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According to legend, Merlin was born in the future and lived backward in time, moving toward the past. He must have often felt out of step with his contemporaries, filled as he was with unconventional notions of what might be. I’m no sage, but sometimes I think I know how he must have felt.My vision for the future, my aspirations for what kind of company Starbucks should be, are so easily misunderstood.
—Howard Schultz, 1997
By 1995 one specialty roaster had emerged as the definitive leader in the dynamic, fragmented market. Starbucks, the pioneering Seattle company begun in 1971 by Jerry Baldwin, Zev Siegl, and Gordon Bowker, had been transformed into a national phenomenon in an astonishingly short period of time. Without paying for the publicity, Starbucks had become synonymous with fine coffee, hip hangouts, and upscale image.
In 1980 Zev Siegl sold out to pursue other interests. By that time, Starbucks was the largest roaster in Washington, with six retail outlets. It also sold its beans to restaurants, other retailers, and supermarkets, and sold espresso machines, grinders, and brewers. Jerry Baldwin sold the Blue Anchor supermarket division to focus primarily on sales in his own stores. He also gave up the equipment accounts, but in 1982 he hired Howard Schultz, a New York salesman who had supplied the coffee firm with drip-brewing thermoses, as his new head of marketing. “You’ve got a real jewel,” Schultz told Baldwin. “Starbucks could be so much bigger.”
In 1983 Baldwin got a call from Sal Bonavita, who had bought Peet’s in 1979. Bonavita wanted to sell. “I was so excited I could hardly sit still,” Baldwin recalled. Here was his chance to own the store that started it all. “I wanted to see Peet’s and Starbucks together.” In 1984 Starbucks bought Peet’s, putting the company deeply into debt. Baldwin found himself juggling two company cultures and commuting between Seattle and San Francisco.
Howard Schultz was agitating to take Starbucks in another direction. In spring 1983 Starbucks sent Schultz to an international housewares show in Milan, Italy. There, like Alice Foote MacDougall sixty years earlier, he found a vibrant coffee culture. Milan, a city the size of Philadelphia, supported 1,500 espresso bars, and there were 200,000 in all of Italy. “Buon giorno! ” a barista (bartender) greeted Schultz one morning, as he handed a tiny demitasse of espresso to one customer, then deftly created a perfect cappuccino. “The barista moved so gracefully that it looked as though he were grinding coffee beans, pulling shots of espresso, and steaming milk at the same time, all the while conversing merrily with his customers,” Schultz recalled. “It was great theater.” In Verona, Schultz had his first caffè latte, a drink with more steamed milk than espresso.
Schultz was inspired. Why not take great Starbucks beans and brew such drinks? Why not create community gathering places like those in Italy? Back in Seattle, Schultz received a chilly reception. Jerry Baldwin didn’t want to dilute his mission to sell whole beans.
When Starbucks opened a sixth store in April 1984, Baldwin let Schultz test a small espresso bar. It proved an immediate hit, but Baldwin didn’t want customers to think of Starbucks as a place to grab a quick cup of coffee to go. Schultz decided to branch out on his own, starting Il Giornale, a coffeehouse named after Italy’s biggest newspaper, meaning “daily.”
Schultz, who grew up in a Brooklyn housing project, had the aggressive drive of a street kid determined to make it. Baldwin showed his goodwill and confidence by investing $150,000 of Starbucks money in Il Giornale, and Schultz convinced other Seattle businessmen to kick in seed money. He hired Dawn Pinaud, who had run the first test espresso bar, to train staff and supervise the retail stores. Then Dave Olsen joined the team. In 1975 Olsen had opened the funky Café Allegro in Seattle’s university district, where he roasted Starbucks beans to a dark finish for his espresso drinks. “I had been running my place for ten years by 1985, and I was beginning to think I should do more. Howard’s dream matched mine.”
The first Il Giornale opened in April 1986. Within six months, a thousand people a day were buying espresso drinks there. A few gulped the concentrated beverage straight like the Italians, but most opted for the cappuccino (a little more espresso than steamed milk) and latte (a lot more milk). Italians drank such dilute beverages only in the morning but Schultz adapted to American preferences. In Italy, most customers stand for their brief shot. Americans wanted to linger, so Schultz added chairs. Customers complained about the incessant opera, so he modified it to background jazz.
