Pour Your Heart Into It (24 page)

As long as we remain respectful of our core product, as long as our customers can come into any Starbucks and buy the greatest coffee in the world, as long as we bring the same pursuit of quality to our new products, then we can feel comfortable offering customers different ways of enjoying our coffee. Options like these help introduce a far wider range of people to Starbucks coffee. And that, after all, is our abiding mission.

W
HEN
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T’S
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F
ANATICAL
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BOUT
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ONTROL

Imagine if a company like Nike not only designed and marketed shoes but also owned all its factories and all the retail stores that sold its shoes.

Or try to picture a national book publishing company that employed its own authors, manufactured its own paper, operated its own printing presses, and sold only through its own bookstores.

What if you had to go into a Pepsi shop every time you wanted a can of Pepsi? Or a Kellogg’s shop whenever you wanted Corn Flakes?

Starbucks has an unusual approach to business, one that is perhaps unique among brand-name consumer-products companies. We’re so fanatical about quality control that we keep the coffee in our hands every step of the way from the raw green beans to the steaming cup. We buy and roast all our own coffee, and we sell it in company-owned stores. That’s vertical integration to the extreme.

Why? The answer can be found in the last cup of lousy coffee you drank. Unlike shoes, or books, or soft drinks, coffee can be ruined at any point from its production to its consumption. To begin with, the beans themselves could be poor. They can be roasted wrong. If the beans aren’t fresh, if they’re ground wrong, if they’re brewed with too much or too little water, if the water tastes bad to begin with, the coffee can taste wrong. The worst, most common sin in coffee preparation is leaving the pot on the burner for too long, which results in a foul, burned taste.

Coffee is a product so perishable that building a business on it is fraught with peril. The minute we hand our coffee over to someone else, we’re extremely vulnerable to its quality being compromised.

Many people assume Starbucks is a franchise operation because we are growing so quickly and are present in so many markets. We receive hundreds of calls a month from people who want to open a Starbucks franchise. What about Alaska? they’ve asked. What about Sun Valley, or Jackson Hole, or any number of smaller markets the company won’t get to for years? We turn them all down. Our approach is to rely instead on company-owned stores.

In the early days, Jack Rodgers, our senior vice president for new business development, was a particularly strong advocate of franchising. Jack was one of the early McDonald’s franchisees, starting in St. Charles, Illinois, in 1959, and knew Ray Kroc as a close family friend. Over time, he became a multi-franchisee, owning several McDonald’s, Red Robin, Benihana, and Casa Lupita restaurants, as well as the Athlete’s Foot stores.

Franchising is the logical route to national expansion, Jack argued. It’s a quick, reliable way to raise capital. It allows you to preempt the competition and enter new markets in a hurry, to get ahead of the pack. And franchise owners are committed to the financial success of their store.

But I refused to franchise. In the 1980s, we didn’t need an extra source of capital, for investors were willing to fund all of Starbucks’ growth. In the early days, too, we had little competition, and the competitors who did grow by franchising never developed a strong brand. And by offering stock options, we were able to generate in-house even more of enthusiasm and sense of ownership that franchise owners bring to their businesses.

In fact, “franchising” is almost a forbidden word at Starbucks. To me, franchisees are middlemen who would stand between us and our customers. We prefer to train all our own people and operate all our own stores, so that each cup of coffee you buy from Starbucks is the real thing.

If we had franchised, Starbucks would have lost the common culture that made us strong. 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.

At first, we were immovable in our position: Our customers could buy Starbucks coffee only in a Starbucks store. I was just as opposed to wholesaling as I was to franchising, and I wouldn’t let our coffee be sold at any other type of store.

But gradually, we began to give up that control. The opportunities to attract new customers were too appealing to pass up, and the window would not be open indefinitely. Each new venture, though, is part of an ongoing struggle. We keep asking ourselves: At what point do we give up so much that we lose our soul?

The first big concession was airports. We knew they would be a great location for us. At airports like O’Hare in Chicago, travelers from all over the world can encounter Starbucks coffee for the first time. These sites give us a chance to raise awareness among new customers.

But because airport stores everywhere are run by concession-aires, in 1991, we decided to make an exception: We signed a licensing agreement with Host Marriott for airport locations. We started in Seattle and gradually expanded to airports across the United States.

As it happened, we went through some rocky times in that relationship. Starbucks had no experience managing a licensing arrangement, and Host Marriott had probably never dealt with a company as hands-on as Starbucks. We had to learn to maintain our standards by influence rather than direct control. We knew next to nothing about airports, which are tough environments in which to operate. Customers are often stressed out, in a hurry, and suspicious that they’ll be faced with higher prices. They’re not willing or able to spend time to be educated about different coffees or espresso drinks.

