Growing a business is tough, exceptionally tough. It is one thing to control and manage a business when your operation is small and close, with a limited number of outlets, but it is completely different when you expand and feel further and further removed from the day-to-day operations. Some businesses are easier to grow than others; online and financial services businesses often have highly scalable business models whereas location based businesses or consulting services are a lot more difficult to expand and grow. This is why the story of Starbucks is such an intriguing phenomenon. In 1984, the concept of a retail coffee shop barely existed and where it did exist, retail coffee stores were seen as small owner operated enterprises with very low growth potential. Yet, Howard Schultz, the then CEO of Starbucks, revolutionised the coffee industry by laying the foundation for a 13 000 store global coffee shop empire. How did he establish a foundation for such phenomenal growth? In this feature we will take a close look at some of the specific things that Howard Schultz and his Starbucks team did to create a revolutionary growth business in a stagnant industry segment. We will also examine how and why, after such a long period of profitable growth, the company is now struggling to keep that trend going.
Starbucks began in 1971 when three academics opened a store called Starbucks Coffee, Tea, and Spice in the touristy Pikes Place Market in Seattle. The original Pikes Place store featured modest, hand-built nautical fixtures, sold whole-bean coffees and coffee products and did not offer freshly-brewed coffee by the cup. The store was an immediate success, with sales exceeding expectations. By the early 1980s, the company had four Starbucks stores in the Seattle area and could boast of having been profitable every year since opening its doors. In 1981, Howard Schultz, vice president and general manager of US operations for Hammarplast – a Swedish maker of stylish kitchen equipment and housewares – noticed that Starbucks was placing very large orders for a certain type of drip coffeemaker. Curious to learn what was going on, he decided to pay the company a visit. On his visit to Seattle from New York, the combination of aroma, taste, authenticity and vibe within the Starbucks store had him hooked.
Schultz loved the Starbucks owners’ deep knowledge of coffee and their commitment to providing quality products and educating customers about the merits of dark roasted coffees. On his trip back to New York, Schultz could not stop thinking about Starbucks and what it would be like to be a part of the Starbucks enterprise. “There was something magic about it, a passion and authenticity I had never experienced in business,” he recalled. By the time Schultz landed at Kennedy Airport, he knew he wanted to go to work for Starbucks and after a year of persuasion, he talked the owners into giving him a job as head of marketing for the company.
Key learning let passion drive you –
From the outset, Starbucks was driven by people who had a deep passion for what they were doing. Howard Schultz was so passionate about the Starbucks product, the brand and the experience that he spent a year trying to convince the original owners of Starbucks to give him a lower paying, less secure, less prestigious job in a city on the other side of the United States from where he currently resided. If you are not driven by this level of passion in your business then you will probably be superceded by someone who is. Passion is the bedrock for an effective growth effort.
Schultz spent the first few months at Starbucks learning about the intricacies of coffee – from roasting and brewing to taste and smell. In his first few months he was also overflowing with ideas but his biggest idea for the future of Starbucks came during the spring of 1983 when the company sent him to Milan to attend an international housewares show. There, he discovered the concept of an espresso bar. A small shop in which a lively, friendly barista (counter worker) served hand crafted espresso-based drinks. Schultz judged the barista’s performance as “great theatre.” What struck Schultz was how popular and vibrant the Italian coffee bars were. Energy levels were high and the bars seemed to function as a community gathering place. Schultz was particularly struck by the fact that there were 1 500 coffee bars in Milan and a total of 200 000 in all of Italy. His mind started churning.
Schultz’s first few days in Milan produced a revelation: The Starbucks stores in Seattle completely missed the point. Starbucks, he decided, needed to serve freshly brewed coffee, espresso, and cappuccino in its stores (in addition to beans and coffee equipment). Going to Starbucks should be an experience, a special treat; the stores should be a place to meet friends and visit. Recreating the Italian coffee bar culture in the United States could be Starbucks’ differentiating factor.
