Starbucks in my eyes

Prologue

It’s living proof that a company can lead with its heart and nurture its soul and still make money. It shows that a company can provide long-term value for shareholders without sacrificing its core belief in treating its employees with respect and dignity, both because we have a team of leaders who believe it’s right and because it’s the best way to do business.

We’ve become such a resonant symbol of contemporary American life that our familiar green siren logo shows up frequently on TV shows and in movies. We’ve introduced new words into the American vocabulary and new social rituals for the 1990s. In some communities, Starbucks stores have become a Third Place—a comfortable, sociable gathering spot away from home and work, like an extension of the front porch.

People connect with Starbucks because they relate to what we stand for. It’s more than great coffee. It’s the romance of the coffee experience, the feeling of warmth and community people get in Starbucks stores. That tone is set by our baristas, who custom-make each espresso drink and explain the origins of different coffees. Some of them come to Starbucks with no more skills than my father had, yet they’re the ones who create the magic.

We’ve built it into such ground-breaking programs as a comprehensive health-care program, even for part-timers, and stock options that provide ownership for everyone. We treat warehouse workers and entry-level retail people with the kind of respect most companies show for only high executives.

What many in business don’t realize is that it’s not a zero-sum game. Treating employees benevolently shouldn’t be viewed as an added cost that cuts into profits, but as a powerful energizer that can grow the enterprise into something far greater than one leader could envision. With pride in their work, Starbucks people are less likely to leave. Our turnover rate is less than half the industry average, which not only saves money but strengthens our bond with customers.

Success is empty if you arrive at the finish line alone. The best reward is to get there surrounded by winners. The more winners you can bring with you—whether they’re employees, customers, shareholders, or readers—the more gratifying the victory.

Imagination, Dreams, and Humble Origins

From my personal experience, I’d say that the more uninspiring your origins, the more likely you are to use your imagination and invent worlds where everything seems possible.

I used to organize pickup games of baseball and basketball with whatever kids lived in the neighborhood—Jewish kids, Italian kids, black kids. Nobody ever had to lecture us about diversity; we lived it.

It’s always been a part of my personality to develop an unbridled passion about things that interest me.

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.

I’ve always been driven and hungry, so at crunch time I get a spurt of adrenaline. Long after others have stopped to rest and recover, I’m still running, chasing after something nobody else could ever see.

They trained me in sales, marketing, and presentation skills, and I walked out with a healthy sense of self-esteem. Xerox was a blue-chip pedigree company, and I got a lot of respect when I told others who my employer was.

After completing the course, I spent six months making fifty cold calls a day...Cold-calling was great training for business. It taught me to think on my feet. So many doors slammed on me that I had to develop a thick skin and a concise sales pitch for a then-newfangled machine called a word processor. But the work fascinated me, and I kept my sense of humor and adventure. I thrived on the competition, trying to be the best, to be noticed, to provide the most leads to my salesmen. I wanted to win...Selling, I discovered, has a lot to do with self-esteem.

A Strong Legacy Makes You Sustainable for the Future

Coffee and coffeehouses have been a meaningful part of community life for centuries, in Europe as well as in America. They have been associated with political upheaval, writers’ movements, and intellectual debate in Venice, Vienna, Paris, and Berlin. Starbucks resonates with people because it embraces this legacy.

I investigated. Starbucks Coffee, Tea, and Spice had only four small stores then, yet it was buying this product in quantities larger than Macy’s.

Alfred Peet began educating a few discerning Americans about the fine distinctions in coffee. He sold whole-bean coffee and taught his customers how to grind and brew it at home. He treated coffee like wine, appraising it in terms of origins and estates and years and harvests. He created his own blends, the mark of a true connoisseur.

Starbucks did not then brew and sell coffee by the cup, but they did sometimes offer tasting samples, which were always served in porcelain cups, because the coffee tasted better that way. The cups also forced customers to stay a little longer to hear about the coffee.

I had never heard anyone talk about a product the way Jerry talked about coffee. He wasn’t calculating how to maximize sales; he was providing people with something he believed they ought to enjoy.

Jerry and Gordon tweaked Alfred Peet’s roasting style and came up with a very similar version, which they called the Full City Roast (now called the Starbucks roast).

If you offer them something they’re not accustomed to, something so far superior that it takes a while to develop their palates, you can create a sense of discovery and excitement and loyalty that will bond them to you. It may take longer, but if you have a great product, you can educate your customers to like it rather than kowtowing to mass-market appeal.

To mean something to customers, you should assume intelligence and sophistication and inform those who are eager to learn. If you do, what may seem to be a niche market could very well appeal to far more people than you imagine.

Although Starbucks has grown enormously since those days, product quality is still at the top of the mission statement. But every so often, when executive decision making gets tough, when corporate bureaucratic thinking starts to prevail, I pay a visit to that first store in Pike Place Market.

To Italians, Espresso Is Like an Aria

It took me a year to convince Jerry Baldwin to hire me. The idea appealed to him, but others in the company were nervous about bringing in someone they regarded as a high-powered New Yorker. It’s always a risk to take on a manager who hasn’t grown up with the values of the company.

All my friends in New York were wowed by the coffee once they tasted it. Why wouldn’t people all over America have the same reaction?

They worried that by hiring me they would be committing themselves to a new direction for Starbucks. They also thought my style and energy would clash with the existing culture.

Life is a series of near misses. But a lot of what we ascribe to luck is not luck at all. It’s seizing the day and accepting responsibility for your future. It’s seeing what other people don’t see, and pursuing that vision, no matter who tells you not to.