I travel a lot, and in the early period of our partnership with Host, I occasionally was dissatisfied with what I saw at airport stores. Lines were too long, the employees lacked knowledge of our coffee, and service was slow and sometimes unfriendly.

Host Marriott responded positively to our concerns, and Starbucks people worked with them to come up with solutions. We improved the training of Host Marriott employees, giving them the full twenty-four hours we provide for new hires at Starbucks. Host added cash registers to busy stores, beefed up staffing during hours of heaviest traffic, and increased its management support for the venture. As Host Marriott’s employees became better versed about coffee and grew more comfortable in Starbucks stores, they were better able to provide friendly service. Today, both sides are satisfied that the partnership is successful.

As the relationship with Host Marriott improved, so did my opinion of licensing. It’s like a marriage: Whether it works is a matter of whom you choose as a partner, the amount of due diligence you do beforehand, and how things go during the courtship. If you jump in with little preparation, you risk setting yourself up for failure.

Today, less than 10 percent of Starbucks stores are licensed—only 75 out of our first 1,000. But the number of airport locations is growing rapidly; in O’Hare alone we have 12 outlets. And we are considering other license arrangements in locations where we cannot operate company-owned stores. We’ve recently licensed Aramark to open Starbucks stores on a few college campuses.

Keeping true to our ideals while expanding the brand requires great discipline and a delicate sense of balance. We want everybody to experience our coffee, yet letting someone else serve it means giving up the reins. Over the years, we have done that very carefully, turning down hundreds of companies that wouldn’t add value. We reject more business proposals than we accept and have walked away from deals that would have earned us millions of dollars.

If we weren’t so obsessed with control, our business would be a lot easier. But the coffee wouldn’t be as good.

As you’re growing a business, you never know the long-term implications of decisions you make. In the early years after 1987, we seldom thought in terms of brand-building, yet everything we did to protect the quality of the coffee and the atmosphere of our stores was strengthening and expanding the reputation Starbucks had created in Seattle. The executives we hired, the plants we built, the decisions we made on how to raise money all laid a foundation that made possible a smooth and rapid national rollout of the vision I had had back in Milan. I was learning on the fly, creating the kind of work environment that appealed to me. What I only half realized is that I was also creating a different kind of company, one that works because its people care deeply about what they’re doing.

Today, when I look back on the years before we went public, 1987 to 1992, I call them “the imprinting years.” Like parents struggling to raise a child, Dave and I, Howard Behar, and Orin Smith brought our values to the workplace and tried to figure out how to apply them even as the company was moving and changing by the day. What I tried to do was honor the individuals around me, let them paint colors and make mistakes without telling them they were wrong. We struggled during that early part of the journey, as we do today, and we made mistakes. But we also forged a team and a mission and built the confidence that we could, indeed, reinvent the coffee experience in America and build a worldwide brand.

CHAPTER 13
Wall Street Measures a Company’s Price, Not Its Value

There are only two guidelines. One, what’s
in the long-term best interests of the
enterprise and its stakeholders, supplemented
by the dominant concern of doing what’s right.

—R
OBERT
D. H
AAS
,
PRESIDENT,

L
EVI
S
TRAUSS
& C
O.,

AS QUOTED IN
T
HE
C
ORPORATE
C
ONSCIENCE

More than most managers, I rely heavily on my instincts about people. Whether I’m hiring a key executive, selecting an investment banker, or assessing a partner in a joint venture, I look for the same kind of qualities most look for in choosing a spouse: integrity and passion. To me, that’s just as important as experience and abilities. I want to work with people who don’t leave their values at home but bring them to work, people whose principles match my own. If I see a mismatch, or a vacuum where values should be, I prefer to keep looking.

T
HE
V
ALUE
OF
V
ALUES

When Starbucks finally decided to go public, we could have hired any investment bank in the country. Many of the biggest national investment banks, as well as a number of smaller, local ones, sought us out in our roasting plant/offices on Airport Way South in Seattle.

At the time, in 1991, we were still a relatively modest-sized, regional company. We ended fiscal 1991 with just over a hundred stores, all of them in the Northwest and Chicago, and $57 million in sales. But the major investment banks were looking for just the sort of promising, high-growth profile we had. They liked our financial projections and our plans for aggressive national expansion. When they examined our books, they were impressed with our
unit economics
—sales per store, average cost, return on investment.