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Starbucks (with Howard Schultz)

Starbucks. You’d be hard pressed to name any brand that’s more ubiquitous in the world today. With nearly half a billion global customer purchases per week across its stores and 3rd party retail channels, a significant portion of the human population gets their daily fix in the green and white paper cup. (Including our own Ben Gilbert who famously enjoys his daily spinach feta wrap. :) But it wasn’t always this way. Long before the frappuccinos and the PSLs and the cake pops, Starbucks was just a small-time Seattle roaster that only sold beans — and was started not by Howard Schultz but rather the guys who later ran Peet’s (!). Starting from six tiny stores when Howard took over in 1987, this quirky coffee company named after a character from Moby Dick has scaled to nearly 40,000 locations worldwide. Today, in a first for Acquired, the protagonist himself joins us as a third cohost to tell the whole story of Starbucks. And Howard is in the perfect moment to do this — after three separate stints as CEO he’s now retired, off the board of directors, and in his own words “not coming back.” So place a mobile order (or not! as you’ll hear Howard speak about), sit back with your own favorite Starbucks items, and enjoy. *Links:* - Howard’s letter “The Soul of a Brand”: https://www.linkedin.com/posts/howardschultz_the-soul-of-a-brand-activity-7169073767615332352-ONbX/ - Worldly Partners’ multi-decade Starbucks analysis: https://worldlypartners.com/starbucks/ - Starbucks S-1: https://www.scribd.com/doc/11801030/Starbucks-IPO *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Ben GilberthostDavid RosenthalhostHoward Schultzguest
Jun 4, 20243h 15mWatch on YouTube ↗

EVERY SPOKEN WORD

  1. 0:00 – 0:35

    Intro

    1. BG

      All right.

    2. DR

      We rolling?

    3. BG

      We're rolling.

    4. HS

      We get to see how you guys do this. It's kinda interesting.

    5. BG

      [laughing]

    6. DR

      We usually have pump-up music, but- Mm-hmm.

    7. BG

      I feel pumped up.

    8. HS

      We can do that! [upbeat music] We, we got a turntable here.

    9. DR

      Ooh, I, I saw your turntable. That's beautiful.

    10. HS

      What do you wanna hear?

    11. BG

      No, we're starting. [chuckles]

    12. DR

      Ben's keeping us on track.

    13. SP

      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?

  2. 0:35 – 5:22

    Why Starbucks deserves the full Acquired treatment (and why now)

    1. BG

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

    2. DR

      I'm David Rosenthal.

    3. BG

      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.

    4. DR

      Whew, what were we thinking?

    5. BG

      [chuckles] Well, it actually was amateur hour back then, David.

    6. DR

      Gotta start somewhere.

    7. BG

      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?

    8. DR

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

    9. BG

      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.

    10. DR

      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.

    11. BG

      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.

    12. DR

      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.

    13. BG

      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.

    14. DR

      We do.

    15. BG

      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]

    16. HS

      [chuckles] Oh, God. That's a great start.

    17. BG

      I also... Here's another stat that David-

    18. DR

      Y- you've done the math on-

    19. BG

      I have done the math.

    20. DR

      Yes.

    21. BG

      I exported all of my credit card transactions since 2011.

    22. HS

      Of course you did.

    23. BG

      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.

    24. HS

      [chuckles] Oh, God. Okay.

  3. 5:22 – 7:24

    Starbucks 1.0: the original founders and Peet’s hidden influence

    1. BG

      So we wanna start with Starbucks 1.0, and listeners may know that there were three founders of Starbucks-

    2. HS

      Yes

    3. BG

      ... none of which were named Howard Schultz.

    4. HS

      Correct.

    5. BG

      So take us back, you know, in the Starbucks prehistory before you arrived.

    6. HS

      Yeah.

    7. BG

      How did the company start?

    8. HS

      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.

    9. HS

      ... uh, which-

    10. SP

      Alfred Peet was the name?

    11. HS

      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.

    12. SP

      Really?

    13. HS

      No one knows that. That's new.

    14. SP

      Wow!

    15. HS

      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.

    16. SP

      So it was Peet's Coffee in Starbucks bags?

    17. HS

      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-

    18. SP

      Mm-hmm

  4. 7:24 – 12:54

    Schultz discovers Starbucks (as a vendor) and moves to Seattle

    1. HS

      ... 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.