When I start something, I immerse myself totally in it. In those early months I spent all of my waking hours in the stores, working behind the counter, meeting the Starbucks people, tasting different kinds of coffee, and talking with customers. Jerry was committed to providing me with very strong training on the coffee side. The last piece of my education—and definitely the highlight—was learning how to roast coffee.

Not surprisingly, there was resentment from some members of the company that Jerry Baldwin had hired an outsider. I could sense that I had to prove myself—prove that I was worthy of the gestalt of Starbucks. I tried hard to blend in.

I identified so closely with Starbucks that any flaw in Starbucks felt like my own personal weakness.

It was on that day that I discovered the ritual and the romance of coffee bars in Italy. I saw how popular they were, and how vibrant. Each one had its own unique character, but there was one common thread: the camaraderie between the customers, who knew each other well, and the barista, who was performing with flair.

To the Italians, the coffee bar is not a diner, as coffee shops came to be in America in the 1950s and 1960s. It is an extension of the front porch, an extension of the home. Each morning they stop at their favorite coffee bar, where they’re treated with a cup of espresso that they know is custom-made. In American terms, the person behind the counter is an unskilled worker, but he becomes an artist when he prepares a beautiful cup of coffee. The coffee baristas of Italy have a respected place in their neighborhoods.

We treated coffee as produce, something to be bagged and sent home with the groceries. We stayed one big step away from the heart and soul of what coffee has meant throughout the centuries.

Here was the perfect balance between steamed milk and coffee, combining espresso, which is the noble essence of coffee, and milk made sweet by steaming rather than by adding sugar.

Luck Is the Residue of Design

Have you ever had a brilliant idea—one that blows you away—only to have the people who can make it a reality tell you it’s not worth pursuing?

There is no more precious commodity than the relationship of trust and confidence a company has with its employees.

Taking on debt is not the best way to fund a company...I believe that the best way for an entrepreneur to maintain control is by performing well and pleasing shareholders, even if his or her stake is below 50 percent. That risk is far preferable to the danger of heavy debt, which can limit the possibilities for future growth and innovation.

To Jerry, espresso drinks were a distraction from the core business of selling exquisite arabica coffee beans at retail. He didn’t want customers to think of Starbucks as a place to get a quick cup of coffee to go. To me, espresso was the heart and soul of the coffee experience. The point of a coffee store was not just to teach customers about fine coffee but to show them how to enjoy it.

The espresso business felt too right, and my instincts about it ran too deep to let it go.

This is my moment, I thought. If I don’t seize the opportunity, if I don’t step out of my comfort zone and risk it all, if I let too much time tick on, my moment will pass. I knew that if I didn’t take advantage of this opportunity, I would replay it in my mind for my whole life, wondering: What if? Why didn’t I?

Naysayers Never Built a Great Enterprise

Gordon and I visited nearly 500 espresso bars in Milan and Verona. We took notes, snapped photographs, and videotaped baristas in action. We observed local habits, menus, decor, espresso-making techniques. We drank a lot of coffee, tasted a lot of Italian wine, and ate some fantastic meals. We sat at outdoor cafés in that intense Italian light and sketched out different design schemes, figuring out how we could replicate an authentic, Italian-style coffee bar.

Retail businesses are highly capital intensive; when they expand rapidly with company-owned stores, they require repeated injections of funds for such expenses as build-out costs, inventory, and rents. Each time more money is raised, the founder’s stake diminishes. I could never have retained 50 percent ownership.

But passion is, and will always be, a necessary ingredient. Even the world’s best business plan won’t produce any return if it is not backed with passion and integrity.

I spent every minute of my day asking for money, racing from one meeting to another and trying to keep my pitch sounding fresh...I wasn’t just an underdog during that year; I was an under-underdog. It was the roughest period of my life. I felt as if I were being kicked and beaten every time I scratched on another door.

There’s a legal definition for an “accredited investor,” someone who has a net worth large enough to assume the risk of investing in a small start-up. Whenever I could find anyone who fit this description, I would approach him or her. I suspect that half the time I was talking to people who couldn’t have invested if they wanted to. I had to lower the price three times...Try to imagine how disheartening it can be to hear that many times why your idea is not worth investing in...You’re depressed as hell, but you have to sound as fresh and confident as you were at your first meeting.

There’s a fine line between self-doubt and self-confidence, and it’s even possible to feel both emotions simultaneously. Back then, and often enough today, I could be overwhelmed with insecurities, and at the same time have an abundance of self-assurance and faith.

Frankly, when I started, I don’t think I was all that good at raising money, because it took me so long to meet my goals. With practice, though, I got better at making my presentation and at anticipating objections and concerns...In fact, we never did miss a payroll, but we came frighteningly close.

In cities like Seattle and San Francisco, a growing niche of people had learned to drink high-quality coffee at home and at restaurants. But they had little or no opportunity to experience good coffee in the workplace. And while in more and more cities, small neighborhood places were starting to sell quality whole-bean coffee, espresso was available mostly in restaurants as an after-dinner drink.

What we proposed to do at Il Giornale, I told them, was to reinvent a commodity...Nike is the only other company I know of that did something comparable. Sneakers were certainly a commodity—cheap and standard and practical and generally not very good. Nike’s strategy was first to design world-class running shoes and then to create an atmosphere of top-flight athletic performance and witty irreverence around them.

The answer’s not easy, but it has a lot to do with instinct. The best ideas are those that create a new mind-set or sense a need before others do, and it takes an astute investor to recognize an idea that not only is ahead of its time but also has long-term prospects.

