 1:18:38 Well, I was considering it because [chuckles] Goldman Sachs-

Ben Gilbert 1:18:39 Because they told you, you- [laughing]

Howard Schultz 1:18:40 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?

Ben Gilbert 1:18:59 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.

David Rosenthal 1:19:15 Yeah.

Ben Gilbert 1:19:15 There's like, there's literally no public companies like yours.

David Rosenthal 1:19:17 You have a huge, you know, investor education problem, right?

Howard Schultz 1:19:19 Yeah, I think we had to take them through everything. We had the product there. You know, we, we served coffee. I, you know, gave them the whole show. We had a short video that was probably in black and white. The comp always was a restaurant, and I was always fighting. We're not a restaurant. We're a hybrid retailer. I never referred to us as a cafe. It was always a store.

Ben Gilbert 1:19:40 Hmm.

Howard Schultz 1:19:40 We are a store. We are merchants.

Ben Gilbert 1:19:43 Fascinating. I mean, I go there and eat m- many, many meals [chuckles] sitting in your store.

Howard Schultz 1:19:49 Yeah, well-

David Rosenthal 1:19:50 But, but as we've been talking about, I mean, the economics, you were a store.

Howard Schultz 1:19:52 We were a store!

Ben Gilbert 1:19:53 Hmm.

Howard Schultz 1:19:53 We were a retail store.

Ben Gilbert 1:19:54 So Howard, I'm gonna take us through the IPO. Uh, you know, you're the first publicly traded coffee company. Uh, you do- end up doing $93 million in, in revenue that year. Do you remember the, the exact price-

Howard Schultz 1:20:05 Yes

Ben Gilbert 1:20:05 ... that you IPO'd at?

Howard Schultz 1:20:05 I mean, we were- we went out at $17, and the price was $21. The market cap, I think, was $250 million.

Ben Gilbert 1:20:13 Can you imagine today a $250 million-

Howard Schultz 1:20:16 No

Ben Gilbert 1:20:16 ... market cap company going public?

Howard Schultz 1:20:17 No.

Ben Gilbert 1:20:17 And people considering that a success. I mean, this is a great-

Howard Schultz 1:20:19 No, at the time.

Ben Gilbert 1:20:20 For your employees, how, how crazy is that? What, 12, 18 months before-

Howard Schultz 1:20:24 Yeah

Ben Gilbert 1:20:24 ... they, I guess 12 months before-

Howard Schultz 1:20:26 Uh, it was... Yeah

Ben Gilbert 1:20:27 ... hit six bucks a share.

Howard Schultz 1:20:28 They tripled their money. Yeah.

Ben Gilbert 1:20:30 Fantastic for-

Howard Schultz 1:20:31 Yeah

Ben Gilbert 1:20:31 ... well, a- and that was when you started calling them partners, right? When they became-

Howard Schultz 1:20:34 '91.

Ben Gilbert 1:20:34 Partners in the business.

Howard Schultz 1:20:35 As soon as bean stock was instituted, it was everyone was a partner. And then-

Ben Gilbert 1:20:38 And is that when you did the lowercase-

Howard Schultz 1:20:39 Yeah

Ben Gilbert 1:20:39 ... when titles all became lowercase also?

Howard Schultz 1:20:40 No, everyone was lowercase from the beginning.

Ben Gilbert 1:20:42 Oh.

Howard Schultz 1:20:43 Out of respect, everyone's lowercase.

Ben Gilbert 1:20:45 Listeners, when you, um, when you look up a Starbucks employee on LinkedIn, it always looks like... Is that, is that a typo?

David Rosenthal 1:20:51 Is that a mistake? Yeah.

Ben Gilbert 1:20:51 And then you realize there's a pattern.

Howard Schultz 1:20:53 Everyone-

Ben Gilbert 1:20:53 All employees always-

Howard Schultz 1:20:55 Yeah

Ben Gilbert 1:20:55 ... put lowercase titles. So another interesting thing about the, uh... I was reading the S-1 last night. The management team, inclusive of you, owned 18%, but only 9 to 10% of that was you personally. So the rest of the management team owned just as much as you did as the founder.

Howard Schultz 1:21:15 Yeah. Yeah.

Ben Gilbert 1:21:16 That does feel unusually high. Do you think that that played a role in sort of getting people's buy-in and getting them to bleed Starbucks as much as you did?

Howard Schultz 1:21:28 Not, not intentionally, no.

Ben Gilbert 1:21:29 Okay, not a strategy.

Howard Schultz 1:21:30 No. No, that was not, not a strategy.

Ben Gilbert 1:21:32 Interesting. So then from there, you open in Washington, D.C., on the East Coast. I think that the reason you picked D.C. was because your mail order business was strong there, so you sort of had-

Howard Schultz 1:21:43 Yeah

Ben Gilbert 1:21:43 ... proprietary data to know that that was gonna be a good coffee city?

Howard Schultz 1:21:46 I, I don't know how you found that out, but that's accurate.

Ben Gilbert 1:21:48 In 1995, you crossed 500 stores. Uh, you had just bought the Coffee Connection, as we talked about in Boston, and, uh, they had one asset that was perhaps much more valuable than any of the real estate or any of the, uh, sales that you would generate from there. They owned the trademark on the word Frappuccino.

Howard Schultz 1:22:07 And I'm so smart- [laughing] ... that I looked at that Frappuccino with disdain.

Ben Gilbert 1:22:13 Really?

Howard Schultz 1:22:14 I didn't like the name. I didn't like the beverage. I, I didn't think it was appropriate for Starbucks, and because I, I just, you know, I just saw Starbucks as such a purity with, with regard to coffee, and, uh, I was wrong. Dead wrong, obviously.

David Rosenthal 1:22:29 Putting myself in your shoes back then, now Starbucks and Frappuccino are like, uh, it's like a synonym. It's like you can't disentangle them. But yeah, it's very different than-

Howard Schultz 1:22:40 Completely different

David Rosenthal 1:22:41 ... coffee.

Howard Schultz 1:22:41 A blended cold drink. That was the first cold drink we've ever introduced. It was not a coffee-forward beverage. When we introduced it in Southern California, it was just... It went crazy.

David Rosenthal 1:22:52 So what changed your mind to green-light it?

Howard Schultz 1:22:55 I didn't have a choice. I mean, it w- it was... Coffee Connection had it, then we had it in Boston. People wanted it, uh, and I just went along.

Ben Gilbert 1:23:02 And you gu- you ended up, like, reformulating it, right?

Howard Schultz 1:23:04 We-

Ben Gilbert 1:23:04 It wasn't exactly what the Coffee-

Howard Schultz 1:23:05 A store manager in Santa Monica reformatted it, and she was on it. I think Howard Behar loved it. People in California loved it. There's a fantastic story about Frappuccino because of what we did with it, not in its existing form in retail, but what we ended up doing with it in terms of the leveraging the brand and distribution. That's a another great story.

David Rosenthal 1:23:29 Was that your first bottled drink in retail?

Howard Schultz 1:23:32 Yeah, yeah. So I went to Atlanta and Pepsi in the same day. I went-

Ben Gilbert 1:23:38 Uh, Atlanta being Coke.

Howard Schultz 1:23:39 I went to Coke- [chuckles] ... I went to Pepsi in the same day. The Coke meeting, uh, was a meeting, lasted less than 30 minutes. I can't, I can't remember who I met with. They dismissed me, uh, didn't view Starbucks as, as... Didn't understand what I was trying to do and didn't give me much time to even explain it. Uh, and then I went to Pepsi.

Ben Gilbert 1:24:01 And this is '95-ish?

Howard Schultz 1:24:02 Mid-'90s.

Ben Gilbert 1:24:03 So you have 500 stores. You're a public company.

Howard Schultz 1:24:04 Yeah, but, but no one... But in the East Coast, Starbucks wasn't really well-known.

Ben Gilbert 1:24:09 Hmm.

Howard Schultz 1:24:10 So I, I went to Pepsi in Purchase, New York, met Roger Enrico, the iconic CEO, and Craig Weatherup, the president of, of Pepsi. They loved the idea, and we started talking about this. Subsequently, Craig Weatherup I- and I, on a napkin, I swear, shook hands and created a multibillion-dollar business for Pepsi and Starbucks in a 50/50 JV on bottled Frappuccino, and Craig Weatherup deserves all the credit for that. And then Craig became a board member of Starbucks.

Ben Gilbert 1:24:43 Oh, wow.

Howard Schultz 1:24:45 And Roger and I were friends until his death-

Ben Gilbert 1:24:48 Wow

Howard Schultz 1:24:48 ... and served on the DreamWorks board together.

David Rosenthal 1:24:51 How did you find yourself at Coke and Pepsi pitching a bottled beverage?

Ben Gilbert 1:24:54 And was there an internal revolt? 'Cause I could imagine people saying, "This is a bridge too far."

Howard Schultz 1:24:58 I don't think people knew what I was even doing. I mean, I think maybe a few people... You know, I, I, I just had the thought: We gotta put this in a bottle. We have to put this in a bottle.

Ben Gilbert 1:25:07 And this product, if I'm remembering right, was so successful, the instant that it hit shores- store shelves-

Howard Schultz 1:25:13 We were-

Ben Gilbert 1:25:14 ... you had to pull it all off because you needed to, like-... create new manufacturing processes and spin up new factories in order to make enough to actually satisfy demand.

Howard Schultz 1:25:23 B- b- basically, correct, and we also, early on, had a recall where with- they found glass in the bottle. And Pepsi, to its credit, took all the blame for that and fixed it. But yeah, it was... From minute one, the, the power of Starbucks and bottled Frappuccino and doing something we had never-- no one-- it was no bottle of coffee, let alone... And, uh, again, just like the Costco story and the United Airlines story, the flywheel of the awareness and people drinking something they can enjoy at home or at work, again, it just created another, uh, level of velocity on the brand.

Ben Gilbert 1:26:07 I mean, the-- uh, just thinking about between the cups, but then United Airlines and Costco and the CPG products, there's gotta have been, like, fifty billion Starbucks logos printed.

Howard Schultz 1:26:20 I'm sure that was... Maybe more.

Ben Gilbert 1:26:22 I, I mean-

Howard Schultz 1:26:22 Maybe more.

Ben Gilbert 1:26:22 I'm just, I ma-

Howard Schultz 1:26:23 Yeah.

Ben Gilbert 1:26:23 I'm sure I could estimate-

Howard Schultz 1:26:24 Yeah

Ben Gilbert 1:26:24 ... it better another time, but-

Howard Schultz 1:26:25 Well, you can see where the, the, the, the, the size of the equity of the brand was much bigger than the size of the company. Much bigger!

Ben Gilbert 1:26:36 Right, 'cause at this point, you were like-

Howard Schultz 1:26:38 Yeah

Ben Gilbert 1:26:38 ... eight hundred stores?

Howard Schultz 1:26:39 Yeah, but then something else happened, and that is we wake up one day and someone says, "Starbucks is in a movie." And we said: "What movie?" "You've Got Mail." [chuckles]

Ben Gilbert 1:26:51 That wasn't coordinated?