    2. SP

      Was Starbucks buying it for use in their-

    3. HS

      They were selling it in their store. Now, but here's the thing-

    4. SP

      'Cause this was a consumer device.

    5. HS

      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.

    6. SP

      Yeah, of course.

    7. HS

      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.

    8. SP

      Still just selling beans?

    9. HS

      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?

    10. SP

      [chuckles]

    11. HS

      Remember, so it was a tiny company.

    12. SP

      It was a grand ambition.

    13. HS

      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.

    14. SP

      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-

    15. HS

      Right

    16. SP

      ... 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?

    17. HS

      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?"

    18. SP

      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-

    19. HS

      Yeah, and Starbucks had a growing mail order business

    20. SP

      ... because I don't have anything like it in my city."

    21. HS

      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.

    22. DR

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

    23. HS

      No, it was a-

    24. DR

      The, the logistics costs, you know, the scale, like... [chuckles]

    25. HS

      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.

  5. 12:54 – 14:36

    Coffee in America was broken: Robusta vs. Arabica and WWII’s legacy

    1. BG

      Okay, so before the Italy trip, I just wanna-

    2. HS

      Yeah

    3. BG

      ... 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-

    4. HS

      Specialty coffee.

    5. BG

      Specialty coffee.

    6. HS

      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.

    7. DR

      Yeah, walk us through the two types of beans.

    8. HS

      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.

    9. DR

      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?

    10. HS

      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.

  6. 14:36 – 19:47

    Xerox, rejection, and the psychology of risk-taking

    1. BG

      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.

    2. HS

      Yeah.

    3. BG

      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.

    4. HS

      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-

    5. DR

      [chuckles] Wow!

    6. HS

      ... 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.

    7. BG

      And does it have a screen, or is it like a typewriter?

    8. HS

      It has a... No, it has... It's a typewriter, no screen.

    9. DR

      It's like a typewriter with, like, a, with a little bit of cache, right?

    10. HS

      Yes, yes, exactly.

    11. DR

      So that you could, like, fix-

    12. HS

      Yeah

    13. DR

      ... mistakes for one line, right?

    14. HS

      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!"

    15. BG

      And so you quitting, well, Hammerplast, but, you know, quitting what seemed like a-

    16. HS

      I hated it

    17. BG

      ... stable of pretty good jobs-

    18. HS

      Yeah

    19. BG

      ... to drive across the country to provincial little Seattle, I mean, that's, that's nuts.

    20. HS

      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."

    21. DR

      This is amazing. Howard Schultz got a three. [chuckles]

    22. HS

      I got a three. I got a three.

    23. DR

      This is inspiration for all entrepreneurs out there.

    24. HS

      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.

    25. DR

      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?

    26. HS

      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.

    27. BG

      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.

    28. HS

      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.

  7. 19:47 – 23:07

    The Milan epiphany: espresso bars, community, and the “third place”

    1. BG

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

    2. HS

      Yeah.

    3. BG

      You are sent, or maybe you asked to go to an international housewares conference in Milan.

    4. HS

      Yeah.

    5. BG

      What do you discover?

    6. HS

      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!

    7. BG

      We gotta do this.

    8. HS

      "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."

    9. BG

      Hmm.

    10. HS

      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.

    11. BG

      And there's nowhere else in town-

    12. HS

      No one in Seattle had it. Well-

    13. BG

      -to get a caffe latte

    14. HS

      ... 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."

    15. BG

      Yeah, what was the objection? Was it the-

    16. HS

      He didn't... He just... He didn't think-

    17. BG

      -stigma of the restaurant business?

    18. HS

      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.

    19. BG

      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?

    20. HS

      Yeah.

    21. BG

      Keep them separate for now.

    22. HS

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

    23. BG

      Starbucks number six.

  8. 23:07 – 30:01

    Il Giornale: fundraising rejections, no salary, and Sherry’s role

    1. HS

      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."

    2. BG

      Which was the company you started to-

    3. HS

      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.

    4. BG

      Oh, yeah.

    5. HS

      Mm-hmm, and I asked them both to invest in my idea, and both of them turned me down.

    6. BG

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

    7. HS

      For the first Il Giornale.

    8. BG

      And only Starbucks and a couple other people have committed.