Active in the Jewish community, and generous philanthropists, the three were friends and sometimes invested together...By now, I had made my pitch almost a hundred times...I had to walk around the block three times to calm myself.

The Imprinting of the Company’s Values

Most entrepreneurs can’t afford to be that farsighted, either. They’re too absorbed with the problems directly in front of their noses to have the luxury of pondering values. I know I certainly was.

Whatever your culture, your values, your guiding principles, you have to take steps to inculcate them in the organization early in its life so that they can guide every decision, every hire, every strategic objective you set.

In a sense, Café Allegro was a prototype for what Starbucks later became, a neighborhood gathering place, although its style was more bohemian and it did not sell coffee beans and merchandise or cater to an early morning, urban, coffee-to-go clientele. It was more in the European café tradition than the Italian stand-up espresso bars I had seen in Milan.

He had experienced firsthand the excitement people can develop about espresso, both in his café and in Italy.

If every business has a memory, then Dave Olsen is right at the heart of the memory of Starbucks, where the core purpose and values come together. Just seeing him in the office centers me...You’ll build a much stronger company if you can find a colleague you trust absolutely, someone who brings different strengths to the mix but who still shares your values.

While on a walk he came upon Peet’s, then an offbeat coffee store on Vine Street...The espresso he brewed that day captivated him so much that he began regularly experimenting with the taste to get it just right.

He worked with them to co-develop a custom espresso roast that suited his palate, just a shade darker than most of Starbucks’ other coffees, but a shade lighter than the darkest coffees they offered. That espresso roast, developed for Café Allegro, is still sold in Starbucks stores today, and it’s used in every espresso drink we serve. That’s how closely integrated Dave Olsen is to the legacy of Starbucks.

When you’re starting a new enterprise, you don’t recognize how critical those early decisions are not only in the formulation of the business itself but in laying the groundwork for its future. As you build, you never know which decisions will end up being the cornerstones. Each one adds so much value later on, and you’re not cognizant of it at the time. Don’t underestimate the importance of the early signals you send out in the course of building your enterprise and imprinting your values upon it.

We paid full price, doing everything we could to keep the sales up, drinking and eating lots of food and coffee to make sure potential investors saw strong sales numbers. It’s a custom we continue; we still pay full price at every Starbucks store we visit.

Speed, we realized, was a competitive advantage...Hap Hewitt, an innovative engineer who had set up the conveyor belts in Starbucks’ factory, also invented a proprietary system for serving three kinds of drip coffee simultaneously, modeled after a beer tap...Our logo reflected the emphasis on speed.

As soon as I heard, I knew I had to buy Starbucks. It seemed like my destiny. Again, bashert.

But to me, the fit seemed natural and logical: Not only would Il Giornale soon need its own roasting plant, but Starbucks’ whole-bean business and Il Giornale’s beverage business complemented each other perfectly. More important, I understood and valued what Starbucks stood for.

They saw that, and they told me they admired my integrity for refusing to agree to a plan that benefited big investors at the expense of smaller ones. They backed me, as did almost all my other investors...Be bold, but be fair. Don’t give in. If others around you have integrity, too, you can prevail.

Act Your Dreams with Open Eyes

It quickly became obvious to me that my number-one priority would have to be to build a new relationship of mutual respect between employees and management. All my goals, all my dreams would amount to nothing unless I could achieve that.

We all got used to doing the impossible.

But the Starbucks name was so much better known, and I knew in my heart that it was the right choice...I decided to hold two meetings—one with major investors and another with employees—to debate the issue. I asked Terry to present his recommendations at both meetings.

The name Starbucks, in contrast, has magic. It piques curiosity. Around Seattle, it already had an undeniable aura and magnetism, and, thanks to mail order, it was beginning to be known across America, too. Starbucks connoted a product that was unique and mystical, yet purely American.

Throughout the process, I knew I had to leave my ego at the door...To symbolize the melding of the two companies and two cultures, Terry came up with a design that merged the two logos.

If It Captures Your Imagination, It Will Captivate Others

I wanted to go to Chicago. It’s a city with a cold climate, great for hot coffee. The downtown area is much bigger than Seattle’s. It’s a city of neighborhoods, which usually welcome local gathering places.

I didn’t realize that to be successful in Chicago’s Loop we needed to open into a lobby. Because the winters are so cold and windy, no one wants to walk outside to get a cup of coffee. Our store faced the street. A few years later, we closed it down, one of the few times we’ve made an error in site selection. Yet in hindsight, I think shutting it down probably was the real mistake. If we had had the patience, today that site would have proven a winner.

It wasn’t until 1990, after we hired Howard Behar to run our retail operations, that Chicago began to turn the corner. The solution included hiring experienced managers and raising the prices we charged to reflect higher rents and labor costs. What really solved the problem, though, was simply time.

Yet this self-assurance was always counterbalanced by a measure of fear. With our greater visibility, I became increasingly afraid of waking up the sleeping giants, the big packaged food companies. If they had begun to sell specialty coffee early on, they could have wiped us out...With a business based on the next price discount and no retail store experience, they weren’t equipped to establish the same sort of close relationship with the customer that we had.

I also worried about competition from other specialty coffee companies. While many were poor operators or franchisers, others roasted good coffee, owned their own stores, and enjoyed a strong reputation in their local regions. If one of them had developed a hunger to go national and obtained the capital to do so, it could have presented a serious challenge to us. But by the time any of them decided to grow, it was too late.