The essential elements worked, though. Dawn Pinaud and her staff created their own lingo. Although Il Giornale was essentially a fast-food outlet, the service people weren’t soda jerks or flunkies. They were baristas, spotlighted as though on stage. A drink wasn’t small, medium, or large. It was short, tall, or grande. A double espresso with a splash of milk was christened a doppio macchiato. “It’s amazing to me that these terms have become part of the language,” Pinaud said. “A few of us sat in a conference room and just made them up.” Eventually, after Starbucks caved in to customer requests and offered skim milk and flavors, ordering became a poetic art form. A large decaf espresso with lots of milk and no foam was an unleaded grande latte without. A small iced hazelnut coffee with one shot of regular and one of decaf, skim milk, and a fair amount of foam, to go, was an iced short schizo skinny hazelnut cappuccino with wings.
Then, in March 1987, Howard Schultz learned that Starbucks was for sale. Gordon Bowker wanted to cash out to start a microbrewery. Baldwin sold off Caravali, the company’s wholesale subsidiary, and was looking to spin off Starbucks itself. He and his chief roaster, Jim Reynolds, would move to San Francisco to concentrate solely on Peet’s. Within weeks, Schultz convinced his investors to contribute $3.8 million to buy the six Starbucks retail outlets and roasting plant. Schultz, then thirty-four, announced plans to open 125 outlets in the next five years. He abandoned the esoteric Il Giornale name in favor of Starbucks. He sanitized the logo’s bare-breasted mermaid, reducing her to a wavy-locked goddess figure, while company brochures now proclaimed that Starbuck was the “coffee-loving first mate” in Moby-Dick, although no one in the book drank coffee.
Schultz attracted a core group of devoted coffee people. Among them was Kevin Knox, the “coffee specialist” who supervised everything that happened from the time the beans tumbled from the roaster until the first sip. In October 1987 Schultz sent Pinaud to open a Chicago Starbucks. “A consultant later said that I was parachuted into enemy territory with a Boy Scout knife and told to survive,” Pinaud recalled. Over the next two years, she opened fifteen stores. Chicagoans, weaned on Hills Brothers and Folgers, did not take to the strong, dark-roasted Starbucks blend immediately. Still, the cappuccinos and lattes were tasty, and gradually the stores developed a loyal clientele.
In 1987 Starbucks lost $330,000. The next year, $764,000, and by 1989 the firm dropped $1.2 million. There were then fifty-five Starbucks locations in the Pacific Northwest and Chicago. Investors simply had to have faith, delivering repeated infusions of venture capital. In 1990 the company turned the corner, building a new roasting plant and showing a small profit. The following year, Pinaud took Starbucks into Los Angeles, where many feared the warm weather would deter hot coffee sales, but it was an immediate hit. “Almost overnight, Starbucks became chic,” Schultz remembered. “Word of mouth, we discovered, is far more powerful than advertising.”
Schultz began to hire MBAs and corporate executives with experience running chain franchises, creating complex computer systems, and training employees nationwide to deliver standardized consumer goods. He recruited many of them in the early 1990s from fast-food companies, and they brought professional management to the preexisting coffee idealism, though the two did not always coexist comfortably. By the end of 1991, there were just over one hundred stores with $57 million in sales, and Schultz was preparing to take Starbucks public to finance more rapid expansion.
Latte Land
“I became increasingly afraid of waking up the sleeping giants,” Schultz admitted, referring to Maxwell House, Folgers, and Nestlé. “If they had begun to sell specialty coffee early on, they could have wiped us out.” Yet they never made a move into small retail stores. Several other regional specialty coffee outlets were expanding.122 Gloria Jean’s Coffee Bean, owned by Ed Kvetko, loomed as Starbucks’ major competition. In 1985, when Kvetko owned eleven stores in the Chicago area, he began franchising, primarily in malls. While Starbucks projected a highbrow Italian image, Gloria Jean’s was thoroughly middle-class, featuring a huge variety, including plenty of flavored beans and, eventually, a variety of coffee beverages. By 1991 Kvetko’s wife’s name graced 124 stores in over a hundred cities, considerably more than Starbucks’.
Sales of gourmet beans tripled in only six years, accounting for 20 percent of home purchases. Consumers were confronted with “beans from countries that college graduates cannot find on a map,” one journalist groused. Once they settled on a nationality, they still had to decide on a flavor: “chocolate, amaretto, vanilla, Irish cream, sambuca, orange, cinnamon, hazelnut, macadamia, raspberry, even chocolate raspberry. Will it be French, American or Italian roast? Decaffeinated or regular? Which grind?” In the 1991 movie LA Story, comedian Steve Martin ordered a “half double decaffeinated half caf with a twist of lemon.”
