Pour Your Heart Into It (30 page)

At Starbucks, we had always aimed to build a company healthy enough to sustain itself for many years to come. We discovered along the way that sustainability is directly linked to self-renewal. 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.

In 1994, Starbucks undertook the second paradigm shift in its history. The first was adding the beverage to the bean sales, beginning in 1984. After that we weren’t selling just coffee but also the coffee experience. The second shift came when we moved outside the four walls of our stores and invented new ways to enjoy the flavor of coffee, in bottled beverages, ice cream, and other innovative products.

This wasn’t a natural or obvious move, and it wasn’t one that was forced upon us. It was a deliberate attempt to spring ahead of the curve, to create a future no one would have imagined, while retaining our core values.

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Coffee has been around for a thousand years. Could it possibly be reinvented? This wasn’t a question we at Starbucks spent much time thinking about in the early years. We figured we already had the best coffee around.

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 had devoted a lot of time to thinking about how to refresh and invigorate various elements of the Starbucks experience, whether store design, merchandise, espresso drinks, coffee blends, even new products like our jazz CDs. That’s a conventional retailing approach, however creative a twist we put on it.

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.

In 1988, Don Valencia began experimenting with coffee. Why he picked coffee, I’ll never know. But we’re lucky he did.

Trained in cell biology at University of California at Davis, Don had founded and run a biomedical business in Sacramento called Immuno Concepts, to develop tests to diagnose autoimmune diseases, such as lupus and rheumatoid arthritis. In his biomedical research, Don had explored the delicate task of isolating molecules within human cells without destroying them.

One day, on a whim, literally at his kitchen table, he applied some of the same techniques to coffee. He discovered that he was able to capture its flavor and aroma in a concentrated extract.

Although Don himself wasn’t even a coffee drinker, his neighbors were. Every morning at 7:30, he would wake them up and put two wine glasses of coffee on their fence. One contained freshly brewed coffee; the other was made from his scientifically prepared coffee extract.

“Which is the control?” Don would ask them. He kept refining the technique until they couldn’t distinguish the two.

When Christmas came, Don’s wife suggested he bring along some of his coffee extract as a gift for her parents, who live in Seattle. During their visit, Don’s wife took him to the Starbucks store in Pike Place Market. It was his first exposure to Starbucks.

Half-embarrassed, Don pulled out a sample of the extract and asked the barista to mix it with hot water and have a taste. The baristas were pretty skeptical, but they agreed to try it. They made his coffee, smelled it, and took a careful sip.

“It’s okay,” they said. “But it’s nothing like Starbucks.”

Don remembers walking out to the street, feeling foolish and deflated. His wife wanted to know what had happened to her latte, which he had forgotten to order. When he returned to the store, several of the baristas were still examining his cup of coffee.

“You said it wasn’t very good,” Don said.

“Well,” they admitted, “it’s actually pretty good, considering what it is. What kind of coffee did you make it from?”

Don had been using beans from a different company. So they sold him a pound of one of our best-selling coffees, Sumatra. He promised to try to prepare an extract from it and send it back to them.

Excited, he returned to Sacramento and worked on the Starbucks Sumatra. When he got it right, he sent a sample to the Pike Place store by overnight express.

Two days later, Don got a call from one of our coffee specialists. “I tasted this,” he said, “and it’s revolutionary. I don’t know if you realize what you’ve got here.”

The next day, he got a call from Dave Olsen. “This is surprisingly good,” Dave told him. “If you’re ever in Seattle, I’d love to sit down and talk to you.”

The next day he got a call from me. I told him I had to meet him as soon as possible.

The day before, Dave had come into my office with a cup of coffee that he told me was Sumatra. When he insisted I try it, I figured he had discovered some new estate.

“How do you like it?” Dave asked

“It’s great,” I said. “Is it a new arrival?”

“Nope,” he said. “It’s from the same lot we’re selling in the stores, but it’s made from an extract!”

He had fooled me. The coffee in my cup tasted 100 percent as good as fresh-brewed Sumatra. He led me into his tasting room and showed me how it was made.

A few days later, I flew to Sacramento to meet Don Valencia. He has intense brown eyes and an infectious boyish excitement. We fed off each other’s energy, like two kids getting ready to build the world’s biggest fort. This scientist had the key to Starbucks’ future, right there in his kitchen. I proposed that he form a joint venture with Starbucks.

Getting him to join forces with us wasn’t easy, for he had made a career in the medical field and didn’t want to leave it. Also, the timing was wrong for Starbucks. In 1990, we were just beginning to make money. We were in the midst of preparing for another round of private financing and still trying to fix problems in Chicago. The Starbucks board wanted me to concentrate on retail expansion, which was critical to the success of the company.

The board hasn’t often turned down my proposals, but they rejected the idea of a joint venture with Don Valencia. I was terribly disappointed, for 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.

Don was more philosophical when he heard the news; his company was growing and taking all of his time. But in the years that followed, we kept in touch with each other. We sent him lots of coffee and a commercial espresso machine from one of our stores, and Don came to visit us in Seattle every Christmas. Dave and I got to know him well.

Then in spring of 1993, we made a formal overture. By then, Starbucks had grown to nearly $150 million in sales, with 250 stores in 10 regions. The company had gone public and was on much sounder financial footing. We could finally afford to set up our own in-house research and development facility.