Howard Schultz 1:26:52 First of all, Starbucks never paid for placement. Someone must have approved it. I, I knew nothing about it. And then someone said, "You've gotta see this movie. Starbucks is all over it." I said, "What movie?" [chuckles] "Tom Hanks, You've Got Mail with Meg Ryan." I, I knew nothing about it. It was just another thing where it was just like a little fairy dust on the brand. David Rosenthal: Did you know that it was, like, the good old days, where you're like, "This is just like..." We were so in the mud, we were so in it, that we didn't have a t-- we didn't have time to look up, and we were just running so fast, so hard. When you're growing at this pace, it's almost virtually impossible to catch the growth in terms of the infrastructure. And so you're constantly back and forth, trying to create that fragile balance between the seductive nature and the intoxication of growth and success and the foundation necessary to support it, and not falling too far behind where you lose it. But you never are in a position, at least we were never in a position, where we were ahead of it. Never. And so there was a constant push, and I think this is where Orin was the wise man in the room to say, "Howard, that's-- we just can't do that now. Just, we don't have the infrastructure. We don't have the people. We don't have the systems."

Ben Gilbert 1:28:17 Mm.

Howard Schultz 1:28:18 And, you know, I'd be screaming, "We, we, we gotta do it. If, if we don't do it, someone else is gonna do it. We gotta do it!" And that takes us to international. We weren't ready for that.

Ben Gilbert 1:28:26 Yeah, so I wanna, uh-

Howard Schultz 1:28:27 [chuckles]

Ben Gilbert 1:28:28 ... uh, putting a bow on Frappuccino.

Howard Schultz 1:28:29 Yeah.

Ben Gilbert 1:28:29 The year after it launched in 1996, Frappuccinos were seven percent of revenue-

Howard Schultz 1:28:34 [chuckles]

Ben Gilbert 1:28:34 ... which I can attest to. Maybe freshman year of high school- David Rosenthal: Seven-year-old Ben is like- I had my first- David Rosenthal: "Hit me with that Frappuccino" ... tall mocha Frappuccino-

Howard Schultz 1:28:41 Oh!

Ben Gilbert 1:28:41 ... with whipped cream and a little chocolate drizzle on top.

Howard Schultz 1:28:43 [chuckles] Yeah.

Ben Gilbert 1:28:43 And, and, like, now here I am drinking... What are we drinking here? It's a, it-

Howard Schultz 1:28:46 You're drinking coffee from India.

Ben Gilbert 1:28:49 Yeah, and no-

Howard Schultz 1:28:49 And it's so good.

Ben Gilbert 1:28:50 No cream, no sugar.

Howard Schultz 1:28:51 No, no, only black.

Ben Gilbert 1:28:52 Yeah. And so, uh-

Howard Schultz 1:28:54 Sure

Ben Gilbert 1:28:54 ... 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.

Howard Schultz 1:29:11 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.

Ben Gilbert 1:29:27 Mm.

Howard Schultz 1:29:27 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?

Ben Gilbert 1:30:35 Aren't there some consultants you could possibly pay to help-

Howard Schultz 1:30:37 Yeah

Ben Gilbert 1:30:37 ... you know, this, uh-

Howard Schultz 1:30:38 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.

Ben Gilbert 1:31:22 It's like they've never met you.

Howard Schultz 1:31:23 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.

Ben Gilbert 1:31:47 Mm.

Howard Schultz 1:31:48 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.

Ben Gilbert 1:32:55 High risk, high reward.

David Rosenthal 1:32:56 Wow!

Howard Schultz 1:32:57 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.

Ben Gilbert 1:33:55 Why were there people lined up around the block? Why did it work so well instantly? Was it a strong co- coffee culture or-

Howard Schultz 1:34:03 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.

Ben Gilbert 1:34:31 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-

Howard Schultz 1:34:47 Mm-hmm

Ben Gilbert 1:34:48 ... there by nineteen ninety-six.

Howard Schultz 1:34:50 I honestly, I haven't thought about it in that way, but-

Ben Gilbert 1:34:52 That's so fast.

Howard Schultz 1:34:53 Yeah.

Ben Gilbert 1:34:53 I mean, to build something that-

Howard Schultz 1:34:55 Didn't seem fast to us.

Ben Gilbert 1:34:56 I bet.

David Rosenthal 1:34:57 The parallels to the Microsoft story are just, like, so apt. You know, Japan was Microsoft's first international market.

Howard Schultz 1:35:03 Did not know that.

David Rosenthal 1:35:03 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.

Ben Gilbert 1:35:22 And they stayed fifty percent international permanently after that.

David Rosenthal 1:35:25 And that's what took them-

Howard Schultz 1:35:26 Right

David Rosenthal 1:35:27 ... you know, from this Albuquerque to like, "Hey, we're international." All right, listeners, this is a great time to talk about one of our big partners here in season fourteen, ServiceNow.

Ben Gilbert 1:35:37 Yes. As you know, ServiceNow is the AI platform for the enterprise, helping to automate processes, improve service delivery, and increase efficiency. Over eighty-five percent of the Fortune five hundred runs on them, and they have quickly become one of the world's most important enterprise technology vendors.

David Rosenthal 1:35:54 Today, we wanna do a little case study on how ServiceNow works with another very well-known consumer brand, NASCAR. Little-known fact: NASCAR is a family-owned business. Even at today's scale, in their seventy-fifth year, they're continuing to innovate with events like their race through the streets of Chicago and growing with over one thousand NASCAR sanctioned events per year.

Ben Gilbert 1:36:16 Yep. The operations are mind-bending. I was looking into it. They move a huge part of the company and set up a new base of operations in a new city every week. The whole thing is like a roving circus that needs to build a festival from scratch while keeping consistent infrastructure to ensure that fans and teams have a seamless experience from race to race.

David Rosenthal 1:36:36 So how do you do that? Well, NASCAR has turned to ServiceNow to help it become one of the most innovative and technologically advanced organizations in the sports entertainment industry. With ServiceNow, they've been able to automate manual and outdated business processes and unify fragmented technology into a single platform. They've also been able to enable their employees to build low-code applications that can be speedily deployed to all employees without having big IT projects associated with it.

Ben Gilbert 1:37:04 Yeah, the NASCAR story is a classic one for ServiceNow. They first became a customer for the IT operations, but as they saw the power of the ServiceNow platform, they extended it into every corner of their business, from employee experience to app engine.

David Rosenthal 1:37:17 So if you wanna learn more about the ServiceNow platform and how it can turbocharge your business transformation and the time to deploy applications, including AI, for your business, go over to servicenow.com/acquired, and when you get in touch, just tell them Ben and David sent you.

Ben Gilbert 1:37:33 ... So Japan's ninety-six. In ninety-seven, you cross a thousand stores globally. You're getting your feet under you. You're saying, "Okay, international is gonna be a thing." Uh, in nineteen ninety-nine, you-

Howard Schultz 1:37:43 Two thousand stores.

Ben Gilbert 1:37:45 Two thousand stores.

Howard Schultz 1:37:46 'Cause we had a goal of two thousand by two thousand. We beat it by a year.

Ben Gilbert 1:37:49 Ah! Ninety-nine, you also open in Beijing. What's the calculus on entering China, and did you realize it could become such a pillar of the company like it is today?

Howard Schultz 1:38:01 I, I honestly don't think we had any real understanding of what we were getting into, and we went there with a partner that didn't work out. We, we-- I should tell you that we, we had a theory of the case that any international market that we opened that didn't speak English, we needed a partner. And so-

Ben Gilbert 1:38:24 Mm

Howard Schultz 1:38:24 ... Japan was a partner, successful. We entered in a partnership in China early on that was not successful, did not share our values, and we got out and ended up going-

Ben Gilbert 1:38:36 So you closed all the stores or was it even better?

Howard Schultz 1:38:37 No, no. We got, we got out of the partnership, bought 'em out, and became company-owned.

Ben Gilbert 1:38:41 And so you, the-

Howard Schultz 1:38:42 But we, but we-

Ben Gilbert 1:38:43 That was, that was legal to do that-

Howard Schultz 1:38:44 Yeah

Ben Gilbert 1:38:44 ... to be an American-owned company-

Howard Schultz 1:38:46 But we struggled

Ben Gilbert 1:38:47 ... operating in China.

Howard Schultz 1:38:47 Yeah, but we struggled in China for almost a decade. Lost money.

Ben Gilbert 1:38:52 Mm.

Howard Schultz 1:38:52 There was tremendous pressure inside the company to close China until Belinda Wong, maybe the most valuable person in the company, from my view.

Ben Gilbert 1:39:04 Really?

Howard Schultz 1:39:05 Yeah.

Ben Gilbert 1:39:06 When did Belinda get involved with Starbucks?

Howard Schultz 1:39:08 Belinda was working-- She started with Starbucks in Singapore, but she was working in Hong Kong. We were open in Hong Kong, and, uh, I, I saw something in her. She was just extraordinary operator and had a touch with people, and I said... And we were dying in China. We were really in trouble: "Would you come to China and run it?" And she said, "I would do-- I would consider doing that, uh, but you've got to decentralize it." And we couldn't do that right away. It was just too much. But she changed the course of history for Starbucks in China.

Ben Gilbert 1:39:46 What year was that, that she ca- that she took over the role?

Howard Schultz 1:39:50 I think it's about a decade after we opened.

Ben Gilbert 1:39:52 Okay. Well, I, I asked-

Howard Schultz 1:39:53 And she's still there today.

Ben Gilbert 1:39:54 I ask because I wanna come back to it. There's a whole interim, you know, between two thousand and, and two thousand and eight, where you are not the CEO of the company.

Howard Schultz 1:40:03 Right.

Ben Gilbert 1:40:03 So in two thousand... I mean, if, if, if you're, if you've been listening to this episode, the theme that should be occurring to you is, "Oh, my God, basically everything worked." And I know it didn't feel like that on the inside-

Howard Schultz 1:40:14 No, it didn't

Ben Gilbert 1:40:14 ... but, like, you read all those investment banking reports, and it's like: "Hey, Starbucks, uh, here's all these price targets for Starbucks, and here's what we think they're gonna do in earnings. And, oh, they beat it again!"

Howard Schultz 1:40:23 Mm.

Ben Gilbert 1:40:23 And, like, I don't know, thirty, forty quarters in a row, it's just like this, uh, I would say, perfectly predictable, except you actually kept exceeding the expectations.

Howard Schultz 1:40:32 Right.

Ben Gilbert 1:40:32 So it wasn't predictable, but-

Howard Schultz 1:40:33 I did a hundred quarterly conference calls- [chuckles]

Ben Gilbert 1:40:36 [chuckles]

Howard Schultz 1:40:37 - as CEO. A hundred.

Ben Gilbert 1:40:41 Yeah, that's a lot. I, I bet. That's a lot of earnings prep because each one of those has, what, two weeks before it of-

Howard Schultz 1:40:46 The truth is, the majority of those were no script, which became the le-- The lawyers took over after that, many years, but no script.

Ben Gilbert 1:40:54 Which is your preferred communication style.

