Starbucks (with Howard Schultz)

In this episode, Howard Schultz, founder of Starbucks, reflects on the company's journey from a small chain of coffee stores to a global icon with nearly 40,000 locations. Schultz discusses the pivotal moments and decisions that shaped Starbucks, including the refusal to franchise, the creation of an industry that didn't exist, and the importance of maintaining the company's core values and culture despite its massive scale. Schultz emphasizes the humanity and personal connection that underpin Starbucks' success, as well as the challenges of managing a complex, multi-faceted business. He candidly addresses recent struggles, including the impact of mobile ordering on the customer experience and offers counsel to current leadership. Throughout, Schultz's deep love for Starbucks and its partners is evident, as is his belief in the brand's resilience and ability to continue thriving.

• Starbucks is a $90 billion institution deserving of a comprehensive analysis.
• Howard Schultz is the key figure behind the Starbucks we know today.
• Schultz started working at Starbucks in 1982 and transformed it into a global presence.
• The podcast aims to discuss why Starbucks succeeded, the lessons learned, and its future direction.

"Howard started working at the small chain of three Starbucks stores in 1982, eventually buying it and becoming CEO." "I come to you, David, and listeners, as an unabashed Starbucks fan in this tumultuous time for the company." "We thought that this would be the perfect time to sit down with Howard and unpack."

• Schultz's leadership played a crucial role in Starbucks' transformation.
• The podcast hosts are fans of Starbucks and see the current challenges as a timely opportunity to explore the company's journey.
• The discussion will focus on unpacking the success and challenges faced by Starbucks.

• Starbucks operates in over 80 countries with 39,000 stores.
• The company is significant in China, a country with historically low coffee consumption.
• Starbucks holds a substantial amount of money in unspent gift card balances, reflecting its financial impact.

"They're in over 80 countries with 39,000 stores across the world." "At any given time, Starbucks holds $1.7 billion that customers have loaded onto gift cards but not yet spent."

• Starbucks' global reach and financial prowess are emphasized.
• The quote illustrates the company's extensive global footprint and the financial trust customers place in it.

• Starbucks was founded in 1971, initially selling only coffee beans.
• The original founders were inspired by Pete's Coffee and initially used Pete's coffee beans.
• Howard Schultz joined Starbucks in 1982 with a vision to transform the company.

"Starbucks Coffee company from 1971 until around 85, 86 only sold pounds of coffee there was no beverage." "I was offered the job as the head of marketing for Starbucks when they were getting ready to open their fourth store in 1982."

• Starbucks' original business model focused solely on selling coffee beans.
• Schultz's entry into Starbucks marked the beginning of significant changes.

• Schultz's trip to Italy in 1983 inspired the introduction of coffee bars to Starbucks.
• Despite initial resistance, Schultz was allowed to test the coffee bar concept, which proved successful.
• Schultz's vision for Starbucks was influenced by the sense of community and connection observed in Italian coffee culture.

"I walked into the pike place market, and I walked into the Starbucks store, and I was blown away by the experience, the romance of coffee, the education." "I was so frustrated. I said, I'm going to leave Starbucks."

• Schultz was inspired by the Italian coffee culture and saw potential to replicate it in Starbucks.
• His frustration with the initial resistance led to the determination to pursue the coffee bar concept.

• Schultz faced challenges raising funds for his venture, Il Giornale, which would later acquire Starbucks.
• Key investors and the support of Bill Gates Sr. played a crucial role in the acquisition.
• The acquisition allowed Schultz to fully implement his vision for Starbucks.

"I go back with Scott, and Mister Gates says, scott, I'm going to see how we're alone. And Scott leaves. Now I'm alone in his office." "You're going to buy Starbucks coffee company and my son and I are going to help you."

• Bill Gates Sr.'s intervention was pivotal in securing the deal for Schultz.
• The quote highlights the decisive moment that enabled Schultz to acquire and lead Starbucks.

• Starbucks' business model focused on high gross margins from beverage sales and rapid store profitability.
• The company avoided debt, reflecting Schultz's personal aversion to it.
• Customization of beverages by customers led to increased sales and customer loyalty.

"The ability to source and roast coffee and put that through the supply chain of a beverage gave us probably at the time, an 80% gross margin." "The average customer was coming 18 times a month."

• Starbucks' strategy capitalized on the high profitability of coffee beverages.
• The quotes demonstrate the strong business model and customer engagement that fueled Starbucks' growth.