    9. HS

      But I didn't have enough money. I still, I needed more money.

    10. BG

      Huh.

    11. HS

      And, uh-

    12. BG

      You were raising one point six million?

    13. HS

      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-

    14. BG

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

    15. HS

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

    16. BG

      [laughing]

    17. HS

      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.

    18. BG

      Wow!

    19. HS

      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.

    20. DR

      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-

    21. HS

      Yes

    22. DR

      ... coffee beans, but probably more capital intensive, right? You need more staff.

    23. HS

      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-

    24. DR

      Wow!

    25. HS

      ... while Sherry was working and pregnant with our first child.

    26. BG

      So looking increasingly worse from a traditional perspective of leaving a- [chuckles]

    27. HS

      Yes

    28. BG

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

    29. HS

      Well

    30. BG

      ... raising millions of dollars to try to start your own business.

  9. 30:01 – 38:29

    The acquisition showdown: buying Starbucks and the Bill Gates Sr. intervention

    1. BG

      All right, so we're at the pivotal moment.

    2. HS

      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]

    3. BG

      [laughing] You gonna give it to me?

    4. HS

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

    5. BG

      Mm-hmm.

    6. HS

      Now we get into a story I have told, but not a hundred percent-

    7. BG

      Hmm

    8. HS

      ... '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."

    9. BG

      For him to take it over, not you?

    10. HS

      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-

    11. BG

      A titan.

    12. BG

      Incredible.

    13. HS

      The other titan-

    14. BG

      We foreshadowed this on-

    15. HS

      There were three titans

    16. BG

      ... the Microsoft episode, but-

    17. HS

      There were, there were three titans there, but here is the titan. And I-

    18. BG

      And Bill was six foot seven?

    19. HS

      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-

    20. BG

      Go get a cup of coffee

    21. HS

      ... went, went to, went to Columbia Center to get a coffee and come back.

    22. BG

      [chuckles]

    23. HS

      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.

    24. BG

      Hmm. One of your investors.

    25. HS

      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]

    26. BG

      Wow!

    27. HS

      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.

    28. BG

      And so did you hear from Jerry that the bid had been dropped?

    29. HS

      We walk out, and I say to Mr. Gates-

    30. BG

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

  10. 38:29 – 41:09

    Starbucks 2.0 begins: merging Il Giornale + Starbucks and staying debt-free

    1. DR

      So the acquisition goes through.

    2. HS

      Yeah. August of 'eighty-seven-

    3. BG

      Yeah

    4. HS

      ... 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.

    5. DR

      All in the Northwest.

    6. HS

      Yeah.

    7. DR

      Meanwhile, the original Starbucks folks, they've now gone down to California.

    8. HS

      They, they went to California.

    9. DR

      When did Peet's open coffee bars?

    10. HS

      Uh, many, many years later.

    11. DR

      Ah, so they... You weren't competing-

    12. HS

      No

    13. DR

      -right away.

    14. HS

      No.

    15. BG

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

    16. HS

      Yeah

    17. BG

      ... 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.

    18. HS

      Yes.

    19. BG

      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-

    20. HS

      Yeah

    21. BG

      ... those are rookie numbers- [chuckles]

    22. HS

      No, but you asked me a question earlier-

    23. BG

      ... no [chuckles]

    24. HS

      -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.

    25. BG

      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.

    26. HS

      No debt. I don't-- I, I want any debt again because of my childhood.

    27. BG

      I was gonna ask you, w- was that informed by the, the-- what you had seen with the Starbucks situation-

    28. HS

      No

    29. BG

      ... or more your childhood?

    30. HS

      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.

  11. 41:09 – 53:06

    The hidden machine: unit economics, cup/lid design, and experience flywheels

    1. DR

      This is probably a good point in time to talk about the business model a little bit.

    2. HS

      Okay.

    3. DR

      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-

    4. HS

      Yeah

    5. DR

      ... when you bought the Starbucks stores?

    6. HS

      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.

    7. DR

      Wow! Yeah, that is not the-

    8. HS

      Yeah

    9. DR

      ... the, quote-unquote, "restaurant business-

    10. HS

      Yeah

    11. DR

      -that people are imagining."

    12. HS

      And I could begin to see, even early on, the accretive nature of frequency.