On returning to the US, Schultz shared his revelation with the Starbucks owners but they disapproved. They feared that serving drinks would put them in the beverage business and dilute the integrity of Starbucks’ mission as a coffee store. It took Schultz nearly a year to convince the owners to let him test the espresso bar concept. In April 1984, in Starbucks’ sixth store in downtown Seattle, Schultz set up a small espresso bar in a corner of the new store. There was no pre-opening marketing blitz and no sign announcing: Now Serving Espresso. The lack of fanfare was part of a deliberate experiment to see what would happen. By closing time on the first day, some 400 customers had been served, well above the 250 customer average of Starbucks’ best-performing stores. Within two months the store was serving 800 customers per day. The two baristas could not keep up with orders during the early morning hours, resulting in lines outside the door onto the sidewalk. Most of the business was at the espresso counter; sales at the regular retail counter were only adequate.
Key learning experiment and adapt –
Throughout the growth years of Starbucks, the people within the company engaged in deliberate experiments. One of the defining contributors to growth and innovation has been their willingness to experiment. Howard Schultz tested his initial idea of selling brewed coffee by experimenting in a store. He continued to experiment with ideas throughout his time at the helm of the company. He experimented with new products, different store formats, alternative partnership arrangements and various in-store music mixes. From each of these experiments, he learned and adapted. When an experiment seemed to work, he would roll it out to all the Starbucks stores; when it did not work he tried something else until he stumbled upon a winning solution.
In spite of the success of the experiment, the original owners still did not want to sell beverages inside the stores, prompting Schultz to leave Starbucks and start his own company. His plan was to open espresso bars in high traffic downtown locations that would emulate the friendly, energetic atmosphere he had encountered in Italian espresso bars. By 1986 he had opened his first Il Giornale coffee bar in downtown Seattle. By closing time on the first day, 300 customers had been served and after making some small changes to the store format, within six months, Il Giornale was serving more than 1 000 customers a day. Then Il Giornale opened a second store in another downtown building and a third store was opened in Vancouver, British Columbia, in April 1987. Vancouver was chosen to test the transferability of the company’s business concept outside Seattle. To reach his goal of opening 50 stores in five years, Schultz needed to dispel doubts about geographic expansion.
In March 1987 the original Starbucks owners decided to sell the whole Starbucks operation. Schultz knew immediately that he had to buy it. Within weeks he had raised the $3,8 million (around $31 million in today’s terms at a 10% annual escalation) needed to buy Starbucks. The acquisition was completed in August 1987. The new name of the combined companies was Starbucks Corporation.
Schultz told the Starbucks employees that his vision was for Starbucks to become a national company with values and guiding principles that employees could be proud of. The new Starbucks had a total of nine stores. The business plan Schultz had presented to investors called for the new company to open 125 stores in the next five years – 15 in the first year, 20 in the second, 25 in the third, 30 in the fourth and 35 in the fifth. Revenues were projected to reach $60 million in 1992.
In the following several months, a number of changes were instituted. To symbolise the merging of the two companies and their cultures, a new logo was created that melded the Starbucks and Il Giornale logos. The Starbucks stores were equipped with espresso machines and remodeled to look more Italian than Old World nautical. The traditional Starbucks brown was replaced by Il Giornale green. The result was a new type of store – a cross between a retail coffee bean store and an espresso bar/café – that became the signature format of Starbucks in the 1990s.
The arrival of Starbucks in Chicago proved far more troublesome than management had anticipated. The first Chicago store opened on 27 October 1987, the day the stock market crashed. Three more stores were opened in Chicago over the next six months, but customer counts were substantially below expectations – Chicagoans didn’t take to dark roasted coffee as fast as Schultz had anticipated. Store margins were squeezed for a number of reasons: It was expensive to supply fresh coffee to the Chicago stores out of the Seattle warehouse, and both rents and wage rates were higher in Chicago than in Seattle. Gradually, customer counts improved, but Starbucks lost money on its Chicago stores until 1990, when prices were raised to reflect higher rents and labour costs. More experienced store managers were hired and a critical mass of customers caught on to the taste of Starbucks products.