Howard Schultz 1:40:57 It is.

Ben Gilbert 1:40:57 I mean, it seems like whenever I see you up speaking, there's-

Howard Schultz 1:40:59 No, it is

Ben Gilbert 1:40:59 ... there's no teleprompters. There's n-

Howard Schultz 1:41:00 Yeah

Ben Gilbert 1:41:00 ... it's from the heart. So at this point, I don't wanna say... It, it would be incorrect to say Starbucks is running itself, but, like, it's in a great place.

Howard Schultz 1:41:11 Right.

Ben Gilbert 1:41:12 And you step into the role of, is it executive chairman?

Howard Schultz 1:41:15 Yes.

Ben Gilbert 1:41:15 Chairman?

Howard Schultz 1:41:15 Executive chairman, with Orin as the CEO.

Ben Gilbert 1:41:17 In two thousand?

Howard Schultz 1:41:18 Yeah.

Ben Gilbert 1:41:19 What was your-

Howard Schultz 1:41:21 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.

Ben Gilbert 1:41:43 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-

Howard Schultz 1:41:59 Yes, yes

Ben Gilbert 1:42:00 ... um, in working with him. Um, what was that transition about?

Howard Schultz 1:42:05 Orin never wanted to be the CEO.

Ben Gilbert 1:42:08 Hmm.

Howard Schultz 1:42:08 He's not a front guy.

Ben Gilbert 1:42:09 Hmm.

Howard Schultz 1:42:11 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."

Ben Gilbert 1:42:23 Hmm.

Howard Schultz 1:42:24 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.

Ben Gilbert 1:43:00 And so how long had he been in that role of CEO?

Howard Schultz 1:43:04 I'd say less than three years, two years maybe.

Ben Gilbert 1:43:06 Okay. But basically, the, um, two thousand and eight happens, and-

Howard Schultz 1:43:11 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."

Ben Gilbert 1:43:34 ... And that wasn't, that was never your intent. When you stepped away, you thought you were really stepping away.

Howard Schultz 1:43:37 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-

Ben Gilbert 1:44:10 Yeah

Howard Schultz 1:44:10 ... almost at the same time. So we had so many things to talk about.

Ben Gilbert 1:44:14 Hmm.

Howard Schultz 1:44:14 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.

Ben Gilbert 1:44:25 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.

Howard Schultz 1:44:33 Okay, okay.

Ben Gilbert 1:44:33 But, uh, suffice to say, just to put some numbers on it, um, the market cap had dropped from thirty billion dollars to less than seven billion dollars. Same-store sales, the, the comparables number, when you compare the, the store this quarter last year to this quarter, you know, or this year to last year, um, had dropped. Growth began to slow, uh, and so you come in, and you have to make these really horrible decisions. You're faced with two terrible options, and you gotta make the right decisions for the business.

Howard Schultz 1:45:01 I, uh, first off, every rock I turned over was worse than I thought. There were a lot of underperforming stores that should have never been opened that we need to close. I think we closed a thousand stores, and I had a company-wide meeting. I remember it vividly 'cause I started crying and apologized to everybody that we gotta close stores, we gotta lay people off. And, I mean, just think about, you know, we were on a, a trajectory for all this time, and all of a sudden, we not only hit a speed bump, but the world, the music was just stopping. The stock price, I think, broke six dollars. I was so afraid that we were gonna get acquired, but the, the only cover we had is that the world was coming undone, so no one had any resources. But I was terrified. I just stood up and apologized and said: "We, we, we've let you down. I promise I'm gonna do my best, but we're trying to save the company." And literally, we were trying to save Starbucks. Things were that bad.

Ben Gilbert 1:46:02 You say that "we were trying to save Starbucks," and in my head, I always thought, "Well, it couldn't have been that bad. This is a big, successful company. It's fast-growing, it's profitable." And then I read you were seven months from being insolvent.

Howard Schultz 1:46:14 So we had, uh... we didn't have enough cash. Comps had-- we never had negative comps in the history of Starbucks, so negative, I didn't-

Ben Gilbert 1:46:22 Every single quarter was better than the twelve months before.

Howard Schultz 1:46:24 Yeah, never had a, never had a negative comp month in my history of, of the company. I didn't understand how we... I, I don't understand it, such an anomaly. So, um, we, we closed all those stores, and, um, then you gotta decide, okay, how do we, how do we turn it? What, what do we do? And I think going back to your line of questions in the past about the people is, of all the things that I could point to that demonstrates what Starbucks is, has been, and needs to be, it's the humanity and the people of the company. The company was built on being a performance-driven company through the lens of humanity. That's how it was built. And whenever we've lost our way, we've lost our way because people in power didn't understand that equation. And so I, I just said, "We need-- I, I, I need to be in front of every store manager. I need a meeting with ten thousand people."

Ben Gilbert 1:47:35 The big conference room.

Howard Schultz 1:47:37 And so in two thousand and eight, no American company was traveling, and so the municipalities were hungry for Starbucks to potentially have a meeting at a discount. And so we got-- we had Detroit come in, we had Houston come in, and then New Orleans came in. What they presented to us was the need for Starbucks to come as a result of Katrina. And when we heard that, we realized we've got to go to New Orleans, and in fact, what we're gonna do in New Orleans is we're gonna have one full day of fifty thousand hours of community service in the Ninth Ward. Next day, we, we walked through, and we built basically a tutorial on how to restore the business and have people walk through it, and we had classes, and we had all these things going on. And the third day was my speech in the basketball coliseum to ten thousand people. About an hour before, I was really feeling the burden of how important what I was gonna say is, and the CFO at the time, who subsequently resigned a week later, wasn't my guy, asked me what I'm gonna say, and I said: "I'm gonna tell them the truth." And he says, "You can't possibly do that. You're gonna scare the shit out of them." I went up there, and I laid it out chapter and verse. "I think we have seven months left. We are going to be insolvent."

Ben Gilbert 1:49:17 I can see why he was freaked out about this. [chuckles] Like, if word got out to Wall Street that you- [chuckles]

Howard Schultz 1:49:21 Yeah. Well, social media didn't exist at that time-

Ben Gilbert 1:49:23 Yeah

Howard Schultz 1:49:23 ... but I just laid it out. What if that store was the difference between the food on your table and its success? And then I had this economic formula of how many customers it would take per store to turn comps around, and the number was low.... It's like less than ten per day or eleven per day.

Ben Gilbert 1:49:45 Hmm.

Howard Schultz 1:49:46 And so I said, "Let's just talk about New Orleans. You know how many s- new incremental customers it'll take in your store?" And it's ma- it was manageable and tangible.

Ben Gilbert 1:49:58 Mm-hmm.

Howard Schultz 1:49:59 Anyway-

Ben Gilbert 1:50:00 Right, 'cause you could actually imagine, okay, if ten more people walk in the door today, and I delight them in a particular way that brings them back tomorrow, like, we're, we're turning this thing around-

Howard Schultz 1:50:10 Yeah

Ben Gilbert 1:50:10 ... or we're, we're turning this one store around.

Howard Schultz 1:50:11 Yeah.

Ben Gilbert 1:50:11 And if everybody does that-

Howard Schultz 1:50:13 Yeah, and, and the problem when you get this big is you start thinking about large numbers. But if you reduce it to the lowest, lowest common denominator, one store, one cup of coffee, one customer, one partner, and what if all of that works? Well, we rushed out of New Orleans like an effing tidal wave, and we never looked back, and in less than a year, it was turned.

Ben Gilbert 1:50:38 And you, you did crazy... I mean, the, the tactics involved in the turnaround, the-

Howard Schultz 1:50:42 We closed the stores.

Ben Gilbert 1:50:44 For what?

Howard Schultz 1:50:44 Yeah.

Ben Gilbert 1:50:44 Noon onward, right?

Howard Schultz 1:50:45 Yeah.

Ben Gilbert 1:50:45 For an entire afternoon and evening.

Howard Schultz 1:50:47 Be- because the previous administration had done things that diluted the integrity of coffee to maximize yield.

Ben Gilbert 1:50:59 W- like what? What does that mean?

Howard Schultz 1:51:01 Well, let's say you're making a batch of brewed coffee.

Ben Gilbert 1:51:04 Yep.

Howard Schultz 1:51:05 Well, what if that brewed coffee was based on a number of ounces of coffee? What if you just reduced it just a little bit? No one's gonna know.

Ben Gilbert 1:51:12 Hmm.

Howard Schultz 1:51:13 Just little things.

Ben Gilbert 1:51:14 Just-

Howard Schultz 1:51:14 Right

Ben Gilbert 1:51:15 ... little, little, 10,000 little-

David Rosenthal 1:51:16 Yeah, it sounds good in theory

Ben Gilbert 1:51:18 ... scratches of efficiency that-

Howard Schultz 1:51:19 Yeah

Ben Gilbert 1:51:19 ... dilute the experience.

Howard Schultz 1:51:21 Yeah.

Ben Gilbert 1:51:22 Huh.

David Rosenthal 1:51:22 But that does seem like a-- reflects a misunderstanding of the fundamental business, that this is a business about a store with high gross margins based on customer loyalty. [chuckles]

Howard Schultz 1:51:36 But we were beginning to face headwinds.

David Rosenthal 1:51:40 Mm-hmm.

Ben Gilbert 1:51:41 And what are the headwinds?

Howard Schultz 1:51:43 Headwinds were dilu- the level of attrition of customers.

David Rosenthal 1:51:47 Mm-hmm. As the financial climate deteriorated-

Howard Schultz 1:51:50 Yeah, yeah

David Rosenthal 1:51:50 ... spending that six dollars on the latte-

Howard Schultz 1:51:52 Yeah

David Rosenthal 1:51:53 ... your daily habit-

Howard Schultz 1:51:53 Yeah, yeah

David Rosenthal 1:51:54 ... gets harder to justify. [chuckles]

Howard Schultz 1:51:55 And we weren't as good as we, we were when we were smaller.

David Rosenthal 1:51:57 Mm, yeah, yeah. Then it makes it easier to give up.

Howard Schultz 1:51:59 And, and, and yeah, and this goes back to what I said earlier, growth covers up mistakes.

David Rosenthal 1:52:02 Mm-hmm.

Howard Schultz 1:52:03 And success breeds hubris, and it did.

Ben Gilbert 1:52:07 How could it not? I mean, how, how could you... Starbucks today is so fricking ubiquitous, which, again, is one of the things I love about it. It's consistent anywhere I travel in the world. I can count on it. I can mobile order and pay. There's all these wonderful things, but when you become like government-level scale in the world, people assume it's a piece of public infrastructure. I assume employees even must feel that way during some periods of time, of like, "We're so big-"

Howard Schultz 1:52:32 Yeah

Ben Gilbert 1:52:32 ... "we're just-"

Howard Schultz 1:52:32 But the, the worst thing that Starbucks could have become, and the worst thing that Starbucks could become, is a utility. Scale and ubiquity creates complexity. Complexity demands efficiency. But we are in a business where that touchpoint between the customer and the barista has to be protected and has to be elevated. Now, then you get stores that are so busy-

Ben Gilbert 1:53:03 Mm

Howard Schultz 1:53:03 ... where the barista can't even look up, can't look up, and then you get mobile order and pay, which we haven't even-

Ben Gilbert 1:53:09 Yeah

Howard Schultz 1:53:09 ... talked about.