Our competitive strategy was to win customers by offering the best coffee and customer service and an inviting atmosphere...Our strategy was to gain a foothold in each market and create a strong presence there before we moved to another city...But even with this regional concentration, we found ourselves beginning to gain a national following through the medium of mail order...In 1988, we developed our first catalogue and began expanding our mail-order base to targeted demographic groups.

In 1990, we invested in a small phone and computer system to set up our 800 number. That allowed us to extend our one-on-one discussions to some of our most knowledgeable customers. Before we had national retail distribution, mail order was a wonderful vehicle to nurture loyal customers and to build awareness of Starbucks across America. Since they had to make a special effort to obtain our coffee, mail-order buyers were often the most loyal customers, and it made sense to open stores in cities and neighborhoods where they were clustered.

Given the size of its population, we could achieve economies of scale if we opened many stores at once.

Despite the reasonable arguments made against the move, I finally put a stake in the ground and said: “We’re going to L.A.”If we could become the coffee brand of choice in Hollywood, it would not only help our expansion into the rest of California but also serve as a jumping-off point to other markets around the country.

Arthur Rubinfeld, then an outside real estate broker, along with other café owners, convinced the City Council to add a new classification to the zoning code to allow “beverage houses” with tables and chairs.

A taste of romance. At Starbucks stores, people get a five- or ten-minute break that takes them far from the routine of their daily lives...An affordable luxury...They’re both giving themselves a reward and enjoying something world class...An oasis. In an increasingly fractured society, our stores offer a quiet moment to gather your thoughts and center yourself...Casual social interaction...Most customers waited silently in line and spoke only to the cashier to order a drink. But somehow, just being in a Starbucks store, they felt they were out in the world, in a safe place yet away from the familiar faces they saw every day.

America once had such spots, in its taverns, barber shops, and beauty parlors. But with suburbanization, they are vanishing, replaced by the self-containment of suburban homes...Without such places, the urban area fails to nourish the kinds of relationships and the diversity of human contact that are the essence of the city. Deprived of these settings, people remain lonely within their crowds.

The generation of people in their twenties figured this out before the sociologists. As teenagers, they had no safe place to hang out except shopping malls. Now that they are older, some find that bars are too noisy and raucous and threatening for companionship. So they hang out in cafés and coffee bars. The music is quiet enough to allow conversation. The places are well-lit. No one is carded, and no one is drunk. Sometimes a group will gather at a Starbucks before heading off to a movie or other entertainment; sometimes they just meet to talk...One couple even wanted to get married at a Starbucks store.

More and more people are working from home offices, telecommuting by phone and fax and modem with distant offices. They go to coffee stores for the human interaction they need on a regular basis.

Big opportunities lie in the creation of something new. But that innovation has to be relevant and inspiring, or it will burst into color and fade away as quickly as fireworks.

People Are Not a Line Item

But it was also wrong that in America, land of dreams, a hard-working man like him couldn’t find a niche where he would be treated with dignity.

It’s an ironic fact that, while retail and restaurant businesses live or die on customer service, their employees have among the lowest pay and worst benefits of any industry.

White-collar workers, too, were learning the hard way that loyalty didn’t pay.

On the surface, I acknowledged, it will seem more expensive. But if it reduces turnover, I pointed out, it will cut our costs of recruiting and training.

Starbucks subsidizes 75 percent of coverage; each employee pays only 25 percent...Nationwide, most retailers and fast-food chains have a turnover rate ranging from 150 percent to as high as 400 percent a year. At Starbucks, turnover at the barista level averages 60 percent to 65 percent.

Every employee in each store and other location would be given a postcard-sized comment card and encouraged to report to the Mission Review team if they saw a decision that did not support our Mission Statement.

If I hang my hat on one thing that makes Starbucks stand out above other companies it would be the introduction of Bean Stock...Investors might own a slightly smaller percentage of the company, but the value of their holdings would grow faster and more surely...To do so, we had to obtain a special exemption from the Securities and Exchange Commission.

The bigger Starbucks grows, the more chance that some employee, somewhere, isn’t getting the respect he or she deserves. If we can’t attend to that problem, we are facing a failure worse than any shortcomings Wall Street can detect.

A Hundred-Story Building First Needs a Strong Foundation

But for a young entrepreneurial company, full of promise, losing money could be a healthy sign that it’s investing ahead of the growth curve. If you aspire to fast growth, you need to create an infrastructure for the larger enterprise you are planning to create...It didn’t take long for me to realize that we couldn’t both sustain that level of earnings and build the foundation we needed for fast growth.

“Look,” I told the board, keeping my voice as steady as possible, “we’re going to keep losing money until we can do three things. We have to attract a management team well beyond our expansion needs. We have to build a world-class roasting facility. And we need a computer information system sophisticated enough to keep track of sales in hundreds and hundreds of stores.”...Looking back now, I realize how sound our strategy proved to be.

When you’re starting a business, whatever the size, it’s critically important to recognize that things are going to take longer and cost more money than you expect. If your plan is ambitious, you have to count on temporarily investing more than you earn, even if sales are increasing rapidly.

Hiring ahead of the growth curve may seem costly at the time, but it’s a lot wiser to bring in experts before you need them than to stumble ahead with green, untested people who are prone to making avoidable mistakes.

Our process of site selection was enormously time-consuming, but we couldn’t afford a single mistake...Arthur didn’t want to do just site selection. He convinced me that we needed real estate, design, and construction to speak with one voice, under the direction of one person, to avoid the conflicts that sometimes arise between those disciplines.