Portland, Oregon, was the next market entered, and Portland coffee drinkers took to Starbucks products quickly. By 1991, the Chicago stores had become profitable and the company was ready for its next big market entry. Management decided on California because of its host of neighbourhood centres and the receptiveness of Californians to innovative, good quality food. Los Angeles was chosen as the first Californian market to enter, principally because of its status as a trendsetter and its cultural ties to the rest of the country. LA consumers embraced Starbucks quickly.When store expansion targets proved easier to meet than Schultz had originally anticipated, he upped the numbers to keep challenging the organisation. Starting from a base of 11 stores, Starbucks opened 15 new stores in fiscal 1988, 20 in 1989, 30 in 1990, 32 in 1991, and 53 in 1992 – producing a total of 161 stores. The opening of 150 new stores in five years significantly exceeded the 1987 business plan objective of 125.
From the outset, the strategy was to open only company-owned stores; franchising was avoided to retain full control of the quality of Starbucks’ products and the character and location of its stores. But company ownership of all stores required Starbucks to raise new venture capital, principally by selling shares to new or existing investors, to cover the cost of expansion. Starbucks was able to raise the needed funds despite posting losses of $330 000 in 1987, $764 000 in 1988, and $1,2 million in 1989. While the losses troubled Starbucks directors and investors, Schultz’s business plan had forecast losses during the early years of expansion. At a particularly tense board meeting where directors sharply questioned him about the lack of profitability, Schultz said: “Look, 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.” Schultz argued for patience as the company invested in the infrastructure to support continued growth well into the 1990s. He contended that hiring experienced executives ahead of the growth curve, building facilities far beyond current needs, and installing support systems laid a strong foundation for rapid, profitable future growth. His arguments carried the day with the board and with investors, especially since revenues were growing approximately 80% annually and customer traffic at the stores was meeting or exceeding expectations. Starbucks became profitable in 1990 and profits increased every year thereafter until 2007.
Howard Schultz strongly believed that the success of Starbucks was heavily dependent on customers having a very positive experience in its stores. This meant having store employees who were knowledgeable about the company’s products and paid attention to detail, who eagerly communicated the company’s passion for coffee and had the skills and personality to deliver consistently pleasing customer service. Many of the baristas were in their 20s and worked part-time, going to college or pursuing other career activities on the side. The challenge to Starbucks, in Schultz’s view, was how to attract, motivate, and reward store employees in a manner that would make Starbucks a company that people would want to work for and that would result in higher levels of performance. Moreover, Schultz wanted to cement the trust that had been building between management and the company’s workforce. As part of this strategy, he invested heavily in staff training programmes, making the training fun and innovative. He also began providing part-timers working 20 or more hours per week with the same health coverage as full-time employees. This laid the foundation for a strong bond between the company and all its employees. This relationship was strengthened in 1991, when a plan, dubbed Bean Stock, granted each employee stock options in the company, effectively giving them an ownership share in the company in which they worked. At this time, Starbucks dropped the term employee and began referring to its entire workforce as partners. Starbucks was able to attract motivated people with above average skills and good work habits not only because of its fringe benefit programme but also because of its pay scale. Store employees were paid $6 to $8 per hour, well above the minimum wage.
Accommodating fast growth also meant putting in systems to recruit, hire, and train baristas and store managers. Every partner/barista hired for a retail job in a Starbucks store received at least 24 hours of training in the first two to four weeks. The training included classes on coffee history, drink preparation, coffee knowledge, customer service, and retail skills, plus a workshop called “Brewing the Perfect Cup.” Management trainees attended classes for 8 to 12 weeks. Their training went much deeper, covering not only the information imparted to baristas but also the details of store operations, practices and procedures as set forth in the company’s operating manual, information systems, and the basics of managing people. Starbucks’ trainers were all store managers and district managers with on-site experience. One of their major objectives was to ingrain the company’s values, principles, and culture and to impart their knowledge about coffee and their passion for Starbucks.