The health concerns of the previous decade were mostly tossed aside as the nation crested on a caffeine high. Coffee lover Joan Frank described “a quivering bunch of quasi-homicidal crackpots” standing in line at Peet’s in San Francisco. “Don’t mess with us,” their eyes seemed to warn. “We haven’t had our coffee.” But who cared? “Bless every drop and granule of the stuff,” Frank wrote. “Coffee’s the vital juice that flows through the nation’s veins, and on which floats its fragile morale.” Baby boomers had come full circle, back to the drink of their parents, after a childhood of Cokes and coming-of-age with cocaine.
If this java nation had a capital, it was Seattle, the home of Starbucks and many other coffee companies. “It is hard to go anywhere,” one visitor observed in 1991, “whether it be the local hardware store or shopping downtown, without coming across a sidewalk espresso cart, or passing the doorway of a sleek café with a gleaming espresso machine behind the bar.” Truck drivers sipped lattes from drive-throughs. The television show Frasier placed the pretentious psychiatrist in Seattle, where he and his friends drank cappuccinos at the Café Nervosa.
Starbucks: The (Very) Public Years
On June 26, 1992, Starbucks launched its initial public offering (IPO) at $17 a share with a market capitalization (the value of all shares) of $273 million. Howard Schultz had paid less than $4 million for the company only five years earlier. Within three months, the stock price had reached $33, making Starbucks worth $420 million. Schultz, Dave Olsen, and other executives were overnight millionaires. Schultz personally held 1.1 million shares, or 8.5 percent of the stock.123
Starbucks employees were indoctrinated in twenty-five hours of course work that imprinted company rules. Among them: thou shalt brew a double espresso shot between eighteen and twenty-three seconds and serve within ten seconds of brewing it, or throw it out. The courses, called Coffee Knowledge 101, Retail Skills, Brewing the Perfect Cup, and Customer Service, were taught by ultra-earnest, peppy young instructors. “Lovely! Fabulous foam!” they would burble as students created lattes. Hip young Generation Xers had to remove studs and rings from nose, lip, or tongue, nor could any employee wear fragrance that might interfere with the roast aroma.
Though Schultz could have quadrupled his rate of expansion by franchising Starbucks, he chose to open only company-owned stores, except in airports, bookstores, or other odd spots that demanded licensure. This way he could maintain strict control over quality and training.
The chain paid slightly above minimum wage and provided an innovative benefits package that included part-time employees who worked twenty hours a week or more. As a result, employee turnover at Starbucks was only 60 percent a year, compared to the industry average of 200 percent or more. In 1991 Schultz introduced his “Bean Stock” program, in which employees—now called “partners”—received stock options worth 12 percent of their annual base pay, to be vested in one-fifth increments over a five-year period. Every year, new options would be issued. Theoretically, each employee had a stake in the company’s success. Since the average employee left after a year and a half, however, most options expired worthless. Still, for those who stayed with the company for several years, Bean Stock could provide a nice little nest egg if the stock kept climbing.
Starbucks became the largest U.S. corporate donor to CARE, specifying that its contributions go to help coffee-producing countries such as Indonesia, Guatemala, Kenya, and Ethiopia, pledging $500,000 a year by mid-decade. The company sold a coffee selection package called a “CARE sampler,” donating a portion of the proceeds. The grateful charity responded by giving Starbucks its International Humanitarian award.
Indeed, Schultz appeared to be a master image builder. As he himself has said, “My story is as much one of perseverance and drive as it is of talent and luck. I willed it to happen. I took my life in my hands, learned from anyone I could, grabbed what opportunity I could, and molded my success step by step.”
In 1989 the sociologist Ray Oldenburg published The Great, Good Place, a lament over the passing of community meeting places like the old country store or soda fountain. The book contained an entire chapter on coffeehouses, concluding: “The survival of the coffeehouse depends upon its ability to meet present day needs and not those of a romanticized past.” Schultz loved the book and adopted Oldenburg’s academic term, christening Starbucks as a “third place” beyond home or work, “an extension of people’s front porch,” where people could gather informally. Modern coffeehouses such as Starbucks do provide a much-needed space for friends and strangers to meet, especially as our cultural ethos becomes more paranoid and fragmented.