Although we leased rather than owned our sites, we bore the entire cost of design and construction. Why? Because every store was company-owned. We refused to franchise. Although it would have been tempting to share costs with franchisees, I didn’t want to risk losing control of the all-important link to the customer.

When companies fail, or fail to grow, it’s almost always because they don’t invest in the people, the systems, and the processes they need. Most people underestimate how much money it will take to do that. They also tend to underestimate how they are going to feel about reporting large losses. Unfortunately, that’s a given in the early stages of retail development, unless you raise money by franchising. Huge investments upfront mean not only potential annual losses but also a dilution of the founder’s shareholding.

But you also can’t just excuse losses in the early stage of the business without examining each expenditure. Growth covers up a lot of mistakes, and you have to be honest about what’s right and what’s wrong about your operations.

I had also never anticipated how isolating running a company would be. You can never let your guard down and admit what you don’t know. Few people can share your frustrations and anxieties when you’re losing money, when you have to deal with investors who have high expectations, when you suddenly find yourself responsible for hundreds of employees, when you face difficult hiring decisions. Trying to balance the intricacies of rallying people and forging complex strategies can feel like running a political campaign—with the same sense of accountability to many different constituencies.

Although I had assured the board that we would turn profitable in fiscal 1990, it took Jeff Brotman to give my arguments credibility in the face of escalating losses. His was the voice of authority and experience, and much easier to believe than my promises based on sheer faith.

My relationship with the board took an unusual turn when I came to view them more as trusted advisers rather than as supervisors. Unlike many CEOs, I was direct with them, confiding in them my problems in running the business. They always challenged me to defend my ideas, and we had open and frank discussions at board meetings. They continually pushed me to sharpen my focus and set clear priorities, fearing that my entrepreneurial zeal would send the company in too many directions.

The board also strongly encouraged me to strengthen my management team ahead of the curve, hiring people with bigger company experience. Debates were at times intense and sometimes difficult but also healthy and constructive. We never needed to take a vote. When one person disagreed strongly, we took the time to work it out and come up with an acceptable solution.

To any entrepreneur, I would offer this advice: Once you’ve figured out what you want to do, find someone who has done it before...Admit you don’t know what you don’t know. When you acknowledge your weaknesses and ask for advice, you’ll be surprised how much others will help.

Don’t Be Threatened by People Smarter Than You

What can you learn from those who know less than you? They may massage your ego for a while and take orders easily, but they won’t help you grow.

I have to admit, it wasn’t easy. My identity had quickly become so closely tied up with that of Starbucks that any suggestion for change made me feel as if I had failed in some aspect of my job. Inside my head, it was a constant battle, and I had to keep reminding myself: These people bring something I don’t have. They will make Starbucks far better than I could alone.

People will determine the ultimate success of Starbucks. Products are inert.

But what we learned, ultimately, is that it’s equally important to value our coffee, our partners, and our customers. Neglect any one, and we would have a weak link.

When you’re in a hole, quit digging! Think like a person of action; act like a person of thought. The best minute I spend is the one I invest in people.

“Offense scores points; defense wins games.”

The Value of Dogmatism and Flexibility

Deciding when to make compromises to please its customers is one of the trickiest questions any business faces.

Our goal, then as always, was to bring the authentic Italian espresso bar experience to the United States. But in fact, lattes and cappuccinos—espresso with steamed milk and foam—had quickly become our most popular drinks...But these beverages enabled us to introduce great coffee to people who normally didn’t even drink coffee.

If we stuck to our conviction that “everything matters,” how could we serve espresso drinks that didn’t taste right to us? ...Our customers have the right to enjoy their cup of coffee however they prefer it.

Starbucks has an unusual approach to business, one that is perhaps unique among brand-name consumer-products companies...That’s vertical integration to the extreme...Unlike shoes, or books, or soft drinks, coffee can be ruined at any point from its production to its consumption...We teach baristas not only how to handle the coffee properly but also how to impart to customers our passion for our products. They understand the vision and value system of the company, which is seldom the case when someone else’s employees are serving Starbucks coffee.

We keep asking ourselves: At what point do we give up so much that we lose our soul?

Wall Street Measures a Company’s Price, Not Its Value

Our first priority was to take care of our people, because they were the ones responsible for communicating our passion to our customers. If we did that well, we’d accomplish our second priority, taking care of our customers. And only if we achieved both of those goals would we be able to provide long-term value for our shareholders.

He believed we were way overvalued and said the stock would fall to $8 by the end of the year. The piece cast a shadow over the glory of the moment. I cut it out and stuck it in a drawer in my office. Every morning for the next six months, I pulled out that clipping and re-read its gloomy prediction. Fortunately, the pundit was wrong.

While Wall Street has taught me a lot, its most enduring lesson is an understanding of just how artificial a stock price is. It’s all too easy to regard it as the true value of your company, and even the value of yourself.

As Long As You’re Reinventing, How About Reinventing Yourself?

The average Starbucks mail-order customer, we’ve found, is a connoisseur, highly educated, relatively affluent, well-traveled, and technologically savvy, with a significant interest in the arts and other cultural events. These were just the right kind of ambassadors we wanted to get the word out about Starbucks.

On the surface, everything was going flawlessly. But in my own mind, I found myself growing apprehensive.

What really made it work so well was the people we were able to employ.

For each region, we targeted a large city to serve as a “hub,” where we located teams of professionals to support new stores...Then from that core we branched out, entering nearby “spoke” markets.

With no easy answers, I explored every avenue I could. I’ve always been a voracious reader, but now I began to read even more widely. I consulted experts. I got to know other CEOs and entrepreneurs. I hired managers who had done it before. I picked the brains of everyone I met: reporters, analysts, investors, store managers, baristas, customers.