Ben Gilbert 1:53:09 Which is, you know, uh, is, is pheno- I, a thing I love and do every day-

Howard Schultz 1:53:13 Right

Ben Gilbert 1:53:13 ... and depersonalizes the experience by definition.

Howard Schultz 1:53:15 Yes. Starbucks demands nurturance. It's, it's a, a company that has to be nurtured like a young child. That is an anomaly inconsistent with scale, and you get people coming into the company with different experience, different language. The immersion doesn't quite hit them in the heart or the soul or the conscience of the company. They, they feel like they're doing a good job, but it's not the job that's consistent with the integrity and heritage of what the company has been. Metaphorically, let's, let's say that's a giant reservoir.

David Rosenthal 1:53:52 Mm-hmm.

Howard Schultz 1:53:52 If you're taking a deposit on a consistent basis out of the reservoir, and it's getting dry, you better stop. You better make sure you're making a deposit, so they're equal, and it's balanced. When you get this, that's when the company loses the plot, and if you get this, and you're making a lot of money, and the stock price is high, people say, "It's okay. We're fine," and that's fool's gold. It's, it's a camouflage because eventually it's gonna bite you in the ass.

Ben Gilbert 1:54:25 Have you ever figured out a way to measure these things in a way that, like, as long as these numbers, that i- that the numbers are a direct tie to our values are good, we can actually put a KPI against them, we know that the core is solid?

Howard Schultz 1:54:41 I, I haven't been smart enough to figure that out, but, I mean, I think the interesting thing to me today is that the Asian business is operating at a much higher level of the soft side of Starbucks than we are in the US.

Ben Gilbert 1:55:01 Hmm.

Howard Schultz 1:55:02 And I've been-

Ben Gilbert 1:55:04 Now I understand your Belinda Wong comment.

Howard Schultz 1:55:06 That doesn't answer your question about quantifying it. But when I am in Asia, I see things that are very elevated to the brand that speak to the financial performance of those markets, which are very high.

Ben Gilbert 1:55:22 Okay, before we get to today, I wanna talk about some other things that happened in 2008. 2008 was a big year.

Howard Schultz 1:55:28 Yeah.

Ben Gilbert 1:55:28 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-

Howard Schultz 1:55:40 I don't know how we did that.

Ben Gilbert 1:55:41 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-

Howard Schultz 1:55:52 Yeah

Ben Gilbert 1:55:52 - around this point in time, too.

Howard Schultz 1:55:53 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.

Ben Gilbert 1:56:04 And you're, uh, cycling with Michael Dell.

Howard Schultz 1:56:06 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-

Ben Gilbert 1:56:15 It's a pretty good Hawaii crew, okay?

Howard Schultz 1:56:17 So I get back, and, um, Adam Brotman, who's a key n- person in all this in terms of mobile order and pay.

Ben Gilbert 1:56:26 Yeah. He ran digital for Starbucks for a long time.

Howard Schultz 1:56:28 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?

Ben Gilbert 1:57:00 This is-

1:57:01 Yeah, of course

1:57:01 ... infinite loop at their old campus?

Howard Schultz 1:57:02 Yeah, yeah.

Ben Gilbert 1:57:03 Yeah.

Howard Schultz 1:57:03 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.

Ben Gilbert 1:57:46 Your whole leadership team turned over after?

Howard Schultz 1:57:48 Yes, they were all gone.

Ben Gilbert 1:57:51 Wow.

Howard Schultz 1:57:51 That's the story about Steve Jobs.

Ben Gilbert 1:57:53 Wow.

1:57:53 What a coincidence.

1:57:53 Did you ever call him back and tell him?

Howard Schultz 1:57:55 Oh, I talked to him since then-

Ben Gilbert 1:57:55 Yeah

Howard Schultz 1:57:55 ... 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]

Ben Gilbert 1:58:05 Of course. All right, well-

Howard Schultz 1:58:07 That's that story.

Ben Gilbert 1:58:08 So while we're in technology land then, um, I think today thirty-three percent of Starbucks orders are done with mobile order and pay, so obviously this, you know, huge pillar of, of Starbucks as it exists in our world. How did that start?

Howard Schultz 1:58:25 Yeah.

Ben Gilbert 1:58:25 Yeah. You had been on pen and paper, then you moved to DOS-

Howard Schultz 1:58:29 That's right

Ben Gilbert 1:58:29 ... and now you have the most-

Howard Schultz 1:58:30 Yeah

Ben Gilbert 1:58:31 ... sophisticated technology platform of probably any retailer in the world.

Howard Schultz 1:58:34 At the time. So you're talking to a non-tech person, so I'm not f- I'm not focused on anything other than the customer experience.

Ben Gilbert 1:58:42 Yep.

Howard Schultz 1:58:43 Uh, Adam Brotman, to his credit, along with Steven Gillette, who's-- who was at Starbucks very shortly, came to us with the idea of building a mobile app. I didn't even know what it was, what he w- I, honestly, we're in a meeting, I'm, I'm trying to figure out what, what are you actually talking about? How are they gonna do that? They created-

Ben Gilbert 1:59:07 And apps at this point, I mean, if it came out in two thousand and nine, which was the first version, the iOS SDK came out in-

1:59:15 Summer two thousand eight

1:59:15 ... summer two thousand eight. So it's like, you know-

Howard Schultz 1:59:17 Early

Ben Gilbert 1:59:18 ... you're one of the very f- if they're having this idea and bringing it to you, it's, like, months after apps exist.

Howard Schultz 1:59:24 Well, they're, they get complete credit for assembling the pieces of all this, convincing us to fund it, and we were off and running. I don't think any of us, honestly, for myself, really knew what they were actually going to create. They explained it to us, but I didn't really-- I didn't get it until I saw it, and then, holy shit, overnight, it was just an unbelievable new vehicle. Now, if we fast-forward, I don't know if you want to do that here, on what it's become-

Ben Gilbert 2:00:05 Yeah

Howard Schultz 2:00:05 ... it is the biggest Achilles heel for Starbucks.

Ben Gilbert 2:00:11 Really?

Howard Schultz 2:00:13 And it's not even a close second. And so the mobile app created unbelievable convenience for our customers, but remember, we are an experiential brand, and so as this thing was growing, there was never an opportunity because it, it, it, it became so seductive for the company.

Ben Gilbert 2:00:45 It also created a even better business model for you, right? It was more efficient, and you get the float [chuckles] with-

Howard Schultz 2:00:50 Yeah

Ben Gilbert 2:00:51 ... with customer funds.

Howard Schultz 2:00:52 All, all that is true, but at, but it was beginning to deteriorate-

Ben Gilbert 2:00:56 Yeah

Howard Schultz 2:00:57 ... at a rapid rate, the ex-- the third place experience and the sense of community, and then it became... It overflowed to the point where it disproportionately created an environment in our stores where the mobile app became the primary vehicle, as well as the primary vehicle for dissatisfaction.

Ben Gilbert 2:01:22 Mm.

Howard Schultz 2:01:23 Because people couldn't get their drink on time. People were confused whether that was their drink. A lot of anxiety, and the, the thing I remember the most is that we were in Chicago at eight AM because people wanted to show me the problem, and so everyone is getting off the loop, the train, at eight AM, and everyone who ordered on their app, it says the same thing: "Your drink's gonna be ready in seven minutes." And everyone shows up, and all of a sudden, we got a mosh pit.... and that's not Starbucks. And so the company did not do a good job of anticipating the technological refinements that needed to be put in place to avoid what was happening. And I wanna be fair to everyone who's managed the company. For about a five-year period-- Remember, I haven't-- I wasn't involved in the company from basically 2018 to 2022.

David Rosenthal 2:02:26 Yep.

Howard Schultz 2:02:27 I, not a-- I wasn't, I was not involved.

Ben Gilbert 2:02:29 You stayed CEO from 2008 until 2017.

Howard Schultz 2:02:33 Then I left, and, um, there were no bad people, and no one had bad intentions, but the heritage and tradition of what I've described, which is so vital to the nurturance, was lost.

David Rosenthal 2:02:48 Well, it must have been. It was so seductive.

Howard Schultz 2:02:50 Yeah, the stock-- we were-

David Rosenthal 2:02:50 How-

Howard Schultz 2:02:50 ... the stock was at record high, and the company was not investing ahead of the curve and not paying attention to the velocity of the mobile app and what it was becoming until it was too late. And now the, and the company has that problem today, which they will solve, but it's, it's late. And also, s- everyone has caught up to... We, you know, we were the only game in town, and, and the novelty of that and the uniqueness of it, especially for our product-

David Rosenthal 2:03:20 Mm-hmm. Mm.

Howard Schultz 2:03:21 -and everyone pretty much copied it.

Ben Gilbert 2:03:24 It is interesting to... David keeps saying it's so seductive. To put some numbers for listeners wondering, you know, w- why is the mobile app such an interesting thing? David pointed out the float. So, of course, uh, if you look at Starbucks', uh, financial statements, right now, at any given time, there's about one point eight billion dollars of cash that Starbucks has gotten in the form, effectively of, as an advance-

Howard Schultz 2:03:44 Mm

Ben Gilbert 2:03:44 ... from customers, that Starbucks can use to operate. It's like this amazing-

David Rosenthal 2:03:48 Invest that in growth, capital, you know, store expansion, et cetera, et cetera.

Ben Gilbert 2:03:51 Right. Uh, so it's-

Howard Schultz 2:03:52 We're not the only one. I mean, everyone-

Ben Gilbert 2:03:53 Uh, right

Howard Schultz 2:03:54 ... you know.

Ben Gilbert 2:03:54 Uh, you know, the, e- Amazon has this-

Howard Schultz 2:03:56 Apple.

David Rosenthal 2:03:56 Yeah.

Ben Gilbert 2:03:57 Apple has this.

David Rosenthal 2:03:57 Berkshire has this, the insurance business.

Howard Schultz 2:03:59 Yeah, yeah.

David Rosenthal 2:03:59 Yeah.

Ben Gilbert 2:03:59 But it's effectively interest-free loan from customers, d- and a loan that's not all gonna get called at once. It's, uh, you know-

David Rosenthal 2:04:07 Some of it will never get called.

Ben Gilbert 2:04:08 Right, the,

Howard Schultz 2:04:08 Mm

Ben Gilbert 2:04:08 ... the breakage. And so there's this benefit of, like, it's a reasonably predictable amount of cash that comes in that you get to use, um, you know, m- for your advantage. Uh, in terms of velocity, about fourteen billion dollars a year gets loaded onto gift cards. It's unbelievable! I mean, that, the-- if you actually j-- like, look at all of the banks in America, if Starbucks were a bank and you treated the gift cards as deposits, it would be in the top ten percent by deposits of banks in the United States. It's this, like, unbelievable business model that happens to exist inside of this experiential business-

Howard Schultz 2:04:50 Mm

Ben Gilbert 2:04:50 ... that powers this experiential business. But to your point, you have to keep it from eating-

Howard Schultz 2:04:54 Yeah, well-

Ben Gilbert 2:04:54 ... the core.