• Terry Heckler, a brilliant design guy and the architect of the name Starbucks, collaborated with Starbucks on the importance of language.
• They changed cup sizes from small, medium, large to short, tall, and grande.
• Initially mocked, the new names became beloved and iconic.
• Venti was not an original size, it was added later due to demand, reflecting American consumer culture.

"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."

This quote highlights the strategic decision to differentiate Starbucks by using unique names for cup sizes, creating a distinct brand identity.

• The practice of writing customer names on cups was a response to baristas having difficulty identifying orders as stores became busier.
• It was not a planned strategy but an organic solution that became standard.
• Starbucks' success often came from customer requests and employee initiatives.

"Someone at Starbucks, I don't know who it was, started writing names on the cup, writing names, and it just became standard."

The quote explains the origin of writing names on cups as a practical solution to manage orders, which then evolved into a standard practice.

• Starbucks became an experiential brand at scale without spending any money on marketing.
• The cup became an iconic symbol and a "badge of honor" for customers.
• The intimacy between the customer and barista was a significant part of the brand's equity.
• The name on the cup was an aspect that scaled well with the growth of the company.

"The intimacy with the customer and the barista became a very powerful component of the equity of the experience."

This quote captures the essence of Starbucks' experiential branding, emphasizing the personal connection between baristas and customers as a key element of their success.

• The advertisement is for JPMorgan Payments, discussing digital commerce, personalization, convenience, and innovative payment solutions.
• It mentions consumer expectations for shopping, the challenges for businesses, and the benefits of biometric payment solutions.
• JPMorgan's payment solutions are presented as driving business growth with the backing of a global bank and fintech innovation.

(Note: As per instructions, the advertisement content has not been included in the study notes.)

• Howard Schultz's early vision for Starbucks was to change America with the concept of becoming America's coffeehouse.
• The growth strategy involved rapid expansion, with plans to grow from 6 to 26 stores in one year and over 100 in five years.
• Starbucks faced competition from regional competitors, which influenced the decision to expand quickly.

"We're going to take your six stores that you've built in 17 years, and we're going to go to 26 in one year, and we're going to go to over 100 in five years."

The quote reflects Schultz's ambitious growth targets for Starbucks, setting the stage for its rapid expansion.

• The H2O era refers to Howard Schultz, Howard Behar, and Orrin Smith's leadership at Starbucks.
• Behar brought the concept of servant leadership and a people-first approach.
• Orrin Smith was seen as the "adult in the room," providing balance with his wisdom and business acumen.
• The three leaders had regular dinners to resolve crises and disagreements, fostering a strong leadership dynamic.

"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. And we listened, more or less."

The quote illustrates Orrin Smith's influence within Starbucks, providing a grounding perspective to the company's leadership.

• Initially, Starbucks had no significant technology infrastructure.
• Point of sale systems were DOS-based until 2008.
• The lack of technology was not seen as a hindrance to the company's success.

"There was no technology. No. It was mostly manual."

This quote indicates the manual nature of Starbucks' operations before the adoption of more advanced technology systems.

• Starbucks' expansion strategy involved careful consideration before entering new markets.
• The decision to enter Los Angeles over San Diego was contentious but ultimately successful.
• The brand's equity and the appeal of warm weather and media exposure in LA played a significant role in the decision.

"We had to go. And even though we maybe were not ready, we just had to do it."

The quote expresses the urgency and strategic importance of entering the Los Angeles market despite potential unpreparedness.

• Starbucks aimed to be accessible to all, with no intentional segmentation of the brand.
• The term "affordable luxury" was used to describe the quality of the coffee and the experience.
• Pricing was linked to the economic model and the rising costs of labor and rent.

"The ubiquity of Starbucks was an enemy to the company. 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."

The quote addresses the challenge of maintaining the brand's intimacy and trust with customers amidst rapid growth.

• Howard Schultz wanted to build a company that provided respect and dignity to its employees.
• Before the IPO, Starbucks introduced the Bean Stock program, offering equity in the form of stock options to every employee.
• The company also provided comprehensive health insurance 25 years before the Affordable Care Act.

"We started talking about exceeding the expectations of our people so they can exceed the expectations of the customer."

This quote underscores the philosophy of investing in employees to enhance customer service and the overall success of the company.

• Starbucks went public with a market cap of $250 million.
• The IPO was a validation for the company and Schultz personally.
• Management's significant ownership stake in the company was not a deliberate strategy but contributed to the commitment of the team.

"We went out at dollar 17, and the price was 21."

The quote provides details on the pricing of Starbucks' IPO, marking a significant milestone in the company's history.