It’s a relief to get out on the basketball court every Sunday morning and play a fast, running, sweaty game. For two and a half hours, I concentrate on that ball, and all of the work world melts away.

At first, I battled against these changes. I’m not process-oriented. I hated the very notion of strategic planning and systems, which always struck me as limiting...Gradually, though, I gained respect for processes and plans as I came to realize that the better Starbucks can handle routine business and growth, the more well-equipped it is to move boldly into new arenas.

The move freed me up to spend time on such projects as the Pepsi joint venture, brand-building, the design of the Store of the Future, and new product development...(even) If you’ve raised a company as if it were your child, it’s difficult to let go of the instinct to care about every detail.

Don’t Let The Entrepreneur Get In the Way Of The Enterprising Spirit

Frappuccinos not only gave us a welcome alternative for warm-weather months but also provided a way to introduce non–coffee drinkers to Starbucks coffee.

Perhaps the most remarkable thing about this story is that we didn’t do any heavy-duty financial analysis on Frappuccino beforehand...No corporate bureaucracy stood in the way of Frappuccino. It was a totally entrepreneurial project, and it flourished with a Starbucks that was no longer a small company. Even when I doubted it, it went ahead.

The idea clicked. Dave had heard the Blue Note tunes played in our stores, and they saw many possibilities for synergy. Both Blue Note and Starbucks had a “coolness factor” in their image and we could benefit from association with each other. Capitol had been looking for ways to get a wider audience for its music, especially jazz, and would benefit from having it played in our stores more regularly...What if Starbucks compiled great recordings from Blue Note in a CD and sold it exclusively in our stores?

Many of our customers are middle-aged with young kids and don’t have time to hang out in record shops and flip through albums or listen to new tunes. But if they hear something good playing at Starbucks, they want to buy it on the spot.

The introduction of Blue Note Blend, on March 30, 1995, coincided with the grand opening of our largest store yet, at Astor Place in New York City’s Greenwich Village.

But more important, it sent a message to our customers that we would continue to surprise and delight with unique products they never expected to find in a coffee store.

Selling music CDs wasn’t just a marketing ploy imposed from on high. The idea was generated right there in our retail stores. It was a perfect demonstration of the character of Starbucks, one that was maturing in harmony with its customers.

Seek To Renew Yourself Even When You’re Hitting Home Runs

But we’re seldom motivated to seek self-renewal when we’re successful. When things are going well, when the fans are cheering, why change a winning formula? The simple answer is this: Because the world is changing...Nothing can stay the same forever, in business or in life, and counting on the status quo can only lead to grief...Even when life seems perfect, you have to take risks and jump to the next level, or you’ll start spiraling downhill into complacency without even realizing it.

Yet any product-oriented company has to keep reinventing its core product if it expects to prosper, let alone survive. Ask Andy Grove of Intel, who obsoletes a whole generation of personal computers every eighteen months when he develops a new microprocessor chip.

We consciously reinvented the coffee experience in America, but it never occurred to us to reinvent coffee itself. It took an immunologist to convince us to try it...He discovered that he was able to capture its flavor and aroma in a concentrated extract.

I could envision a raft of future products this technology would make possible. But they thought his idea would drain a lot of time and money from Starbucks’ top priority, which was to expand rapidly before other companies started copying us...But in the years that followed, we kept in touch with each other.

Nontraditional results are more likely to arise from someone who can think out of the box.

The extract that Don first developed in his Sacramento kitchen has opened new worlds for Starbucks. It enabled us to capture the unmistakable taste of fresh-brewed coffee as the key ingredient in a wide range of new products, including coffee-flavored beer, coffee ice cream, and ready-to-drink bottled beverages.

Because of their company’s huge size, Pepsi people tend to be process-driven and focused on one project at a time, where Starbucks people tend to work on multiple projects simultaneously. Pepsi is so big that one division can be involved in a project that another knows nothing about, as we discovered when Pepsi International announced a joint venture in China with Maxwell House.

Bottled Frappuccino was the runaway hit we had been hoping for. It ushered our way into the supermarket and into the ready-to-drink beverage business.

We put the Starbucks brand only on best-of-class products that take advantage of our recognized expertise in coffee...If we had done this before the Starbucks brand was firmly established, it could have hurt us.

Crisis of Prices, Crisis of Values

The big three roasters, Nestlé, Kraft General Foods, and Procter & Gamble, increased prices immediately on their canned coffee. Between them, they control about 70 percent of the U.S. coffee market.

We did not raise our prices to cover current replacement costs, passing raw material price rises immediately on to the consumer...Instead, we tried to offset only our actual cost increases for fiscal year 1995.

While we all agonized, Orin’s calm manner and training in financial markets helped maintain our equilibrium. “It’s futile to try to outguess the market,” he advised. “Let’s look at it this way. Assume there are two equally likely risks: On the one hand, the coffee price might go higher; on the other, it might go lower. Which is a more acceptable risk?”

We discovered that there were a lot of synergies we weren’t taking advantage of, chances to renegotiate contracts, to lower other costs, to plan better, to work smarter, to use our resources more wisely. We probably would have gotten around to making these improvements sooner or later, but this emergency forced us to recognize, earlier than we might have, the need for a tighter ship.

Pundits can wisely analyze what went wrong and what should have been done. But pundits are not as proficient at analyzing success. What does it take to achieve 50 percent annual growth in both sales and profits for six years in a row? What enabled Starbucks to do that was a combination of discipline and innovation, process and creativity, caution and boldness that few companies have mastered.