    13. DR

      Hmm.

    14. HS

      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.

    15. BG

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

    16. BG

      Yeah, twice.

    17. HS

      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.

    18. BG

      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.

    19. HS

      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.

    20. BG

      So what does that mean, sales to investment ratio?

    21. HS

      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.

    22. BG

      Wow!

    23. BG

      In year one of operation?

    24. HS

      Yeah. Yes, and the, and the, and the, the operating profit was, was north of twenty percent.

    25. BG

      Wow.

    26. HS

      So the cash on cash return was just-

    27. BG

      So, yeah, you get that-

    28. HS

      Yeah

    29. BG

      ... two years or less payback.

    30. HS

      Yeah, yeah.

  12. 53:06 – 1:03:28

    Scaling without marketing: Chicago fixes, LA ‘halo’, and the H2O operating system

    1. DR

      So, uh, in this era, I mean, you must just be getting more and more excited every day.

    2. HS

      Oh, I was out of my mind. [chuckles]

    3. BG

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

    4. DR

      Yeah

    5. BG

      ... 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."

    6. HS

      Mm-hmm.

    7. BG

      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-

    8. HS

      Right, right

    9. BG

      ... 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.

    10. HS

      That's what happened.

    11. BG

      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"?

    12. HS

      There were regional competitors who were making noise about doing what we were aspiring to do.

    13. BG

      Mm-hmm.

    14. HS

      And I was very mindful because one of them was franchising, and that was Gloria Jeans out of Chicago.

    15. BG

      Hmm.

    16. HS

      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.

    17. BG

      Because Chicago was the first market outside of Seattle and Vancouver, right?

    18. HS

      Yes.

    19. BG

      Even before L.A.

    20. HS

      Yeah, and it didn't work right away.

    21. BG

      Huh.

    22. HS

      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.

    23. BG

      Yeah, so I have in my script here, this is literally labeled the, uh, H2O era, and-

    24. HS

      Yeah

    25. BG

      ... 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.

    26. HS

      Okay.

    27. BG

      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.

    28. HS

      No, he was the adult in the room.

    29. BG

      Hmm.

    30. HS

      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."

  13. 1:03:28 – 1:08:16

    People as strategy: Bean Stock, healthcare, Costco parallels, and cultural proof

    1. DR

      Yeah. Can you tell us about the people? This is such a huge-

    2. HS

      Yeah

    3. DR

      ...pillar to our minds of building Starbucks.

    4. HS

      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.

    5. BG

      I mean, the, the healthcare for part-time workers.

    6. HS

      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.

    7. BG

      Do you want the stats on that initial employee stock grant?

    8. HS

      I'd love to hear it.

    9. BG

      So the program was called Bean Stock.

    10. HS

      Yeah.

    11. BG

      Listeners, that, uh-

    12. HS

      Another great name

    13. BG

      ...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.

    14. HS

      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.

    15. DR

      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.

    16. HS

      Costco, right.

    17. DR

      And how you treat your people, specifically.

    18. HS

      Mm-hmm. That's not by accident.

    19. BG

      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.

    20. HS

      Yeah.

  14. 1:08:16 – 1:16:43

    Distribution as ‘billboards’: Costco, United, grocery—and the Frappuccino leap to Pepsi

    1. BG

      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?

    2. HS

      Do you know the answer to that? That's why I asked-

    3. BG

      I actually don't.

    4. DR

      No, we don't know the answer.

    5. BG

      I assume the answer to this, but I don't know it.

    6. HS

      First, Jeff Brotman invested in Starbucks in the round to buy Starbucks.

    7. DR

      No way! [chuckles]

    8. HS

      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-

    9. DR

      [chuckles]

    10. HS

      ... "No effing way!"

    11. DR

      Wow.

    12. HS

      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.

    13. BG

      You sold beans-

    14. HS

      We sold beans.

    15. BG

      -in Costco.

    16. HS

      Yes.

    17. BG

      And that brand awareness of, "I buy Starbucks beans at home," meant that that group of people went to the stores more often.

    18. DR

      Coffee bar business.

    19. HS

      Because we, we introduced thousands of beverage customers to Costco through the beans.

    20. DR

      Wow!

    21. HS

      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.

    22. BG

      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.

    23. HS

      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.

    24. BG

      Right.