• Starbucks' first international expansion was in Japan, chosen due to its direct flights from Seattle and existing coffee culture.
• Despite board resistance and negative consultant reports, Schultz was determined to enter the Japanese market.
• The Tokyo store opening was a huge success, with long lines and immediate brand recognition.

"Japan was an extraordinary success. From minute one, we got 2000 stores there."

This quote highlights the overwhelming success of Starbucks' entry into the Japanese market, which became a cornerstone of its international presence.

• The introduction of the Frappuccino was initially met with skepticism by Schultz but became a significant revenue driver.
• The bottled Frappuccino, developed in partnership with Pepsi, became a multi-billion dollar business and expanded the brand's reach.

"We got to put this in a bottle."

The quote captures the strategic insight that led to the successful launch of bottled Starbucks products, significantly enhancing the brand's market presence.

• Starbucks used various channels such as airlines, retail partnerships, and grocery stores to build brand awareness without traditional marketing.
• Partnerships with United Airlines and Costco, among others, served as effective means of customer acquisition and brand building.
• The company's strategy included creating visibility through brand placements and leveraging the Starbucks logo.

"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."

This quote summarizes the organic and strategic approach to building Starbucks' reputation and brand awareness through customer experiences and partnerships.

• Starbucks became a globally desirable brand by 1996.
• Japan was Microsoft's first international market, which was a surprise to many, and it represented a significant portion of their revenue.
• The parallel between Microsoft's and Starbucks' international growth is highlighted, showcasing the importance of international markets in a company's expansion.
• The discussion emphasizes the strategic importance of international expansion for companies like Starbucks and Microsoft.

"Japan was Microsoft's first international market. Did not know that it was half their business. And it started in the same way. Bill and Paul got a cold call from Kei Nishi, who was a guy in Japan who had somehow gotten ahold of the basic interpreter, loved it, and said, I'm so passionate about this, I want to bring it to Japan. 50% of Microsoft's revenue for the first at least five years."

• This quote illustrates the unexpected and serendipitous nature of Microsoft's entry into the Japanese market, which became a significant revenue source.

• ServiceNow is recognized as a critical AI platform for enterprises, automating processes and increasing efficiency.
• NASCAR's use of ServiceNow is a case study demonstrating the platform's ability to automate manual processes and unify technology into a single platform.
• The discussion highlights the role of technology in enhancing operational efficiency and innovation within large organizations.

"With ServiceNow, they've been able to automate manual and outdated business processes and unify fragmented technology into a single platform."

• This quote underscores the transformative impact of ServiceNow on NASCAR's operations, streamlining processes and integrating technology.

• Starbucks' entry into China was a major strategic move, but initially faced challenges with a partner that did not share the company's values.
• The concept of partnering with local entities in non-English speaking markets is discussed as a strategic approach to international expansion.
• Belinda Wong's role in turning around Starbucks' operations in China is highlighted as a pivotal moment in the company's history.

"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... No, no, we got out of the partnership, bought them out, and became company owned."

• This quote reveals the difficulties Starbucks faced in China with an incompatible partnership and the decision to take full ownership to align operations with the company's values.

• The transition of leadership roles within Starbucks is discussed, including the move from CEO to Executive Chairman and the appointment of new CEOs.
• The importance of aligning leadership with the company's culture and values is emphasized.
• The impact of leadership changes on the company's trajectory, especially during challenging economic times, is examined.

"I think I was physically and emotionally exhausted. 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 Oren, so it was no problem."

• This quote reflects the personal reasons behind a leadership transition and the trust placed in successors to continue guiding the company.

• Starbucks' financial crisis in 2008 and the subsequent turnaround strategy are discussed.
• The company faced significant challenges, including unprofitable store locations and pressure to close operations in certain markets.
• The emphasis on connecting with employees and reinforcing the company's values is highlighted as a critical factor in the turnaround.

"I, first off, every rock I turned over was worse than I thought. There were a lot of unperforming stores that should have never been opened that we need to close. I think we closed 1000 stores and I had a company wide meeting."

• This quote illustrates the tough decisions and actions taken to address the financial crisis, including closing stores and communicating transparently with employees.

• The introduction and growth of mobile order and pay at Starbucks is discussed, highlighting both the benefits and challenges.
• The conversation explores the balance between technological convenience and maintaining the experiential aspect of the Starbucks brand.
• The unintended consequences of mobile order and pay, such as depersonalizing the customer experience and creating operational bottlenecks, are considered.

"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 became so seductive for the company."

• This quote conveys the tension between embracing technological innovation for convenience and preserving the core experiential values of the Starbucks brand.