Even then, Don wasn’t a shoo-in. If you’re going to hire an R & D guy, people advised me, hire a world-class R & D expert. But an immunologist? It was hard to justify how someone from the field of immunology could add value in a coffee company’s pursuit of new products.

But I knew instinctively that Don’s lack of experience in coffee was one of the factors that made him such an ideal candidate. We didn’t need someone whose gaze was turned toward the past. Nontraditional results are more likely to arise from someone who can think out of the box. You’re not likely to find such a person by looking inside the box.

Don had recently turned forty and was, in fact, contemplating a change of career. But he did not want to join us to work on just one product. He said he would accept Starbucks’ offer only if he could develop a long-term strategic vision for technology and support it with a lab and researchers within a new department. After a lot of discussion, Don finally arrived in 1993 as vice president for research and development.

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.

In 1996 we invested several million dollars to build a Technology Resource Application Center for Don. In a locked-off section on the seventh floor of our building, he’s equipped seven labs and hired thirty scientists and technicians who work with such sophisticated technologies as gas chromatography, high-pressure liquid chromatography, and capillary electrophoresis. Ask Don what all that means! Some of the equipment is found only rarely in the top labs in the world.

At the same time, we devoted more than $4 million to a state-ofthe-art pilot plant, set up in our parking garage, to produce the extract and test other new technology. At first we planned it only for small test batches, but as new products caught on quickly, we had to ramp up to commercial production levels.

It was wild: a coffee company, hiring scientists and investing millions in R & D.

It’s a long way from espresso.

It’s a long way from immunology.

What it wasn’t far from was the market.

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For all his scientific brilliance, Don Valencia did not have the background to develop a commercial product on his own. That step required another major move by the company—a partnership that few could fathom at first.

In 1992, I attended a top-secret meeting in Purchase, New York, in the imposing, mahogany-paneled boardroom of PepsiCo. Accompanying me was George Reynolds, then Starbucks’ senior vice president for marketing, who had worked for Frito Lay and Taco Bell for thirteen years and knew Pepsi well.

I approached Pepsi the same way I’ve approached every one of Starbucks’ partnerships: looking, first and foremost, for the right people. We had arranged to meet the then-president of Pepsi-Cola North America, Craig Weatherup. I had half-expected a top executive of a $33 billion company to be formal, detached, impersonal, and bureaucratic, so I was pleasantly surprised when Craig proved to be the very opposite: a hands-on, warm, personable man who genuinely valued the entrepreneurial spirit. Craig and I quickly developed a mutual trust and respect, which later proved vital in cementing the relationship between our companies.

Initially, neither of us had a clue how Pepsi and Starbucks might work together. But I figured there had to be a way to leverage Pepsi’s tremendous distribution power to help move Starbucks out of our retail stores and into a more visible position in the mainstream market. Craig suggested we have a discussion with Pepsi’s new beverage group, which had developed and marketed successful bottled beverages for Lipton and Ocean Spray.

I had discovered, during a trip to Tokyo in 1991, how popular cold, ready-to-drink, coffee-based beverages were in Japan, in both bottles and cans. The Japanese consume $8 billion worth of these drinks a year, about one-third of their coffee consumption. By contrast, this market is only $50 million a year in the United States—so far. Coke had found a ready market in Japan for its Georgia Coffee, and I was certain that if Starbucks could create a better product, it could be a huge success in North America and ultimately the world. I knew we would need a partner with strong national distribution to help us break into this category; who better than Pepsi?

In July 1993, on Don Valencia’s first day at Starbucks, we held our first meeting with Pepsi’s new-beverage group. Don didn’t even have a lab yet, let alone support staff. But when the possibility of a bottled coffee product was proposed, he and our coffee specialist Tim Kern began experimenting immediately.

A few months later, working with the Pepsi R & D group, they had developed a wonderful coffee drink, made from Don’s extract. Its taste was far superior to that of Georgia Coffee or any other cold coffee beverage on the market. We hoped it would be the first of many products with the potential to redefine the experience of coffee drinking in America.

Pepsi was excited, and so were we. We set up a task force, studied the market, and discussed the alternatives. Tiny Starbucks, with annual sales barely over $200 million, sat down with Pepsi and negotiated a fifty-fifty joint venture with a company more than a hundred times its size. Pepsi had huge marketing muscle and one million points of distribution, yet they agreed to cede us a high degree of ownership and control over our brand equity and product formulas.

In August 1994, Pepsi and Starbucks publicly announced the formation of the North American Coffee Partnership, with the goal of creating new coffee-related products for mass distribution, including cold coffee drinks in a bottle or can.

From the outside, the venture may have seemed an odd sideline, with little relevance to Starbucks’ core business, or to Pepsi’s, an unusual experiment unlikely to substantially affect the bottom line of either company. But I viewed it as an earth-jolting paradigm shift, a sign that our business might evolve in unimaginable directions. Our core business was now about to expand to a far wider concentric circle: coffee-based products. That meant leaving the comfortable confines of our stores, where we firmly controlled the quality and the environment, and entering intimidating new channels of distribution, where we were a bit player. It meant creating products that would carry the Starbucks brand name but would not be sold by Starbucks directly. It meant working with joint-venture partners who had a different agenda. It also meant reaching out to far more potential customers than those who came into our stores.