Key Learning Export the Culture –
One of the primary challenges in growing a business is trying to keep a culture and a company ideology alive as operations become more and more dispersed. Culture tends to develop naturally within a small business when most people work closely with the leader. As a company grows, the leader needs to be more deliberate and purposeful in ensuring that people buy into and live out a core set of values and principles that represent the culture of the organisation. Schultz ensured that the Starbucks culture was instilled in new employees in stores across a wide geographic region by investing heavily in training, giving people a reason to feel connected and loyal to the company and establishing regional management teams that would be accountable for the culture in stores in a particular area.
Starbucks’ initial public offering (IPO) of common stock in June 1992 turned into one of the most successful IPOs of the year. With the capital afforded it by being a public company, Starbucks accelerated the expansion of its store network. But, its success spurred the development of other specialty coffee products across the US and competitors – some imitating the Starbucks model – began to spring up in many locations.
In 1992 and 1993 Starbucks developed a three-year geographic expansion strategy that targeted areas which not only had favourable demographic profiles but could also be serviced and supported by the company’s operations infrastructure. For each targeted region, Starbucks selected a large city to serve as a “hub”; teams of professionals were located in hub cities to support the goal of opening 20 or more stores in the hub in the first two years. Once stores blanketed the hub, additional stores were opened in smaller, surrounding “spoke” areas in the region. To oversee the expansion process, Starbucks created zone vice presidents to direct the development of each region and implant the Starbucks culture in the newly opened stores. The Starbucks store launches grew steadily more successful and in 1995, new stores generated an average of $700 000 in revenue in their first year, far more than the average of $427 000 in 1990. This was partly due to the growing reputation of the Starbucks brand but it was also attributable to the company’s ability to select excellent sites. Starbucks had the best real estate team in the coffee bar industry and a sophisticated system that enabled it to identify not only the most attractive individual city blocks but also the exact store location that was best. The company’s site location track record was so good that by 1997 it had closed only two of the 1 500 sites it had opened.
Key learning location, location, location –
Location is a critical part of the growth recipe for certain businesses. For any store-based retail business and a myriad of different services businesses, location can be critical. Getting the location right for a single store can be tough but finding quality locations on an ongoing basis as you try growing an enterprise to multiple locations is a whole new challenge. It has been shown time and time again that location can have a major impact on the success or failure of a new store; therefore it is essential that if your business is location dependent, you should develop a strategy and system for finding quality locations before you embark on a massive growth effort.
Key learning details matter –
When you are trying to grow a business, details count. Growth equals new customers and new customers often engage with a business on a test basis. Because new customers have no loyalty to the company, if a small detail is not taken care of, they are likely to go elsewhere. When one is trying to grow a business it is easy to let the details slide or assume that someone else, further down the chain of command, will take care of the details. But they won’t. Schultz and his team were sticklers for detail and this created a consistent image and quality experience for customers as they rolled out more and more stores.
Schultz continued to strengthen the top management team of Starbucks, hiring people with extensive experience in managing and expanding retail chains. Orin Smith, who had an MBA from Harvard and 13 years of experience at Deloitte, was brought in as chief financial officer in 1990 and then promoted to president and chief operating officer in 1994. The three key executives during the company’s growth years – Howard Schultz, Howard Behar and Orin Smith – contributed the most to defining and shaping its values, principles, and culture. As the company grew, additional executives were added in marketing, store supervision, specialty sales, human resources, finance, and information systems. Schultz also took care to add people to the Starbucks board of directors who had experience growing a retail chain and could add valuable perspectives.