• Starbucks' real estate strategy focused on finding prime urban locations with high pedestrian traffic and favorable co-tenancies.
• The decision not to franchise was deliberate to maintain control over the company culture and customer experience.
• The discussion underscores the importance of strategic real estate choices and company-owned operations in building a cohesive brand experience.

"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."

• This quote highlights the reasoning behind Starbucks' decision to avoid franchising, emphasizing the significance of a unified company culture in driving success.

• Leadership is closely tied to the company's foundational values and mission.
• A company's success is often attributed to its core principles and the consistent application of those principles throughout its growth.
• Starbucks' leadership emphasizes compassion, empathy, and love, which are not typically taught in business schools.
• Overcoming cynicism and maintaining a genuine company culture is a challenge for large corporations.
• Leaders have a responsibility to uphold and execute the company's values, regardless of the company's scale.

"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. They're not being taught in business schools."

• This quote emphasizes the unique cultural elements that have contributed to Starbucks' success, which are not commonly part of traditional business education.

• Starbucks' significant scale is demonstrated by its revenue, net income, employee count, and global presence.
• The company has employed millions of people over its lifetime, highlighting its impact on the labor market.
• Starbucks' growth strategy includes joint ventures and licensing rather than traditional franchising models.
• The company's international expansion is tailored to each country's economic and political climate.
• Partners in various countries understand and uphold Starbucks' culture and values.

"Today, Starbucks does $36 billion in revenue, 4.1 billion in net income. There are 380,000 employees... over the lifetime, the company has employed over 5 million."

• This quote provides a snapshot of Starbucks' financial success and its role as a major global employer.

• Starbucks' approach to international expansion involves forming joint ventures with local partners who understand the company's ethos.
• The company maintains control over coffee roasting and recipes, while local partners manage operations.
• Starbucks' presence in airports and other specific locations often involves master licensing agreements.
• The goal is for the customer experience to be consistent worldwide, despite local variations.

"Starbucks is responsible for roasting the coffee, 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, and they control all the operations."

• This quote outlines the division of responsibilities in Starbucks' international partnerships, ensuring brand consistency while leveraging local expertise.

• Starbucks' entry into Italy was strategic and waited until the company was ready to meet high expectations.
• The Italian market was approached with respect for the local coffee culture and a unique offering through the roastery concept.
• The roasteries are experiential spaces that elevate the Starbucks brand and provide a theatrical coffee experience.
• Starbucks' success in Italy, including the popularity of its espresso, indicates acceptance by the local population, not just tourists.

"We waited and waited and waited until the roastery. And so before we get to Italy, I have to explain the roastery for you."

• This quote explains the deliberate timing and concept behind Starbucks' entry into the Italian market, emphasizing the importance of the roastery experience.

• Starbucks has faced predictions of competition eroding its market share, yet specialty coffee remains a relatively small segment.
• The company's success is attributed to creating a new industry and expanding the market for coffee culture.
• Third wave coffee shops have introduced more consumers to specialty coffee, some of whom also become Starbucks customers.
• Innovation at Starbucks includes the mobile app, which has enhanced customization options for customers.
• Baristas are credited for their ability to handle a vast array of beverage customizations, contributing to the personalized Starbucks experience.

"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."

• This quote highlights the skill and adaptability of Starbucks baristas in creating a tailored experience for each customer.

• Some speculate about the role of caffeine in Starbucks' success, suggesting it's an addictive substance that benefits the business.
• Starbucks leaders believe the customer experience around coffee, rather than addiction, drives the company's success.
• Customization plays a significant role, with customers dictating the incremental price of their personalized beverages.
• The company's business model includes being an agricultural buyer, manufacturer, retailer, wholesaler, and employer, which adds complexity to its operations.

"I'd like to believe it's the experience that has been created around the enjoyment of the coffee and the experience that happens."

• This quote conveys the belief that Starbucks' success is rooted in the overall experience it offers, not merely the addictive properties of caffeine.

• Founder-led companies have the leeway to take risks and innovate due to the trust placed in the founder's vision.
• The challenge for these companies is ensuring that innovation continues and that the company remains on the offensive after the founder steps back.
• Hubris and complacency can be detrimental to a company's continued success.
• Succession planning is critical, and past mistakes in this area have been acknowledged by Starbucks' leadership.

"The worst thing that a company can do, like a sports team, is start playing defense because you're afraid to fail."

• This quote emphasizes the importance of maintaining an offensive, innovative approach in business rather than becoming overly cautious or defensive.