    25. HS

      And we were then going back to our core business in new channels of distribution.

    26. BG

      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.

    27. HS

      I don't know what our cost of customer acquisition was back then, but it was low.

    28. BG

      Well, you also did-

    29. DR

      Well, you weren't spending any money on marketing, so [chuckles]

    30. BG

      But United Airlines was paying you for coffee, I assume. I don't know exactly how-

  15. 1:16:43 – 1:28:54

    Becoming public: IPO realities, comps education, and early East Coast expansion

    1. BG

      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.

    2. HS

      I thought so.

    3. BG

      There was no-

    4. HS

      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.

    5. BG

      Hmm.

    6. HS

      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.

    7. BG

      And what was the revenue at the time?

    8. HS

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

    9. BG

      I think, uh, you d- you ended up doing 93 million that year-

    10. HS

      Yeah

    11. BG

      ... but the, the year before, you know, was 50 million or something like that.

    12. HS

      Yeah.

    13. BG

      Like, you know, companies went public when they were smaller-

    14. HS

      Yeah

    15. BG

      ... back then, but-

    16. HS

      Well-

    17. BG

      But you were a small cap IPO.

    18. HS

      Yeah, we were, and, you know, we got turned down by Goldman Sachs. You know that?

    19. BG

      [chuckles] I did not know that.

    20. HS

      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.

    21. BG

      It would be a very Starbucks thing for Goldman Sachs to be the, the lead left.

    22. HS

      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."

    23. BG

      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.

    24. HS

      Well, I was considering it because [chuckles] Goldman Sachs-

    25. BG

      Because they told you, you- [laughing]

    26. HS

      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?

    27. BG

      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.

    28. DR

      Yeah.

    29. BG

      There's like, there's literally no public companies like yours.

    30. DR

      You have a huge, you know, investor education problem, right?

  16. 1:28:54 – 1:43:06

    International expansion: Japan’s instant success and China’s long struggle (then breakout)

    1. HS

      Sure

    2. BG

      ... 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.

    3. HS

      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.

    4. BG

      Mm.

    5. HS

      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?

    6. BG

      Aren't there some consultants you could possibly pay to help-

    7. HS

      Yeah

    8. BG

      ... you know, this, uh-

    9. HS

      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.

    10. BG

      It's like they've never met you.

    11. HS

      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.

    12. BG

      Mm.

    13. HS

      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.

    14. BG

      High risk, high reward.

    15. DR

      Wow!

    16. HS

      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.

    17. BG

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

    18. HS

      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.

    19. BG

      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-

    20. HS

      Mm-hmm

    21. BG

      ... there by nineteen ninety-six.

    22. HS

      I honestly, I haven't thought about it in that way, but-

    23. BG

      That's so fast.

    24. HS

      Yeah.

    25. BG

      I mean, to build something that-

    26. HS

      Didn't seem fast to us.

    27. BG

      I bet.

    28. DR

      The parallels to the Microsoft story are just, like, so apt. You know, Japan was Microsoft's first international market.

    29. HS

      Did not know that.

    30. DR

      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.

  17. 1:43:06 – 1:58:08

    2008 crisis and rebirth: store closures, truth-telling, and rebuilding the ‘reservoir’

    1. BG

      Okay. But basically, the, um, two thousand and eight happens, and-

    2. HS

      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."

    3. BG

      ... And that wasn't, that was never your intent. When you stepped away, you thought you were really stepping away.

    4. HS

      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-

    5. BG

      Yeah

    6. HS

      ... almost at the same time. So we had so many things to talk about.

    7. BG

      Hmm.

    8. HS

      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.

    9. BG

      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.

    10. HS

      Okay, okay.

    11. BG

      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.

    12. HS

      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.

    13. BG

      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.

    14. HS

      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-

    15. BG

      Every single quarter was better than the twelve months before.

    16. HS

      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."

    17. BG

      The big conference room.

    18. HS

      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."

    19. BG

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

    20. HS

      Yeah. Well, social media didn't exist at that time-

    21. BG

      Yeah

    22. HS

      ... 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.

    23. BG

      Hmm.

    24. HS

      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.

    25. BG

      Mm-hmm.

    26. HS

      Anyway-

    27. BG

      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-

    28. HS

      Yeah

    29. BG

      ... or we're, we're turning this one store around.