Following the initial public offering, Starbucks grew to 165 stores in 1992, 272 in 1993, and 425 in 1994. By mid-decade, the company was opening an average of a store every business day, targeting appropriate locations by studying the demographics of mail-order customers. Schultz monitored the daily sales and profit numbers for each store, calling managers to congratulate or berate them.
In 1993 Starbucks established a beachhead on the East Coast in Washington, D.C. On National Public Radio, Susan Stamberg doubted whether the concept would work there: “I’ve lived in this town for thirty years. You are in workaholic central here. I mean, this is not a town where people want to hang out and take their time.” Stamberg was wrong. Washingtonians flocked to Starbucks. Fortune featured Schultz on its cover as the CEO of one of America’s one hundred fastest-growing companies. “Howard Schultz’s Starbucks grinds coffee into gold,” the magazine noted.
Starbucks announced its intention of rolling into Minneapolis, Boston, New York, Atlanta, Dallas, and Houston in 1994. In Boston, Coffee Connection founder George Howell had feared such a move. In 1990 Schultz had sought to buy him out. The answer was no. Schultz repeated the offer over the next few years. Howell despised the dark Starbucks roast. He prided himself on nuanced roasting to bring out the delicate flavor of each bean. He didn’t want to see the work of two decades destroyed, so he opened new Coffee Connections, beginning in 1992. By 1994, Howell had opened twenty-one outlets, with plans for six more that year.
The Boston Globe reported on the looming battle. “We don’t like to get in coffee wars,” Starbucks marketer George Reynolds told the Globe. But he added, “We want to dominate.” Howell responded by calling his rival “Charbucks,” referring to its roast style. Then, in March 1994, Howell shocked the specialty coffee world by agreeing to sell out to Starbucks for $23 million. He realized that he would have lost some quality control in the rapid expansion. He didn’t enjoy financial management. The business wasn’t fun anymore. “Howard Schultz promised that the Coffee Connection would remain in business, that they would keep the concept and product unaltered,” Howell recalled ruefully.
Within two years, all Coffee Connections were converted to Starbucks, and the roast profile shifted toward the dark end of the spectrum. Requiring a centralized roasting plant on the East Coast, Starbucks opened a facility in York, Pennsylvania, shutting down the Boston Coffee Connection plant.
The enterprise moved at “warp speed,” as Business Week observed, swiftly conquering New York City. In 1995 Starbucks opened in Pittsburgh, Las Vegas, San Antonio, Philadelphia, Cincinnati, Baltimore, and Austin for a total of 676 stores by year’s end. The following year Starbucks grew to a thousand, one of which was an outlet in Tokyo. Howard Schultz was there, witnessing Japanese lined up in 95-degree weather for the “Starbucks experience.” He cried.
Through shrewd joint partnerships, Starbucks spread its fame and logo while making even more money. With Pepsi, it created Mazagran, a carbonated coffee drink, its first flop, but followed that with Frappuccino, a cold, milky coffee that took off in supermarkets. Teaming with Redhook Ale Brewery, the company came out with Double Black Stout, a coffee-flavored beer. Dreyer’s produced a Starbucks coffee ice cream that swiftly became the best-selling brand of that flavor. Starbucks even issued its own music, Blue Note Blend, a jazz CD for easy listening and coffee sipping, and Songs of the Siren, a collection of female singers. In Barnes & Noble superstores in the United States and in Chapters bookstores in Canada, customers could sip Starbucks coffee while reading in a comfortable café.
Starbucks opened stores in Singapore, Hawaii, the Philippines, Taiwan, and Korea. It was in the air with United Airlines and Canadian Airlines, partnered with Oprah Winfrey to promote literacy, entered into deals with hotel chains and cruise lines, became part-owner of a bagel chain, and tested supermarket sales. Starbucks became a household word without mounting a national advertising campaign. Indeed, the company spent less than $10 million on advertising in its first twenty-five years. It was a veritable “word-of-mouth wonder,” as an Advertising Age reporter put it. Not only that, it made money while advertising itself, selling mugs, thermoses, and canisters with the emblazoned logo. In 1994 Dave Olsen wrote Starbucks Passion for Coffee, a coffee primer with recipes that was sold by Sunset Books, followed by Starbucks Pleasures of Summer the following year.
Two years later, Howard Schultz told his story (cowritten with a Business Week reporter) in Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time, donating the proceeds to the newly formed Starbucks Foundation. On April 1, 1996, National Public Radio’s All Things Considered reported: “Starbucks will soon announce their plans to build a pipeline costing more than a billion dollars, a pipeline thousands of miles long from Seattle to the East Coast, with branches to Boston and New York and Washington, a pipeline that will carry freshly roasted coffee beans.” It’s a testament to Starbucks’ ubiquity that many people initially believed that this April Fool’s hoax was a real news story.