Howard Schultz 2:04:55 Yeah. Let's, so let's just go back not to the economics, but the, the idea itself. And I think whether we talked about bottled Frappuccino, the cup, o- you just thread all these things, there is, there is a common through line, and that is we took a commodity business, and we transformed it into a premium product, brand, and experience. But when you are disrupting the market, there has to be some governor on the, on the disruptive innovation to monitor how is it being used, how is it being abused, and the era of judgment in the period where this was really kind of, uh... where we really took hold, this five-year period between 2018 and 2022, is the governor didn't exist.

Ben Gilbert 2:05:49 Oh, you feel like it wasn't really taking hold in that whole-

Howard Schultz 2:05:53 It was taking hold-

Ben Gilbert 2:05:54 Before?

Howard Schultz 2:05:55 ... You know, and I, I'm not criticising anyone because, you know, we're all-- everyone's trying to do a good job. But the, the, the result is the, the, the runner-- the, the unbelievable success, it disrupted the experience.

Ben Gilbert 2:06:10 Yeah.

David Rosenthal 2:06:10 Mm-hmm.

Ben Gilbert 2:06:11 And now you have stores that are entirely built to just pick up mobile orders.

Howard Schultz 2:06:15 Yeah, and so... And, and my view is we should not succumb to the mobile app.

David Rosenthal 2:06:23 Looking back now, and not when you're in the moment, and you and others in the management team, things happen, but knowing what you know now-

Howard Schultz 2:06:29 Yeah

David Rosenthal 2:06:30 ... are there a couple key design decisions or things that you would re-architect differently about the mobile app experience?

Howard Schultz 2:06:38 I, I don't think I would have allowed the mobile app to be on demand twenty-four hours a day.

Ben Gilbert 2:06:47 Hmm.

Howard Schultz 2:06:48 I, I would have slow-rolled the, the availability of it and then understood how it was being used and whether, and whether or not it was gonna disrupt the experience. But now it's, it's, you know, on demand, whenever you want it.

David Rosenthal 2:07:03 Right.

Howard Schultz 2:07:03 And now you can't. You can't shut it off from eight to nine.

Ben Gilbert 2:07:05 Right, the expectations been set.

David Rosenthal 2:07:07 Genie's out of the bottle.

Ben Gilbert 2:07:08 Whenever I get that, that message, um, you know, "Mobile order ahead is not available at this time," I'm like, "Ugh! But it's available ninety-nine percent of the time. It's not available now?"

Howard Schultz 2:07:17 And because the store is full-

David Rosenthal 2:07:18 Yeah, I won't even go to a store if it doesn't have it.

Howard Schultz 2:07:19 The store is overrun. You wouldn't go?

David Rosenthal 2:07:20 Yeah.

Howard Schultz 2:07:21 That breaks my heart. I hate to, hate to hear that.

David Rosenthal 2:07:24 Well, there's certain-

Howard Schultz 2:07:25 No, I understand.

David Rosenthal 2:07:25 I, I went to the Presidio store yesterday in San Francisco-

Howard Schultz 2:07:28 Okay

David Rosenthal 2:07:28 ... and I would go there no matter what.

Howard Schultz 2:07:29 No, I, I-

David Rosenthal 2:07:30 But if, um, you know, um, yeah.

Ben Gilbert 2:07:31 I only agree with you in airports. In airports, I'm so time-constrained that I'm like, if mobile order isn't working, the line's too long. But it's just-

David Rosenthal 2:07:38 Oh, but I've had plenty of times where, like, I'm looking at stores in the radius. I'm in... I'm traveling.

Ben Gilbert 2:07:42 Oh, I see.

David Rosenthal 2:07:42 I'm in a new city, and it's like, well, I'm only gonna go to the one that's open for mobile order and pay. I'm not even gonna try.

Ben Gilbert 2:07:47 It's fascinating.

David Rosenthal 2:07:48 Yeah.

Ben Gilbert 2:07:48 I gotta hit one other-- Howard, I know you hate it, but one other, like, amazing business model benefit of mobile order and pay: If I'm buying six-dollar lattes over and over again with my Visa card, and Starbucks is getting hit with thirty cents every time, i- instead, if I'm buying-... $25 gift cards, well, that's now three out of four times I'm, I'm going and buying my coffee, and Starbucks doesn't have to pay Visa thirty cents or the bank thirty cents. That's a pretty amazing business unlock. Like, uh, you know, I'm, I'm, I'm aware it degrades the experience, so you have to find ways-

Howard Schultz 2:08:22 Yeah

Ben Gilbert 2:08:22 ... to deal with that, but.

Howard Schultz 2:08:24 I, I'd be more than willing to sacrifice economics to go back to ways to enhance the experience myself, but I'm not in in charge. [laughing]

Ben Gilbert 2:08:37 All right, listeners, this is the perfect time to talk about another one of our favorite companies and longtime Acquired partners, Pilot.com. For startups and growth companies of all kinds, Pilot handles all of your company's accounting, tax, and bookkeeping needs, and in fact, now is by far the largest startup-focused accounting firm in the entire US.

David Rosenthal 2:08:58 We talk all the time on Acquired about Jeff Bezos's AWS-inspired axiom that startups should focus on what makes your beer taste better. In other words, only spend your limited time and resources only on what's actually gonna move the needle for your product and customers, and outsource everything else that you need to do as a company but doesn't fit that bill.

Ben Gilbert 2:09:18 Yeah. While we're in beverage land, Starbucks is actually a great example of this. There are so many things that are not proprietary to Starbucks. For the most part, they don't own the real estate that the stores are in. They don't manufacture the bottled beverages, like Frappuccinos, that you see in grocery stores. They use Pepsi for that. And they don't make their own cups, napkins, silverware, any of that from scratch. They focus on what makes their coffee taste better.

David Rosenthal 2:09:41 Aha, love that! For startups and growth stage companies, accounting is example number one of this idea. Every company needs it, it needs to be done by a professional, and you don't wanna take any risk of something going wrong. But at the same time, it has zero impact on your actual product or customers.

Ben Gilbert 2:09:59 So enter Pilot. Pilot both sets up and operates your entire company's financial stack, so finance, accounting, tax, and even CFO services, like investor reporting, from your general ledger all the way up to budget and financial sections of your board decks. And they've been doing this now for years across thousands of startups from Silicon Valley and everywhere else. So there's really no one better that you can trust to both get your finance right and make it easy and painless for your company.

David Rosenthal 2:10:26 Yep, and when you say thousands of companies Pilot does this for, these are now companies like OpenAI, Airtable, and Scale, as well as large e-commerce and other companies. So it's not just that they have experience across startups, they can also keep working with you as you scale to the growth phase and beyond. So if your company or a company you start in the future wants to go back to focusing on what makes your beer or coffee taste better, go on over to pilot.com/acquired and tell them that Ben and David sent you.

Ben Gilbert 2:10:54 Thanks, Pilot.

David Rosenthal 2:10:56 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-

Howard Schultz 2:11:19 Yeah

David Rosenthal 2:11:19 ... real estate.

Howard Schultz 2:11:21 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.

Ben Gilbert 2:12:55 Oh, well, there were franchises.

Howard Schultz 2:12:58 But I'll... Let me explain that, if I can-

Ben Gilbert 2:13:00 Yeah

Howard Schultz 2:13:00 ... 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.

David Rosenthal 2:13:45 Well, as you've been saying, it's from the beginning, it was about elevating.

Howard Schultz 2:13:48 Yeah.

David Rosenthal 2:13:49 McDonald's, great company, but-

Howard Schultz 2:13:51 Yeah

David Rosenthal 2:13:51 ... nobody would ever accuse them of elevating-

Howard Schultz 2:13:52 Yeah

David Rosenthal 2:13:52 ... I don't think. [chuckles]

Howard Schultz 2:13:53 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?

Ben Gilbert 2:14:22 That's actually quite befuddling to me-

Howard Schultz 2:14:23 Yeah, yeah

Ben Gilbert 2:14:23 ... 'cause so many-

Howard Schultz 2:14:24 Yeah

Ben Gilbert 2:14:24 ... food and beverage concepts do not transfer geographies.

Howard Schultz 2:14:28 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.

Ben Gilbert 2:15:17 I wanna pick up the thread on China now that we're sort of into the 2010s.

Howard Schultz 2:15:22 Okay.

Ben Gilbert 2:15:23 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.

Howard Schultz 2:15:42 True.

Ben Gilbert 2:15:44 Now bring us to that seed that you planted earlier with Belinda being the single most important-

Howard Schultz 2:15:48 Yeah

Ben Gilbert 2:15:49 ... employee.

Howard Schultz 2:15:50 China presented the enormity of opportunity with the significant challenge of pioneering, and-

Ben Gilbert 2:16:02 It's a tea-drinking culture. [chuckles]

Howard Schultz 2:16:03 Yeah, so a tea-drinking culture, no morning business, people eating rice in the morning. We got real estate wrong. [chuckles] We got breakfast wrong, but it was all coming from the control of Seattle. Mm.

Ben Gilbert 2:16:18 Did you go in with essentially the Starbucks concept?

Howard Schultz 2:16:20 Yeah, it was exac- exactly what you see right now. There's no, no different, but they didn't know... The Chinese people hardly knew what coffee was. There was no morning traffic, and, and the early days of our partner, w- we, we d- we didn't see eye to eye, so we got them out. When Belinda came along, we had a world-class operator who had succeeded in Singapore and Hong Kong. She's a strong person, who believed that Seattle, the way we were organized, was not a formula for success. You can't have people in Starbucks in Seattle designing the breakfast menu who have never been to China, who think we're gonna- they're gonna eat blueberry muffins. And so when she said to me, "I will do it if I'm in control of everything," so I want to decentralize China. "I report to you. It's you and me and John Culver, who runs international."

Ben Gilbert 2:17:19 Mm-hmm.

Howard Schultz 2:17:19 "Uh, take Seattle out of the equation." We were failing. What choice did I have?

Ben Gilbert 2:17:28 Hmm.

Howard Schultz 2:17:29 She turned it. She single-handedly built the China business.

Ben Gilbert 2:17:34 Today, eighteen percent of Starbucks's revenue is China.

Howard Schultz 2:17:37 Yeah. She deserves all the credit. W- John and I have been to China almost every quarter during the building years of turning it with her, and all the government meetings to tell the Starbucks story, and, and then we did things in China disruptively. Well, Belinda decided that she could go to the government and go to an insurance company and come back to Starbucks and get government approval for Starbucks to do the fir- do something that had never been done before and provide health insurance to the parents and grandparents of our partners.

Ben Gilbert 2:18:18 Cool.

Howard Schultz 2:18:19 So the Chinese government was so intrigued, sitting down with them saying, "Can, can you explain, why do you wanna do this?"

Ben Gilbert 2:18:31 Right. You don't have to.