    30. HS

      Yeah.

  18. 1:58:08 – 2:10:56

    Mobile order & pay: huge innovation, unintended chaos, and today’s Achilles heel

    1. BG

      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?

    2. HS

      Yeah.

    3. BG

      Yeah. You had been on pen and paper, then you moved to DOS-

    4. HS

      That's right

    5. BG

      ... and now you have the most-

    6. HS

      Yeah

    7. BG

      ... sophisticated technology platform of probably any retailer in the world.

    8. HS

      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.

    9. BG

      Yep.

    10. HS

      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-

    11. BG

      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-

    12. BG

      Summer two thousand eight

    13. BG

      ... summer two thousand eight. So it's like, you know-

    14. HS

      Early

    15. BG

      ... 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.

    16. HS

      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-

    17. BG

      Yeah

    18. HS

      ... it is the biggest Achilles heel for Starbucks.

    19. BG

      Really?

    20. HS

      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.

    21. BG

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

    22. HS

      Yeah

    23. BG

      ... with customer funds.

    24. HS

      All, all that is true, but at, but it was beginning to deteriorate-

    25. BG

      Yeah

    26. HS

      ... 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.

    27. BG

      Mm.

    28. HS

      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.

    29. DR

      Yep.

    30. HS

      I, not a-- I wasn't, I was not involved.

  19. 2:10:56 – 2:31:04

    Real estate and control: why Starbucks avoided franchising (and what ‘licensed’ means)

    1. DR

      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-

    2. HS

      Yeah

    3. DR

      ... real estate.

    4. HS

      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.

    5. BG

      Oh, well, there were franchises.

    6. HS

      But I'll... Let me explain that, if I can-

    7. BG

      Yeah

    8. HS

      ... 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.

    9. DR

      Well, as you've been saying, it's from the beginning, it was about elevating.

    10. HS

      Yeah.

    11. DR

      McDonald's, great company, but-

    12. HS

      Yeah

    13. DR

      ... nobody would ever accuse them of elevating-

    14. HS

      Yeah

    15. DR

      ... I don't think. [chuckles]

    16. HS

      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?

    17. BG

      That's actually quite befuddling to me-

    18. HS

      Yeah, yeah

    19. BG

      ... 'cause so many-

    20. HS

      Yeah

    21. BG

      ... food and beverage concepts do not transfer geographies.

    22. HS

      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.

    23. BG

      I wanna pick up the thread on China now that we're sort of into the 2010s.

    24. HS

      Okay.

    25. BG

      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.

    26. HS

      True.

    27. BG

      Now bring us to that seed that you planted earlier with Belinda being the single most important-

    28. HS

      Yeah

    29. BG

      ... employee.

    30. HS

      China presented the enormity of opportunity with the significant challenge of pioneering, and-

  20. 2:31:04 – 2:53:20

    Full-circle Italy + Roasteries: “Willy Wonka” theater and earning the right to enter Milan

    1. BG

      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.

    2. HS

      Yeah, yeah.

    3. BG

      The whole thing- [chuckles]

    4. HS

      [chuckles]

    5. BG

      ... came out of Milan.

    6. HS

      Right.

    7. BG

      And yet, for decades-

    8. HS

      Fifty years

    9. BG

      ... no Starbucks. Fifty years, no, no Starbucks in Italy.

    10. HS

      Yeah.

    11. BG

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

    12. HS

      Okay, yeah

    13. BG

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

    14. HS

      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] -

    15. BG

      [chuckles]

    16. HS

      ... that's, that's, that's my truth.

    17. BG

      If you don't believe you have a better product, who does? [chuckles]

    18. HS

      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.

    19. BG

      Please.

    20. DR

      Yeah.

    21. BG

      I, I mean, the first time I went in there, you know-

    22. HS

      Yeah

    23. BG

      ... kid in a candy store, wide eyes.

    24. HS

      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.

    25. BG

      I was gonna say-

    26. DR

      I was gonna say

    27. BG

      ... that has to be.

    28. DR

      It's gotta be. [laughing]

    29. HS

      I turned on Willy Wonka, Wonka with Gene Wilder, and we went to work starting to design a space. Now, we realized early on-

    30. BG

      And this was what? 2013-

Episode duration: 3:15:40

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