Great companies need both a visionary leader and a skilled executive: one for the top line, the other for the bottom line.

That time(1997) we knew how to calculate the costs, and we understood the need to take action while the news events were still fresh in the minds of our customers. Again, our increase covered only the incremental costs, not the replacement costs, of the higher-priced coffee.

Every business has a memory. The memory of sacrificing quality for profit would have been fixed in the minds of Starbucks people forever. It would have been an impossible price to pay.

The Best Way to Build a Brand Is One Person At a Time

We had been warned that, culturally, the Japanese refuse to carry to-go food or beverages on the street. Yet many customers were walking out the door proudly carrying their Starbucks cups—with the logo showing.

We never set out to build a brand. Our goal was to build a great company, one that stood for something, one that valued the authenticity of its product and the passion of its people.

We built the Starbucks brand first with our people, not with consumers—the opposite approach from that of the crackers-and-cereal companies. Because we believed the best way to meet and exceed the expectations of customers was to hire and train great people, we invested in employees who were zealous about good coffee...That’s the secret of the power of the Starbucks brand: the personal attachment our partners feel and the connection they make with our customers.

Great brands, he says, have a distinctive, memorable identity, a product that makes people look or feel better, and a strong but comfortable delivery channel, which in Starbucks’ case was the store. To succeed, you need to be in a category large enough to be robust and vibrant and to have a clear and original vision.

Most national brands in America are marketing-driven...That is, you go after mass markets with mass distribution and mass advertising, and then focus on grabbing market share from your competitors. That’s the basic way of life for mature products in established markets...At Starbucks, we have a different approach. We’re creating something new. We’re expanding and defining the market...We wanted to introduce them to fine coffees the way wine stewards bring forward fine wines.

In this ever-changing society, the most powerful and enduring brands are built from the heart...Few people remember that Phil Knight disdained advertising for years, preferring event promotions and athlete endorsements...For years, Starbucks spent more on training our people than on advertising our product.

Romancing the bean. Romancing the customer. Romancing all the senses in the store experience...People come to Starbucks for a refreshing time-out, a break in their busy days, a personal treat. Their visit has to be rewarding. If any detail is wrong, the brand suffers. That’s why we love the saying, “Everything matters.”

Jennifer Tisdel, our vice president for retail marketing since 1992, organized a market entry strategy that began by hiring a local public relations firm to help us understand the heritage and concerns of a given city. Early in our store-opening sequence we always picked a flagship site, a very visible location in a busy part of the city, to build a high-profile store.

At the same time, our creative people designed artwork that celebrated each city’s personality...We used the artwork on commuter mugs, T-shirts, and invitations for our partners and customers...we try to integrate our stores into the fabric of their local communities...Before each opening, we assembled a list of people who could serve as local “ambassadors” for Starbucks.

We held tastings with local reporters, food critics, chefs, and owners of well-regarded restaurants. To give our baristas a chance to practice, we let them invite their friends and family to pre-opening parties, where the coffee and pastries were free, with a suggested $3 donation to a local nonprofit group. Finally, we’d throw a Grand Opening party, usually the Saturday after the store opened, sometimes with thousands attending.

Community events and sponsorships became an ongoing part of our marketing work...In the weeks after each opening, we often set up a reward system to thank our customers for their repeat business...We also offer company-wide printed in-store materials, which provide information for customers interested in learning more about coffee...In addition, we publish and distribute Coffee Matters, a monthly newsletter focusing on the romance and culture of coffee through the ages.

“Wow! I come in here and I’m treated so well. And when I come back the next day, they know my name and they know my drink! And there’s a seat here, and I’m listening to jazz, and I can close my eyes and have five minutes of rest away from work and away from home. I can do it every day, and it’s for me, and it’s only a dollar fifty or two dollars. I can’t afford a vacation to Hawaii, but this is something I can treat myself to! And I can afford it every day.”

But another group argued that we ought to seize every opportunity to push the brand further with a new design that was bold and fresh and as playful and fun as eating ice cream...Ultimately, the innovative, playful approach won out.

As fanatical as we remain about coffee and the store experience, we also want people to realize that Starbucks has a sense of humor and a playful side, a well-rounded personality with both exuberance and irreverence, one that can connect with people at many levels and in many moods.

Although we had built a reputation based on world-class coffee and a meaningful connection with people, the field was getting so crowded that some customers couldn’t differentiate us from scores of competitors...Clearly, word of mouth was no longer sufficient to get our message out...Gradually, though, we realized that we had to be more proactive in telling our story.

The key threat to the Starbucks brand was a growing belief among customers that the company was becoming corporate and predictable, inaccessible, or irrelevant...Scott was especially interested in hearing the opinions of young, college-aged people, tomorrow’s coffee consumers, many of whom preferred offbeat local coffee places.

The research forced us to rethink our marketing strategy. We see ourselves as the respectful inheritors of the European coffee-house tradition, with all its connotations of art, literature, and progressive ideals. We can strengthen and enrich the Starbucks experience by drawing from this legacy and finding parallels in contemporary America...They are seeking to balance the successful corporate giant against the personal, human interaction our customers have every time they take time out to go get their favorite coffee.

We aim for the unexpected, the offbeat, the clever. Coming up with just the right message and tone has proved much harder than I imagined.

Twenty Million New Customers Are Worth Taking a Risk For

We had taken a big gamble, and the early returns weren’t looking good.