Howard Schultz 2:18:32 Yeah.

Ben Gilbert 2:18:32 Right.

Howard Schultz 2:18:33 Yeah. Because it's the culture of our company. We, we, we wanna do everything we can to benefit our people. Humanity, and it's universal, but it's so, I think, important to just, um, create some guardrails. So one day, in the early stages of Starbucks, Howard Behar comes in my office one day... Remember, we're small at this stage, and he says, "We, we got a terrible situation." He said, "The manager of the Seattle Trust store on Second and Madison, Seattle, Tom Kerrigan, has AIDS." Now, AIDS at that time was like leprosy. Leprosy. So he- Tom comes in, and he says, "I need to resign from Starbucks," and he's crying. "Do you have any health insurance?" "No." And so we covered Tom Kerrigan from that point on, but it was those kinds of imprinting moments, and there were many like that.

Ben Gilbert 2:19:50 Right. I think it's funny. So I have heard that story probably five times-

Howard Schultz 2:19:55 Oh, yeah

Ben Gilbert 2:19:56 ... um, because I've consumed an incredible amount of Starbucks content over the last couple of months, and I've heard, uh, a story about, uh, uh, im- Starbucks employees wanting to buy a cow for a farmer in Africa, and stories about Flint, Michigan, and stories about g- the initiative to bring the company together to try to bring the country together when the government was shut down in 2013, whenever that was. And I, I, I was getting frustrated watching all these stories because I kept thinking-... this is not the answer to why Starbucks worked. These are these one-off anecdotes that are, sure, they're emblematic of some broader theme, but at the end of the day, like, the answer to why Starbucks works has to be something about the business model, and every time you walk into the store, X, Y, Z happens, and here's the economics. But it turns out there are thousands of these stories, and it's the humanity seeping through, and it's hard for the company to tell the story because everyone just feels like a random one-off example, but they're happening in every community in every part of the country. And I think that is the, for me, as like a business historian, that's been the thing that jumps out, is there's no other company that we've studied that has this sort of obsession with people and humanity the way that, that Starbucks does.

Howard Schultz 2:21:13 And we're not perfect, and so we do make mistakes. And when you're-- when the brand is being shined so brightly-

Ben Gilbert 2:21:22 It's a high standard to be held to.

Howard Schultz 2:21:23 We live in an environment where if you do make a mistake, and we are human, we're going to make mistakes, unfortunately, that becomes the thing.

Ben Gilbert 2:21:32 Yep.

Howard Schultz 2:21:32 Uh, and it's tough to fight that.

Ben Gilbert 2:21:34 Are, are you open-- I'd love to kinda flash forward. Uh, you know, y- you were CEO through twenty seventeen. Kevin Johnson took over twenty seventeen to twenty twenty-two. You came back for one year as interim CEO, and now Laxman is the, the CEO and has been in the seat for about a year. Um, you came in after a tumultuous COVID era and, and tried to basically figure out who the successor was gonna be and, and, you know, patch the ship in the meantime. A lot of stuff has, has happened in that last five years, notably with labor unions. I don't wanna make this podcast about labor unions-

Howard Schultz 2:22:09 No.

Ben Gilbert 2:22:09 -but I do wanna ask you, what have you learned from the experience of, you know, having to do a deep dive into how we got here?

Howard Schultz 2:22:17 That's a very tough, complex question. Uh, I think my personal relationship with the company and how personal it is to me, and the things that we, not I, but we have tried to do to build a different kind of company. Uh, when the country started moving in a post-COVID era to a direction that I didn't recognize, very, very hard to understand why Starbucks would be under assault or, or just being challenged this way.

Ben Gilbert 2:23:08 Particularly when you had built a reputation on a-

Howard Schultz 2:23:11 A very progressive-

Ben Gilbert 2:23:12 -a fact pattern and a history of being unbelievably, you know-

Howard Schultz 2:23:16 Kind to your people.

Ben Gilbert 2:23:17 Yes.

Howard Schultz 2:23:17 Yeah. I entered Starbucks as the interim CEO when this was already going on, and I think the company made some early mistakes, some of which were COVID-related.

Ben Gilbert 2:23:32 Mm.

Howard Schultz 2:23:32 Again, no textbook how to deal with COVID issues, health issues, safety issues. Uh, and then I think, uh, underestimated the groundswell of public sentiment, uh, for this movement in America. And, um, then became vilified for trying to defend the company in a way that I thought was appropriate. Um, I think what's lost in all this is the percentage of stores that have been petitioned, and the number of people is very small in relationship to the, to the whole, and then all of the people in Starbucks who were depending on me to defend the company, and trying to do that in a world of disinformation is d- very difficult. At the time, when I was trying to restore the company back to health, clearly, mistakes were made. This story is still unfolding, and, um, my heart's with the company, and... But the thing that I think was lost in the story is, the shareholder is not the primary person. It's the Starbucks partner in the green apron, which is the cloth of the company, and if we e- exceed the expectations of the cloth of the company and our people, shareholders and customers are gonna win. That's been my whole life story.

Ben Gilbert 2:25:00 And that's basically worked for-

Howard Schultz 2:25:02 Yeah

Ben Gilbert 2:25:02 ... decades and decades.

Howard Schultz 2:25:03 Yeah.

Ben Gilbert 2:25:04 It also seems like when you-- Starbucks has become such an institution in our society, that leading a small, disruptive organization, everyone gives you the credit for all the positives and all the exciting things you're doing, and you sort of get a pass on anything that didn't work.

2:25:21 Move fast to break things.

2:25:22 When you're at this scale, everyone expects you to be wildly successful all the time 'cause you always have been, but anything that's misaligned, that is where a hundred percent of the focus is.

Howard Schultz 2:25:35 Well, I think if you take a step back, not from Starbucks, but if you say to yourself, "What company has gotten big in the food business and stayed true to its core purpose and reason for being, and then stayed positively inclined to its customers?" So if, I... What are you gonna name? And so the odds on getting this big and still being revered for who you once were is very, very difficult. And I would argue, in so many ways, we are better today than we were when we were smaller. That is expected of us, uh, but I don't think we get much credit, and maybe we shouldn't. Maybe this is, uh, our responsibility. The elements, the characteristics that built the Starbucks business, the culture, is compassion, empathy, and love.... Those are not just words. It's, like, real things that are not- [laughing] They're not being taught in business schools, and people on the outside view it as not true. I'm telling you, the reason we've succeeded is because the underpinning of the company's purpose has been just that, and it's much harder today to, to execute that because you're, you're dealing with cynicism as the first order of defense that you have to overcome.

Ben Gilbert 2:27:00 Mm.

Howard Schultz 2:27:01 But the responsibility as leaders is to do just that.

Ben Gilbert 2:27:06 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-

Howard Schultz 2:27:36 I, I think over four hundred, four hundred and fifty thousand-

Ben Gilbert 2:27:38 Four hundred and fifty thousand now.

Howard Schultz 2:27:38 Globally.

Ben Gilbert 2:27:39 I must be using an old number. Um, and over the lifetime of the company, has employed over five million?

Howard Schultz 2:27:44 Yes, five million alum.

Ben Gilbert 2:27:46 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.

Howard Schultz 2:28:09 Right.

Ben Gilbert 2:28:09 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.

Howard Schultz 2:28:18 They're not franchises in the typical sense.

Ben Gilbert 2:28:20 Yeah, so tell us about that.

Howard Schultz 2:28:22 And I think we should talk about that.

Ben Gilbert 2:28:23 Yeah.

Howard Schultz 2:28:24 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.

Ben Gilbert 2:28:40 And what does it mean to be your partner?

Howard Schultz 2:28:42 So, uh, every country is different depending on the economics of that country, the political issues.

Ben Gilbert 2:28:49 Mm.

Howard Schultz 2:28:49 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.

Ben Gilbert 2:29:02 Mm.

Howard Schultz 2:29:03 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.

Ben Gilbert 2:29:21 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?

Howard Schultz 2:29:31 Starbucks is responsible for roasting the coffee-

Ben Gilbert 2:29:35 Mm-hmm

Howard Schultz 2:29:36 ... 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-

Ben Gilbert 2:29:46 Mm

Howard Schultz 2:29:46 ... and they control all the operations.

Ben Gilbert 2:29:48 Hmm. And so all of Starbucks's franchise or licensed stores are done in this way, where there's a partner in a country-

Howard Schultz 2:29:57 Yes

Ben Gilbert 2:29:58 ... that-

Howard Schultz 2:29:58 There are not, no individual licensed franchises of any kind-

Ben Gilbert 2:30:01 Mm

Howard Schultz 2:30:02 ... unless it's certain real estate that we can't get-

Ben Gilbert 2:30:06 Mm

Howard Schultz 2:30:07 ... uh, that we want access to, like the, a roadway, uh, on a highway in Switzerland or s- something odd.

Ben Gilbert 2:30:14 I see. And airports are this way, right?

Howard Schultz 2:30:15 Airports are master licensed with the, with the master licensee, like whoever has it in, like, Marriott or whoever has it.

Ben Gilbert 2:30:23 I gotcha.

Howard Schultz 2:30:24 Or Target, that has two thousand Starbucks stores.

Ben Gilbert 2:30:27 And those are Target-operated?

Howard Schultz 2:30:28 Yes. Yes.

Ben Gilbert 2:30:30 I see.

Howard Schultz 2:30:30 And great partner, and Brian Cornell, great guy.

Ben Gilbert 2:30:33 And it's interesting, the... Basically, you know, half of Starbucks stores look like the, the Platonic ideal of coming out of the Starbucks HQ. Here is how we imagine this, this store to be, and half of them are, uh, there's some reason why we alone can't do this and need a partner, and you, you know-

Howard Schultz 2:30:52 Yeah

Ben Gilbert 2:30:52 ... you spent a lifetime building this.

Howard Schultz 2:30:52 But the customer experience, I mean, I mean, ideally, you want the customer experience to be the same worldwide, regardless of the shape and size of the store, where it's located.

Ben Gilbert 2:31:01 Makes sense.

Howard Schultz 2:31:01 Which is not always the case. I, I admit that.

Ben Gilbert 2:31:04 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.

Howard Schultz 2:31:12 Yeah, yeah.

Ben Gilbert 2:31:13 The whole thing- [chuckles]

Howard Schultz 2:31:14 [chuckles]

Ben Gilbert 2:31:14 ... came out of Milan.

Howard Schultz 2:31:15 Right.

Ben Gilbert 2:31:16 And yet, for decades-

Howard Schultz 2:31:18 Fifty years

Ben Gilbert 2:31:19 ... no Starbucks. Fifty years, no, no Starbucks in Italy.

Howard Schultz 2:31:22 Yeah.

Ben Gilbert 2:31:22 And the belief, at least as I see it, is they've perfected the coffeehouse concept. Don't bring an imitation in here. W-

Howard Schultz 2:31:31 Okay, yeah

Ben Gilbert 2:31:31 ... W- but it's worked! It's, it's working phenomenally well. Why is Starbucks being so well-received in Italy?

