From: acquiredfm
Starbucks has grown into a global institution, boasting 39,000 stores in over 80 countries and holding $1.7 billion in unspent customer gift card balances at any given time [02:00:35] [02:04:11] [02:27:51]. The company’s journey from a small chain selling beans to a global coffee powerhouse offers significant lessons for founders and business leaders [02:03:06].
Early Days: Starbucks 1.0 (Selling Beans)
Starbucks was founded in 1971 in Seattle’s Pike Place Market by Jerry Baldwin, Zev Siegl, and Gordon Bowker [06:39:00] [06:42:00]. Initially, the company only sold pounds of coffee beans, not prepared beverages [08:16:00]. Notably, when Starbucks first opened, they used Peet’s Coffee, as they were not roasting their own beans [06:42:00].
Howard Schultz joined Starbucks in 1982 as the head of marketing when the company had only three stores [01:17:00] [09:15:00] [09:48:00]. At this time, American coffee culture was dominated by instant or stale coffee from brands like Folgers and Maxwell House, primarily made from low-grade robusta beans [01:13:00] [01:43:00]. Starbucks distinguished itself by educating customers on the taste of good quality arabica coffee [01:09:00] [01:50:00]. The Pike Place Market location also allowed Starbucks to establish an early mail-order business due to tourist interest [01:21:00]. Even in these early days, the brand’s equity was much larger than its actual size [01:33:00].
The Italian Epiphany: Transformation to Coffee Bar
A pivotal moment occurred in 1983 when Howard Schultz visited Milan, Italy, for a housewares trade show [01:54:00] [02:01:00]. He was captivated by the vibrant coffee bar culture and the sense of community it fostered [02:06:00] [02:59:00]. He returned to Seattle convinced that Starbucks needed to be in the beverage business [02:07:00]. However, the original founders, Jerry Baldwin and Gordon Bowker, were resistant to entering the “restaurant business” [02:10:00] [02:12:00].
After two years of persistence, Schultz was allowed to open a small coffee bar section within the sixth Starbucks store on Fourth and Spring in Seattle [02:24:00] [02:26:00]. This experiment, introducing lattes and cappuccinos, quickly attracted 500 customers a week, compared to the 200-300 customers previously buying only beans [02:47:00]. Despite its success, the founders remained unwilling to expand the beverage concept [02:08:00].
Acquisition and New Business Model
Frustrated, Schultz left Starbucks to start his own coffee bar company, Il Giornale [02:09:00] [02:28:00] [02:31:00]. He faced significant fundraising challenges, speaking to 242 investors, 217 of whom said no [03:34:00] [03:52:00]. Despite setbacks, Il Giornale successfully opened three stores: two in Seattle and one in Vancouver BC [02:22:00] [02:52:00].
Meanwhile, Starbucks found itself in financial trouble after acquiring Peet’s Coffee [02:37:00] [02:41:00]. In 1986-1987, original founder Jerry Baldwin offered to sell Starbucks to Schultz for $3.8 million [03:06:00]. Facing a competing all-cash offer from one of his own investors, Sam Strong, Schultz sought help from Bill Gates Sr., who intervened to ensure Schultz’s acquisition [03:22:00] [03:30:00].
The acquisition closed in August 1987 [03:32:00]. Il Giornale incorporated as Starbucks Corporation, acquiring the six existing Starbucks stores and integrating its own three stores, plus two under construction, to reach 11 stores and 100 employees by the end of 1987 [03:36:00] [03:41:00]. The original Starbucks company, now owning Peet’s, rebranded itself as Peet’s [03:56:00].
The Core Business Model: “Lightning in a Bottle”
The integrated Starbucks company quickly realized it had a unique and powerful business model [04:29:00]. By sourcing and roasting its own coffee and selling it as prepared beverages, Starbucks achieved an approximate 80% gross margin [04:48:00]. This high margin, combined with high customer frequency (loyal customers coming 18 times a month), meant stores were incredibly profitable [04:50:00] [04:52:00]. Each new store typically generated enough profit to cover its initial cost within 1.5 to 2 years [04:53:00] [04:55:00]. The company aimed for a 2:1 sales-to-investment ratio and a 20% operating profit in the first year of operation [04:55:00] [04:59:00].
Starbucks also benefited from customer-driven customization, which increased average ticket size and loyalty [04:46:00] [04:48:00]. The development of a unique, hot-beverage compatible cup and a “sip lid” further enhanced the experience, though Schultz admits missing the opportunity to trademark the lid [04:31:00] [04:36:00] [04:41:00]. The iconic cup became a “badge of honor” and a free billboard for the brand, as Starbucks spent “zero” on traditional marketing [04:58:00] [05:27:00] [05:31:00].
The concept of the “third place” – a welcoming environment between home and work – became central to the brand’s identity and fostered a sense of community [02:59:00] [02:01:00].
Rapid Expansion and Strategic Partnerships
Starbucks embarked on a period of aggressive expansion, doubling its store count year over year [05:42:00] [05:45:00]. Schultz aimed to expand to 26 stores in one year and over 100 in five years, targets that seemed “bonkers” at the time but were met [05:32:00] [05:36:00] [05:41:00].
A key strategic decision was to avoid traditional franchising, which Schultz believed would dilute the company’s unique culture [02:46:00] [02:50:00] [02:52:00] [03:00:00]. Instead, Starbucks focused on company-owned stores and later, joint ventures for international expansion [02:50:00] [02:52:00].
Starbucks strategically built brand awareness through partnerships:
- Costco [01:08:50]: Despite internal resistance, selling Starbucks beans in Costco warehouses increased brand awareness and drove thousands of new beverage customers to Starbucks stores [01:09:03] [01:09:56] [01:10:07].