There’s a metaphor Vincent Eades likes to use: “If you examine a butterfly according to the laws of aerodynamics, it shouldn’t be able to fly. But the butterfly doesn’t know that, so it flies.” At Starbucks, we likewise do things we don’t know we’re not supposed to be able to do.

You Can Grow Big And Stay Small

The criticisms leveled against us, I think, crystallize a deeper issue: the growing fear about the homogenization of neighborhoods and towns.

Some of our competitors have openly admitted that they wait for Starbucks to enter a market and educate customers before they go in.

In two cases, when activists protested, we examined the situation closely and decided not to open a store in their community. We want people to feel delighted and excited that we’re in their neighborhood, not put upon.

Many complementary retailers, such as bakeries and bagel shops, locate their stores near ours as a matter of strategy.

From the beginning, we’ve executed our expansion plans according to our own real estate strategy—locating in sites we consider desirable—and not as a response to the competition. We carefully analyze the demographics of a given area, our human and financial resources, the level of coffee knowledge, and each market’s ability to accommodate a cluster of stores.

What I’ve learned in the process of responding to these critics is that Starbucks has to increase its sensitivity to local issues and loyalties. In communities that are troubled about our entry, we have met with local leaders to understand local concerns. We also need to speak up more forcefully about our values and the contributions we have made.

I used to think that marketing was the most important department at Starbucks. Today, I’d say, unequivocally, it’s human resources...Sharon had a far broader view of diversity than one considering only race and gender. She encouraged a broadening of the workforce in terms of age, handicaps, personality, and learning style...Sharon also encouraged greater directness and accountability in our relations with one another.

One of the most rewarding experiences for me has been to witness the development of gifted people who do grow with the company, however painful that maturing may sometimes be.

We are going to make mistakes. But if our people recognize that what we’re trying to do, in our hearts, is build value for us all, they’re more likely to forgive the mistakes.

How Socially Responsible Can a Company Be?

We hadn’t exploited our support of CARE’s programs in these countries for public relations purposes, and now we wondered if we had erred in not being more vocal about it.

Although we purchase less than 1/20th of 1 percent of all the world’s coffee, and coffee prices are set on international commodity exchanges, people seemed convinced that we single-handedly had the power to change the coffee plantation system in Guatemala.

They wanted us to use our purchasing power to promote social change according to their agendas.

What these protesters didn’t understand was that, since we don’t grow coffee ourselves, we cannot guarantee which farm produces it, whose hands pick it, or how much farm workers are paid.

It is processed, bagged, and delivered to an exporter before it is shipped to us...We could never conduct meaningful inspections the way a manufacturer does.

We did, however, outline a specific work plan for educating suppliers about our mission and values, communicating our goals to the coffee industry as a whole, and gathering further information during visits to selected origin countries.

As a company grows, its values will inevitably be challenged, but not in predictable ways.

If you anger suppliers, if you alienate groups of customers, if you spend too much time and money on causes, you cannot build a strong, long-lasting company. If your company fails, or fails to grow, you can no longer afford to be socially responsible.

To coordinate efforts for our retail stores, we created an all-company Green Team, which consists of store managers from all our regions. Three times a year they meet with senior management and representatives from departments such as marketing and retail operations, coordinate plans for Earth Day activities, conduct recycling audits, and champion new ideas, which they then take back to their regions.

Often good ideas originate in the stores and percolate upward...We need to rely on local store initiative because recycling practices and services vary across the country.

How Not to Be a Cookie-Cutter Chain

We want to establish a personal connection with our customers, but we also want our stores to be accessible and convenient.

But most important for those who wanted a Third Place, we added seating and introduced the concept of Grand Cafés, large flagship stores with fireplaces, leather chairs, newspapers, couches, attitude. Customers love them. There’s something wonderfully satisfying about curling up with a cup of coffee in front of a fireplace.

Wright recognized that the big savings would come only if we took advantage of our size and scale. Building hundreds of stores a year gave us tremendous buying power that we had never really leveraged.

When They Tell You To Focus, Don’t Get Myopic

One of the fundamental aspects of leadership, I realized more and more, is the ability to instill confidence in others when you yourself are feeling insecure.

As a large company, we needed to rely more and more on planning and discipline, rather than on our instincts and last-minute fine-tuning...To be an enduring, great company, you have to build a mechanism for pre-venting and solving problems that will long outlast any one individual leader.

A lot of managers find it hard to admit their fears to those who depend on their decisions. But I believe that if you level with your employees in bad times, they will trust you more when you say things are going well.

As we grew, we hired more experts with specialized functions, but many of these people—because they came from larger, more risk-averse companies and because they had observed only a thin slice of the business—had narrow viewpoints. One of my most gnawing fears is what I call incrementalization. What may look right for each specialist’s slice of the business could be a disaster for the company as a whole.

Yet over-retailing creates tremendous opportunity for Starbucks. Unlike packaged food brands, we are able to connect with people, one at a time, through our stores. And because we strive to consistently deliver a quality product and a quality experience, when other retailers are falling into mediocrity, we stand out.

Lead with Your Heart

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 of what kind of company Starbucks should be, are so easily misunderstood by people both inside and outside the company.

In the ethical vacuum of this era, people long to be inspired. Even if it's just a movie, or a TV program, or a great cup of coffee, they want a break from the negative noise that inundates us all. When you step into a theater or pick up a good novel, you just need some time out.

Remember: You’ll be left with an empty feeling if you hit the finish line alone. When you run a race as a team, though, you’ll discover that much of the reward comes from hitting the tape together. You want to be surrounded not just by cheering onlookers but by a crowd of winners, celebrating as one.