Howard Schultz 2:31:38 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] -

Ben Gilbert 2:32:01 [chuckles]

Howard Schultz 2:32:01 ... that's, that's, that's my truth.

Ben Gilbert 2:32:03 If you don't believe you have a better product, who does? [chuckles]

Howard Schultz 2:32:05 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.

Ben Gilbert 2:32:36 Please.

David Rosenthal 2:32:37 Yeah.

Ben Gilbert 2:32:37 I, I mean, the first time I went in there, you know-

Howard Schultz 2:32:39 Yeah

Ben Gilbert 2:32:39 ... kid in a candy store, wide eyes.

Howard Schultz 2:32:41 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.

Ben Gilbert 2:33:24 I was gonna say-

David Rosenthal 2:33:24 I was gonna say

Ben Gilbert 2:33:24 ... that has to be.

David Rosenthal 2:33:25 It's gotta be. [laughing]

Howard Schultz 2:33:25 I turned on Willy Wonka, Wonka with Gene Wilder, and we went to work starting to design a space. Now, we realized early on-

Ben Gilbert 2:33:35 And this was what? 2013-

Howard Schultz 2:33:37 '17, '14

Ben Gilbert 2:33:38 ... years ago?

Howard Schultz 2:33:38 Eight years ago. Now, we realized economically this is a tough business model. So what are we trying to do? We're trying to create an experience that is accretive to the brand and significantly elevates Starbucks, which is fighting ubiquity all the time, every day. And so we created this 30,000 square foot space in Seattle, which we opened seven years ago, which is the most dynamic, entertaining vehicle of theater, romance, seduction, and we opened it to rave reviews, and we're manufacturing like Willy Wonka did. We're manufacturing and roasting coffee in the space.

Ben Gilbert 2:34:25 Which makes the smell of the-

Howard Schultz 2:34:27 Yeah, it's just-

Ben Gilbert 2:34:27 It's just amazing.

Howard Schultz 2:34:28 It's amazing. So we open it up, and then over time, we start opening a couple more. We get approval from the Chinese government to manufacture in the center j- of Shanghai, and we open up a 40,000 square foot in Shanghai. We open up an incredible space in Tokyo. We open up in the old Crate & Barrel space on North Michigan Avenue in Chicago. We open up in the meatpacking business in New York, but the shrine has to be Milan.

David Rosenthal 2:34:54 This is the way to go back. [chuckles]

Howard Schultz 2:34:56 And this is the way we open up Italy. Now, our partner in Italy is the Percassi family, fantastic people who are in the real estate business, and they are showing me... I'm going back and forth to Milan, like, all the time because they've got real estate, and I've gotta see it. I gotta touch it. I gotta smell it. I keep going back and back and back. "No, not the right site, not the right site," and I'm standing on the corner of, of Carducci Square, and I look at this space, and I say, "What about that?" And he says, "That's the post office."

David Rosenthal 2:35:31 [chuckles]

Howard Schultz 2:35:31 "You can't get the post..." I said, "Well, it's empty. It's empty!" "You can't get it." So I said, "Can I meet the landlord?" He said, "Howard, it's the government." [laughing] I said, "Well, who, who, who's responsible for it?" So they arrange a meeting for me, and I meet the broker who's involved in this, but it's, it's empty space. And I find out the story is that these government buildings, during the financial crisis, were sold to private equity. So I said, "Who's the landlord?" "I'm not... I can't tell you." I said, "You have to tell me the landlord."

Ben Gilbert 2:36:03 Private equity-

David Rosenthal 2:36:04 Yeah

Ben Gilbert 2:36:04 ... that's letting real estate sit empty?

Howard Schultz 2:36:06 But it's empty.

David Rosenthal 2:36:07 I know where this is going. [chuckles]

Howard Schultz 2:36:08 Okay, it turns out I know I'm gonna get killed for this story. You're gonna have to fix this.

David Rosenthal 2:36:12 [laughing]

Howard Schultz 2:36:14 Turns out the owner of the space is Blackstone.

Ben Gilbert 2:36:19 [laughing]

David Rosenthal 2:36:19 I knew it! I knew it. [laughing]

Ben Gilbert 2:36:22 Of course.

David Rosenthal 2:36:22 Of course.

Howard Schultz 2:36:23 So I said, "Why am I in Italy?"

David Rosenthal 2:36:25 [chuckles]

Howard Schultz 2:36:25 I called John Gray.

David Rosenthal 2:36:25 You gotta go to New York.

Howard Schultz 2:36:26 I called John Gray up, friend of mine.

Ben Gilbert 2:36:28 No way!

David Rosenthal 2:36:28 Yeah.

Howard Schultz 2:36:28 I said, "John, I'm in Milan. Do you realize you own this space in Carducci Square that used to be a post office?" He said, "I don't know. Let me check," you know? I said, "John, I'm coming to see you tomorrow."

David Rosenthal 2:36:42 I'm on the next flight.

Howard Schultz 2:36:42 We do the deal with John Gray.

David Rosenthal 2:36:45 Amazing.

Ben Gilbert 2:36:45 Unbelievable.

David Rosenthal 2:36:46 We-

Howard Schultz 2:36:46 It's okay.

David Rosenthal 2:36:46 John Gray, of course, being the number two person at Blackstone.

Howard Schultz 2:36:49 So, uh... And John's a big fan of Starbucks. He had previously been in Seattle for a wedding or a bar mitzvah or something, and saw the Roastery, so he knew exactly what I was talking about, and so that is how we entered in Milan. Now-

David Rosenthal 2:37:05 We got to- [chuckles]

Howard Schultz 2:37:05 ... we have 30 stores. We have 30 traditional stores in Italy.

David Rosenthal 2:37:09 Did they already exist before the Roastery opened?

Howard Schultz 2:37:11 No, Milan opened first.

David Rosenthal 2:37:12 First, the Roastery.

Howard Schultz 2:37:13 Then 30 stores w- in- we're in Milan, we're in Rome, and we're in Florence, and, um, two, three years later, what do you think the number one beverage is? It's espresso for Starbucks.

David Rosenthal 2:37:31 Yeah. Yeah.

Howard Schultz 2:37:32 No, straight espresso. Espresso is the number one beverage.

David Rosenthal 2:37:35 Wow.

Ben Gilbert 2:37:35 Wow.

Howard Schultz 2:37:36 And so we're- I don't take the, the success in Italy for granted. We've got to continue to earn it, but what I'm most proud of is that we've respected the Italian people and coffee culture for 50 years, and they, they embraced us.

Ben Gilbert 2:37:50 And so the implication of espresso being the number one beverage is it's not tourists. It's the Italians coming to-

Howard Schultz 2:37:55 Yes

Ben Gilbert 2:37:55 ... Starbucks.

Howard Schultz 2:37:56 There's a lot of tourists coming into the Roastery, but yes, it's-

David Rosenthal 2:37:58 And that they're choosing to get their espresso at Starbucks-

Howard Schultz 2:38:01 Yeah

David Rosenthal 2:38:01 ... not at-

Ben Gilbert 2:38:01 Yeah.

Howard Schultz 2:38:02 Yeah.

David Rosenthal 2:38:03 Um-

Howard Schultz 2:38:03 So, you know, so... And, you know, Italy, I'm going to Italy, I think, next week, but just for me, the, the, the gratification, the satisfaction of, of, you know, f- complete full circle from 1983-

David Rosenthal 2:38:17 That's amazing

Howard Schultz 2:38:18 ... is just beyond belief for me.

David Rosenthal 2:38:20 I, I'm wondering, another backdrop to the Roastery, and really throughout all the 2010s, must have been third wave coffee, and I'm sure it was on your radar screen.

Howard Schultz 2:38:32 Yes.

Ben Gilbert 2:38:33 ... At the same time, it doesn't seem like it's ever made a dent in Starbucks.

Howard Schultz 2:38:38 There has always been stories that all these competitors were going to steal business from Starbucks, but from 1983 to all the way today, the consumption of specialty coffee is still a small amount relative to the macro opportunity. So all those people have expanded the market with and for Starbucks. Now, we created an industry that didn't exist, and they have followed us and done really good things, but, um, we're not threatened by that.

Ben Gilbert 2:39:07 Interesting. So you think third wave coffee brought consumers into the coffee-

Howard Schultz 2:39:12 Into the category

Ben Gilbert 2:39:12 ... culture market-

Howard Schultz 2:39:14 Yes

Ben Gilbert 2:39:14 - that have then also become Starbucks consumers-

Howard Schultz 2:39:16 Yes

Ben Gilbert 2:39:16 ... and maybe they wouldn't have been coffee culture consumers at all?

Howard Schultz 2:39:19 Yes.

Ben Gilbert 2:39:21 Hmm. How do you define third wave coffee? Actually, Howard's probably the best person to ask.

Howard Schultz 2:39:24 I mean, it's a very, uh, intentional, independent coffee store that is small enough that they're roasting their own coffee or getting coffee from a small proprietary roaster-

Ben Gilbert 2:39:40 Mm-hmm

Howard Schultz 2:39:41 ... and creating a very unique, handcrafted experience, uh, that in many ways Starbucks can't do in scale.

Ben Gilbert 2:39:52 Right.

2:39:53 Right.

2:39:53 Right.

Howard Schultz 2:39:53 And so I, I tip my hat to them, but there's no coffee experience in the world that comes close to the Roastery, any of them.

Ben Gilbert 2:40:02 And do those roasteries break even, or are they this, like, marketing showpiece that loses?

Howard Schultz 2:40:06 Some have-- Some are making money, and some aren't.

Ben Gilbert 2:40:09 Wow! I mean, I, it's-

Howard Schultz 2:40:10 But, but I don't, I, you know, I don't... I've never viewed it that way.

Ben Gilbert 2:40:13 Right.

2:40:13 It's like the billboards.

2:40:14 Right.

Howard Schultz 2:40:14 It's, it's- you can't- you couldn't put a price on the hundreds of thousands of people that come into this Roastery and have an experience of a lifetime, and I took Mr. Arnault to the Roastery.

Ben Gilbert 2:40:25 Really?

2:40:26 Wow!

Howard Schultz 2:40:26 I did, yeah.

Ben Gilbert 2:40:26 In Milan?

Howard Schultz 2:40:27 In Seattle.

Ben Gilbert 2:40:28 Or where?

2:40:28 In Seattle.

Howard Schultz 2:40:29 He and his son, yeah.

Ben Gilbert 2:40:30 Wow!

Howard Schultz 2:40:30 Yeah, spent a, a good amount of time with him. I've taken a lot of, of retail CEOs and iconic businesspeople to the Roastery-

Ben Gilbert 2:40:41 I bet

Howard Schultz 2:40:41 ... who have-- who want to see it.

Ben Gilbert 2:40:43 Wow.

2:40:44 Wow. What was Bernard doing in Seattle?

Howard Schultz 2:40:47 I don't know what he was doing in Seattle, but I sp-

Ben Gilbert 2:40:48 Huh

Howard Schultz 2:40:48 ... spent a fair amount of time with him and his son. His son now runs Tiffany.

Ben Gilbert 2:40:51 Oh, great.