Key Learning Build a Balanced Management Team – People enable business growth and managers, in particular, make the difference between a successful and an unsuccessful growth effort. One of the critical things that Howard Schulz did that enabled him to grow Starbucks so quickly and effectively was to put a balanced management team in place. Each of the three key executives played a very particular role in the business – Schultz was the visionary and the innovator, primarily concerned with strategy; Behar focused intensely on the people in the business, making sure that the human side of the business was nurtured and Smith was the detailed operator, he oversaw the company’s finances and operations. These three, working synergistically together had the right combination of trust, diverse skills and alternate viewpoints to be a catalyst and enabler of massive growth. If you don’t have the right management team in place you won’t grow effectively.
In markets outside the continental United States, the strategy of Starbucks was to license a reputable and capable local company with retailing know-how in the target host country to develop and operate new Starbucks stores. In some cases, Starbucks was a joint venture partner in the stores outside the continental Untied States. Starbucks created a new subsidiary, Starbucks Coffee International (SCI), to orchestrate overseas expansion and begin to build the Starbucks brand name globally via licensees.
Success Leads to Struggles
Starbucks’ performance record since its 1992 IPO made it, for many years, a darling of the investment community. Between 1995 and 2005, the company’s stock rose from about $2 to more than $30. The company’s revenues had grown to over $9 billion and it had 13 000 stores across the globe. But in late 2006, Starbucks’ stock began a seemingly relentless descent, losing more than half its value in 15 months. From a value near $39 in November, 2006, it dropped to less than $19 in early 2008. In February 2007, Schultz, then the company chairman, sent a memo to senior management suggesting that recent decisions at the firm had led to the “watering down of the Starbucks experience” and “commoditisation of the [Starbucks] brand”. Later that year, Starbucks reported a first ever decline in same-store sales. In January 2008, Schultz decided to replace CEO Jim Donald and return as the company’s chief executive, a position he had last held in 2000.
By 2007, Starbucks Coffee Company had become the largest specialty coffee retailer in the world, with more than 13 000 stores globally and revenues in excess of $9 billion. To reach this store count, the company had opened units at a remarkably rapid rate. “Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1 000 stores to 13 000 stores and beyond, we have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbucks experience, and, what some might call the commoditisation of our brand… We desperately need to look into the mirror and realise it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience… We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and the 150 000 partners and their families who are relying on our stewardship.
Key Learning Growth is Not Never-Ending –
The reality is that a recipe for growth will never last for ever. Some companies may be able to grow effectively for a few months, others such as Starbucks may manufacture years of profitable growth. But any growth strategy that is pushed too far will lead to decline. The challenge for business owners is to foresee how long a growth phase will last and then to revise, reinvent and reinvigorate the company before the initial strategy stagnates.
The success of Starbucks has attracted many competitors into most markets in which they operate. Almost every town or region has a local chain of coffee shops modelled along the lines of Starbucks, and large multinational chains such as MacDonald’s and Dunkin Doughnuts were lured into the coffee market, competing on price for Starbucks customers. These competitors all had the potential to erode the Starbucks customer base and cause a decline in revenues and profits. In addition to that, the more a business grows, the more challenging it becomes to find good quality retail locations. There is only a finite number of really good retail locations in any one area and, to keep growth going, companies are often tempted to settle for second-rate locations. A second-rate location can be the difference between profit and loss in a store and the lower the quality of locations that a company is tempted to accept (to fuel growth) the greater the losses can become.
Real life stories create an excellent context to learn about the complexity and realities of business. The story of Starbucks, as described here, provides insight into what it really takes to grow a business, how one can increase success when growing a business and how business growth cannot be expected to continue into perpetuity.
Whether you want to expand your current operation from R100 000 in annual revenue to R1 million or whether you are looking to go from R50 million to R500 million, the lessons from Starbucks over many years of profitable growth provide definitive actions that you can implement to increase your chances of success.
Every business’s growth path will be different, with different obstacles to overcome and different breakthroughs along the way, but for everyone choosing to embrace the challenge of growing a business, the following items should serve as an effective guide.
The (Starbucks) Recipe for Growth
1. Let passion drive you
2. Experiment and adapt
3. Export the culture
4. Location, location, location
5. Build a balanced management team
6. BUT BEWARE: Growth is not never-ending