- United Airlines: Providing Starbucks coffee on flights offered significant exposure and delighted customers in an unexpected setting [01:11:14].
- Grocery Stores: Expanding into retail channels with packaged coffee products further built the beverage business and brand recognition [01:11:50].
- Barnes & Noble: Opening cafes inside Barnes & Noble bookstores was a “natural extension” of the “third place” concept [01:12:34].
Focus on People and Culture
A cornerstone of Starbucks’ strategy has been its deep commitment to its employees, referred to as “partners” since 1991 [01:48:00] [02:25:00] [02:28:00]. This focus originated from Schultz’s childhood experiences with his father’s feeling of disrespect and lack of dignity in his work [01:57:00] [02:03:00].
Key initiatives included:
- Bean Stock: In 1991, Starbucks became the first company to offer stock options to every employee, including part-time workers (working 20+ hours a week) [02:54:00] [02:56:00] [02:59:00]. This program, initially valued at $6 per share, grew to 800 times its original value by 2024 [02:52:00] [03:06:00] [03:19:00] [03:22:00].
- Healthcare Benefits: As early as 1988, Starbucks provided comprehensive health benefits to all employees, including part-time workers and domestic partners, long before the Affordable Care Act [03:11:00] [03:33:00] [03:54:00]. This was a radical move at the time for a company of 33 stores [03:38:00].
- College Achievement Plan: Starbucks partnered with Arizona State University to offer 4-year free college tuition to all eligible partners [02:52:00] [02:53:00].
This focus on people resulted in significantly lower employee turnover (half the industry average) [02:06:00] [02:08:00] [02:52:00]. The company’s culture is built on “compassion, empathy, and love,” which Schultz believes is the “underpinning of the company’s purpose” [02:26:22] [02:26:40].
International Expansion
Starbucks’ global expansion, especially into non-coffee-drinking cultures like China, showcased its adaptability and commitment to its core values [02:41:00] [02:43:00].
- Japan (1996): Despite consultants advising against it, Starbucks entered Japan, forming a joint venture with a local partner [01:29:50] [01:30:30] [01:31:00]. The first store in Tokyo’s Ginza district experienced an “extraordinary success from minute one” [01:34:48].
- China (1999): Starbucks entered China with a partner, but initially struggled for a decade due to cultural differences (tea-drinking culture, no morning coffee business) and a misaligned partner [01:38:50] [02:15:52] [02:16:00]. The turning point came when Belinda Wong took over, decentralizing operations and tailoring the business to local customs, including providing health insurance to partners’ parents and grandparents [01:38:50] [01:39:50] [02:17:10] [02:18:00]. China now accounts for 18% of Starbucks’ revenue with almost 7,000 stores [02:17:34] [02:27:53].
- Italy: Despite being the inspiration for the coffee bar concept, Starbucks waited 50 years to enter Italy, doing so with its elaborate Roastery concept in Milan [03:11:00] [03:22:30]. This approach was chosen to show respect for Italian coffee culture and to present the brand in its “best possible way” [03:14:00] [03:16:00]. Starbucks now has 30 traditional stores in Italy, with espresso being the number one beverage, indicating acceptance by locals [03:06:00] [03:07:00] [03:09:00].
Challenges and Transformations
Starbucks’ immense success led to challenges [02:48:00] [02:51:00]. From 2000 to 2008, Schultz stepped away from the CEO role, and the company experienced a decline in performance [01:40:00] [01:41:00]. Schultz returned as CEO in 2008 amidst a financial crisis, finding the company “seven months from being insolvent” and facing negative same-store sales [01:46:11] [01:46:17] [01:46:21].
During this period, he closed a thousand underperforming stores, apologized to employees, and rallied them to focus on the core customer experience [01:45:14] [01:45:49]. He also mandated closing all stores for an afternoon to retrain baristas on coffee purity, reversing previous attempts to “maximize yield” at the expense of quality [01:50:41] [01:50:51]. This turnaround saw profits jump from 945 million by 2010 [01:55:33] [01:55:40].
Technology and the Mobile App
Starbucks’ mobile app, launched in 2009, became a significant technological innovation [01:59:10] [01:59:13]. It provided immense convenience and a strong financial benefit through customer “float” – customers loading money onto gift cards [02:00:23] [02:04:01]. At any given time, Starbucks holds about 4 billion a year is loaded onto gift cards [02:03:51] [02:04:22].
However, Schultz views the mobile app as both a success and “the biggest Achilles heel” [02:00:08]. While convenient, it has depersonalized the experience and led to operational challenges like “mosh pits” at pickup counters, disrupting the crucial barista-customer connection [02:01:10] [02:02:00]. Schultz suggests that the company became too seduced by the app’s velocity and failed to anticipate the needed technological refinements to maintain the “third place” experience [02:00:38] [02:02:50].
Business Complexity and Future Outlook
Starbucks’ business model is remarkably complex. It operates as an agricultural buyer, manufacturer, retailer, wholesaler, and a financial institution [03:02:15] [03:03:00] [03:03:00] [03:04:00] [03:47:00]. It also manages numerous joint ventures and partnerships globally [03:13:00] [03:16:00]. The company aims to remain “coffee forward” and prioritize the experiential aspect over transactional efficiency [03:12:36] [03:12:52].
Despite its success, Schultz warns against “hubris” and the risk of becoming a “utility” [02:52:00] [02:52:00] [03:00:22]. He emphasizes that Starbucks’ essence lies in “scaling humanity” and continually nurturing the unique relationship between baristas and customers, which is the core of its brand equity [02:49:58] [02:52:50] [03:13:00].