2:40:52 Yeah. Wow.

Howard Schultz 2:40:53 And he- his level of curiosity was, uh, [chuckles] very high. I remember he was-- he kept looking at the leather railing and the stitching, and I just said, "Well, you're spending a lot of time on the leather." [laughing]

Ben Gilbert 2:41:05 [laughing] I bet he was.

2:41:06 Maybe there's a partnership to be done. [laughing]

2:41:09 Um, okay.

Howard Schultz 2:41:10 Well-

Ben Gilbert 2:41:10 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-

Howard Schultz 2:41:49 Mm

Ben Gilbert 2:41:49 ... 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.

Howard Schultz 2:41:56 No.

Ben Gilbert 2:41:56 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.

2:42:03 And it gives you superpowers, [chuckles] yeah.

Howard Schultz 2:42:05 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-

Ben Gilbert 2:42:38 Mm.

2:42:39 Yeah

Howard Schultz 2:42:39 ... and how customers created a personal beverage well beyond what the menu was. And I don't know any other business-

Ben Gilbert 2:42:49 Yeah

Howard Schultz 2:42:49 ... in which the, the incrementality of the price has been dictated by the consumer.

Ben Gilbert 2:42:57 Yep.

Howard Schultz 2:42:57 The base price is X, but most people are doing something in addition.

Ben Gilbert 2:43:02 X plus Y, yeah.

2:43:03 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-

Howard Schultz 2:43:12 Hmm

Ben Gilbert 2:43:12 ... an iced almond milk latte with whipped cream, and when I go to most coffee houses-

Howard Schultz 2:43:17 They don't want to give you whipped cream?

Ben Gilbert 2:43:17 ... 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]

2:43:23 Uh, this is something that I think has translated incredibly well to the mobile app-

Howard Schultz 2:43:27 Yes

Ben Gilbert 2:43:27 ... and that no other-

Howard Schultz 2:43:28 Yeah

Ben Gilbert 2:43:29 ... food company has, really, the level of customization.

Howard Schultz 2:43:32 And, and I think m- the mobile app actually added velocity to customization. It powered customization.

Ben Gilbert 2:43:42 Mm.

2:43:42 Yeah.

Howard Schultz 2:43:42 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.

Ben Gilbert 2:43:59 Yeah.

Howard Schultz 2:43:59 Hard to do. It's a hard work.

Ben Gilbert 2:44:01 It has to be a, a good number because there's... I don't know if it's, I haven't done the math, billions, trillions of combinations of possible drinks, and so it has to be every single day as a barista-

Howard Schultz 2:44:12 Yeah

Ben Gilbert 2:44:12 ... you are making something for the first time.

Howard Schultz 2:44:14 Yes. I think I, I, the, the, this, the number that people use inside the company is 100,000 different variations of beverages that are being made consistently. 100,000 different beverages.

Ben Gilbert 2:44:29 Wow.

2:44:29 Hmm.

2:44:30 This is actually a really interesting way to lead into Playbook because-

David Rosenthal 2:44:35 ... on the surface, it's like an obvious question, right? Like, yes, it's an addictive substance, caffeine is.

2:44:40 Yeah.

2:44:40 Of course. On the other hand, you're in a highly competitive market.

2:44:44 Right.

2:44:45 Highly com-

2:44:45 Selling a commodity.

2:44:46 And the market-

2:44:47 Or it should be a commodity

2:44:47 ... actually is not just coffee. It's, let's stick with this theme, it's caffeine broadly.

2:44:53 Well, and, and-

2:44:54 Of which there's Coca-Cola, there's Pepsi, there's, you know.

2:44:56 Well, not only that, but every food company, every retail food business, from McDonald's on-

2:45:02 Yeah

2:45:02 ... took a page out of Starbucks, went to school on us-

2:45:05 Right

2:45:05 ... put espresso machines in their stores, and started doing coffee beverages.

2:45:08 Right.

2:45:09 That also expanded the market.

2:45:11 And I think the real question is, for us here, nobody has built Starbucks, despite decades-

2:45:17 Mm

2:45:17 ... in a highly competitive market with whether it's third wave, or competitors in other geographies-

2:45:23 Mm

2:45:23 ... or domestic competitors, or McDonald's getting into the business, or Folgers and Maxwell House. There is a unique tapestry that we've been weaving throughout this episode that, you know, in Hamilton Helmer's terms, has power here.

2:45:40 Mm-hmm. Yes. Coffee-- So here's my second one, in addition to the, the, the, um... It's w- addictive, but delightful. It is perceived to be virtuous to be a barista, where it is not perceived to be virtuous to flip burgers. And I don't know if that's something Starbucks created. I don't know if that's something inherent to the product. I don't know if that's because it has this Italian lineage, but there's all these incredible benefits that Starbucks and any other coffeehouse chains get to enjoy because it's respected to do that work. And I'm curious, why do you think that's respected when similar ways of spending your hours in restaurant work isn't? First of all, I've never heard it quite like that, and I think that's a very interesting insight. There is craft and art to the expression of making the beverage. I also think the intimacy of the relationship with the customer is so different, and baristas know the names of their customers. They know their dog's name. Uh, we have a drive-thru, and I, I, I saw a, a, a video where the barista knows the name of the dog and knows that... It's just the whole thing is just like a magical dance that happens when the, the cars pull in, and all of a sudden, it's not a transaction. One of the beauties that we've been-- we have been able to do is elevate the experience of the drive-thru, not all the time. So I think your question is steeped in one is a commoditized environment, and the other clearly is not, and the challenge for Starbucks is continuing to innovate for the barista. And when you-- In this category, to extend that point, w- you start from a place of, "This is a good job," and you can sort of improve the experience for that employee, so they can im-improve the experience for your customers. Whereas in other things that are commoditized, they start from a position of, "I have to do this job."

2:48:04 Mm-hmm.

2:48:04 And it's a really tough uphill battle to invest in your people, whereas Starbucks kind of has a tailwind. But it is a hard job. Certainly. And we have to honor the people who are doing it, more so today than ever before. Yep. Another one that I have is... It's funny, it flies in the face of some of the, um, pitfalls of ubiquity that we were discussing before. The fact that it is everywhere, uh, almost cheapens the experience. To me, Starbucks's ubiquity is a massive feature. The fact that I can go anywhere in the world and get basically my same order, or certainly anywhere in America, and get my same order. I can even do it from the mobile app in a way that I'm very familiar with ordering. Uh, it's reliable, it's predictable. Like, it's the same reason I bank with Chase, and I buy Apple products. It's this thing that I just know works everywhere, and I never have to, you know, take any risk on. And, uh, Starbucks didn't have that when it was starting, but it really feels like it's reached this scale that n- no one else can really compete with the level of ubiquity. So ubiquity, earlier on in our conversation, I said ubiquity is an enemy of Starbucks. Mm-hmm. And it's an enemy because we can't be defined by our ubiquity. We have to be defined by the one store you come into, not based on the thousands, but that experience you have in the store. Yep. So if the ubiquity is driving trust and driving convenience, we have to ensure the fact that we are providing that intimacy in the store and not allowing ubiquity to commoditize the experience. That, that is the framework of the daily challenge of the company. Mm-hmm. Frustratingly, for those of us who are trying to analytically put this puzzle together- [laughing] ... the humanity is actually the answer. [chuckles] Yeah. Scaling humanity is actually the- The answer. You know, along with- That's the challenge ... we've got this long list here, this obsessive quality of product, the fact that product isn't just product, but experience is the product. It's all every-- It's everything you experience around consuming the beverage itself. It's, uh, a, a bunch of the things we've already talked about. You invest in your employees, they take care, care of the customers, who takes care of the shareholders, but the shareholders are last. It's the fact that, um

Ben Gilbert 2:50:26 ... Oh, yeah, we talked about the store cash flow dynamics, that you can scale in a really cash-efficient way when, you know, you're paying the stores back in, in less than two years every time. Every store is a billboard, so you're intentionally picking real estate in these places where you're building familiarity with people. They're walking by over and over and over. You're extending the brand by doing United Airlines-

David Rosenthal 2:50:49 Yeah

Ben Gilbert 2:50:49 ... by going to grocery stores.

David Rosenthal 2:50:50 Everything is a billboard. [chuckles]

Ben Gilbert 2:50:51 Everything is a billboard. Yeah, that's the like wh- why pay for customer acquisition when you can, you know-

David Rosenthal 2:50:57 Partner for it

Ben Gilbert 2:50:57 ... get product in people's ha- hands?

David Rosenthal 2:50:58 Yeah.

Ben Gilbert 2:50:59 Yeah. Um, the, the third place, you know, very novel idea at first, turned out that was something basically the entire country and then the wor- the world wanted to participate in. Not obvious at first.

David Rosenthal 2:51:11 Mm-hmm.

Ben Gilbert 2:51:11 And it's so easy to think about these things that now we take completely for granted. Like, Starbucks is infrastructure in our society. It is assumed... Like, when I go to an airport or a city and there's not an easy way to get to a store, I'm like, "What?" [chuckles]

David Rosenthal 2:51:26 What is this place?

Ben Gilbert 2:51:27 What-

David Rosenthal 2:51:28 Yeah

Ben Gilbert 2:51:28 ... backwoods place am I in?

David Rosenthal 2:51:30 [laughs]

Ben Gilbert 2:51:30 Like, it's, it's, it's expected. And when you l- live with something, you know, most of your life, you forget that it was once a crazy idea, and I think that's the-

David Rosenthal 2:51:41 Yeah

Ben Gilbert 2:51:41 -the groundwork.

David Rosenthal 2:51:42 I think, I think the other piece that you didn't just list off there, uh, that we've covered in depth is, is, you know, the Costco-like investment in your employees-

Ben Gilbert 2:51:49 Yep

David Rosenthal 2:51:49 ... and the people, and the reduction of turnover. And, uh, you know, th- in, in Costco's case, I think it's probably much more so the reduction of turnover. In Starbucks's case, it really is like that's, like, a key, the key element to building the humanity, right? Like, uh, I don't know the employees at my Costco store. [chuckles]

Ben Gilbert 2:52:11 Mm. What's the stat that you have on, um... I've heard you say it a number of times, on, um, employee tenure at Starbucks versus others in the category?

Howard Schultz 2:52:19 It's a 2X, is what I believe.

Ben Gilbert 2:52:21 That employee tenure is 2X longer-

Howard Schultz 2:52:22 Yes

Ben Gilbert 2:52:23 ... or turnover is half-

Howard Schultz 2:52:24 Half

Ben Gilbert 2:52:24 ... of what it is industry-wide.

Howard Schultz 2:52:25 Yes.

Ben Gilbert 2:52:26 It makes a huge difference.

Howard Schultz 2:52:28 Mm. And you've talked about Bean Stock, you've talked about comprehensive health insurance. When I think about the most important thing we probably have done in the last 20 years, it's been the unique relationship that we established with Arizona State University and its president, Michael Crow. Could we create free college tuition, a four-year free college tuition, through Arizona State for every single partner at Starbucks? And we did it, and thousands of Starbucks partners are engaged and