Deflecting the Critics
Starbucks’ overwhelming success, with its aggressive tactics, inevitably brought criticism. Specialty competitors complained that Starbucks used predatory retail tactics, frequently opening outlets directly across the street from their stores. “It has never been Starbucks’ intention to put anyone out of business, and we adhere to standard real estate practices when obtaining new locations,” a public relations spokesman said. The company simply looked for optimal locations. Besides, “having competitors nearby does nothing but increase the awareness of coffee in general.”
Despite complaints, it was clear that Starbucks was doing something right. The average customer visited Starbucks eighteen times a month, and 10 percent came twice a day. “If you walk into any Starbucks store,” Howard Schultz said, “you see little vignettes. Of business people having meetings. A mother and her child in a stroller. You see single people actually meeting there.” He was right, though far more frequently people came there seeking communal solitude. “The coffeehouse is the ideal place,” as Viennese wit Alfred Poger once put it, “for people who want to be alone but need company for it.”
Owing to its ubiquity, Starbucks perhaps attracted an unwarranted amount of criticism. “It always has baffled me,” Schultz commented in 1997, “that in America for some reason, there are people who passionately root for the underdog to succeed, and when the underdog reaches a level of success, some of those same people find a need to tear it down.” Specialty coffee veteran Dan Cox called for an end to “Starbucks bashing,” pointing out that the brand had excellent management, provided consistent quality, treated its employees well, gave back to the community, and had been innovative within the industry.
Within a few years, Schultz built a $1 billion-a-year business with only the earth’s boundaries as a limit. “Starbucks is going to be a global brand,” Schultz predicted. Comedian Jay Leno suggested it might go even farther, showing his audience a satellite picture of Mars—where there was already a Starbucks.
A Maturing Market
By mid-decade, there were signs that the specialty revolution had reached a plateau. Though coffeehouses were still popping up—even a Mocha Joe’s in Peoria—the number of espresso carts in Seattle declined, and analysts began to talk about “saturation.” In rebuttal, the Specialty Coffee Association of America estimated that, though over 4,000 specialty outlets existed in 1995, there would be 10,000 by the turn of the twenty-first century.
From fewer than a hundred in 1985, SCAA membership had swelled into the thousands a decade later. Its annual convention turned into a gigantic marketing opportunity for suppliers of roasters, brewers, flavors, T-shirts with coffee messages, mugs, books, and every other device having anything remotely to do with coffee. Members listened not only to coffee experts but to slick motivational speakers. Veterans complained that neophytes had dollar signs in their eyes instead of coffee beans. Since it cost around $250,000 to open a coffee bar, perhaps that was understandable.
A new round of coffee books for the would-be connoisseur flooded bookstores. Magazines devoted to coffee—Coffee Journal, Cups, Café Olé, Coffee Culture, Fresh Cup, Literal Latte, and others—appeared in the 1990s. Most vanished as quickly as the morning cup of coffee, but a few survived with loyal readerships.
Dunkin’ Donuts didn’t have the upscale panache or special drink jargon of Starbucks, but since its inception in 1948 as the Open Kettle, it had served excellent coffee. In 1983 it began to sell whole beans and by 1995, with over 3,000 franchised outlets, it was actually a “coffee company disguised as a donut company,” as one coffee expert described it. So was Tim Hortons, a similar Canadian chain.
The battle over whole beans in the supermarket was another sign of maturity. In the 1980s grocers were overjoyed to stock little-known specialty whole beans, since they offered a much larger profit margin than canned coffee. But as the competition mounted, the supermarkets began to demand discounts in the form of slotting allowances, gate fees, promotions, and free first-time bin fills—all trade practices that charged coffee roasters simply to get their beans onto shelves.
By the mid-1990s business consultants were taking note of the specialty trend. Procter & Gamble bought Millstone in December 1995 for an undisclosed sum.124 By that time, founder Phil Johnson had grown Millstone to a seminational brand with roasting plants in Washington and Kentucky and its own truck fleet, selling 1.5 million pounds per month and grossing over $40 million annually.
It appeared that another business cycle was beginning. Just as the traditional coffee industry had gone through fragmented growth and merger, the specialty movement would, in its maturity, consolidate. In the process, would it also lose its soul?