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Episode: Starbucks (with Howard Schultz)

Author: Ben Gilbert and David Rosenthal
Duration: 03:15:14

Episode Shownotes

Starbucks. You’d be hard pressed to name any brand that’s more ubiquitous in the world today. With nearly half a billion global customer purchases per week across its stores and 3rd party retail channels, a significant portion of the human population gets their daily fix in the green and white

paper cup. (Including our own Ben Gilbert who famously enjoys his daily spinach feta wrap. :)But it wasn’t always this way. Long before the frappuccinos and the PSLs and the cake pops, Starbucks was just a small-time Seattle roaster that only sold beans — and was started not by Howard Schultz but rather the guys who later ran Peet’s (!). Starting from six tiny stores when Howard took over in 1987, this quirky coffee company named after a character from Moby Dick has scaled to nearly 40,000 locations worldwide.Today, in a first for Acquired, the protagonist himself joins us as a third cohost to tell the whole story of Starbucks. And Howard is in the perfect moment to do this — after three separate stints as CEO he’s now retired, off the board of directors, and in his own words “not coming back.” So place a mobile order (or not! as you’ll hear Howard speak about), sit back with your own favorite Starbucks items, and enjoy.Sponsors:Many thanks to our fantastic Season 14 partners:J.P. Morgan Payments ServiceNowPilotThe Biggest Thing We’ve Ever Done:San Francisco. September 10, 2024. Mark your calendars.Links:Howard’s letter “The Soul of a Brand”Worldly Partners’ multi-decade Starbucks analysisStarbucks S-1More Acquired:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Check out the latest swag in the ACQ Merch Store!* Future capabilities of biometric payments are under development; features and timelines are subject to change at the bank’s sole discretion.*Note: references to Fortune in ServiceNow sponsor sections are from Fortune ©2023. Used under license.‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

Summary

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal are joined by Howard Schultz to explore the transformative journey of Starbucks from a local Seattle coffee roaster to a global coffeehouse giant with nearly 40,000 locations. The discussion covers Starbucks' origins, challenges such as unionization and recent declines in same-store sales, and pivotal moments in its history, including Schultz's vision inspired by Italian coffee culture. Schultz shares insights on the brand's expansion strategies, innovative employee programs, and the importance of maintaining customer intimacy amidst rapid growth.

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Full Transcript

00:00:00 Speaker_01
All right. We're rolling? We're rolling.

00:00:02 Speaker_00
We get to see how you guys do this. It's kind of interesting.

00:00:05 Speaker_01
Usually a pump up music.

00:00:07 Speaker_00
I feel pumped up.

00:00:08 Speaker_01
We can do that. We got a turntable. I saw your turntable. That's beautiful. What do you want to hear? No, we're starting. Ben's keeping us on track.

00:00:18 Speaker_04
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now?

00:00:35 Speaker_05
Welcome to Season 14, Episode 5 of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Seven years ago, David and I did an episode on the Starbucks IPO.

00:00:51 Speaker_05
Just the IPO. That episode was a mere one hour and 24 minutes, and Starbucks is a $90 billion institution in our world that deserves the full acquired treatment. What were we thinking? Well, it actually was amateur hour back then, David.

00:01:07 Speaker_05
Gotta start somewhere. Well, today we have a very special third co-host to discuss this third place, Howard Schultz. Howard started working at the small chain of three Starbucks stores in 1982, eventually buying it and becoming CEO.

00:01:22 Speaker_05
As you probably know, he is effectively the founder of the Starbucks we know today that exists on every corner of the earth. I come to you, David, and listeners, as an unabashed Starbucks fan.

00:01:35 Speaker_05
In this tumultuous time for the company, I am absolutely pulling for them in every way possible, and that is going to come through in our conversation.

00:01:42 Speaker_05
You may have seen the news recently that they had a very rough last quarter, with a key metric that you may remember from previous episodes as same-store sales. These dropped, and their stock price plummeted as a result.

00:01:55 Speaker_05
This is on top of a tumultuous pandemic era and some of their stores unionizing and a change in leadership. We thought that this would be the perfect time to sit down with Howard and unpack why did Starbucks work in the first place?

00:02:08 Speaker_05
And how did it work at such grand scale? What can other founders and business leaders learn from what got them here? And although he is no longer CEO, where do they go now?

00:02:19 Speaker_01
It really is incredible. One of the very, very small number of food and beverage establishments that has scaled to the entire world.

00:02:29 Speaker_05
Yeah, most of those types of concepts do not work in different countries and continents. But Starbucks is different. Today they're in over 80 countries with 39,000 stores across the world.

00:02:39 Speaker_05
They're even huge in China, a country that didn't consume very much coffee until Starbucks arrived. They are a bank-scale financial institution as well.

00:02:48 Speaker_05
At any given time, Starbucks holds $1.7 billion that customers have loaded onto gift cards but not yet spent.

00:02:55 Speaker_05
So how did they go from one store selling beans, not even drinks and cups, just beans, to the default meeting place in communities everywhere? Today, we tell that story. And listeners, this episode has video.

00:03:08 Speaker_05
We recorded it in person in Seattle at the Schultz Family Foundation, and you can watch it on YouTube.

00:03:14 Speaker_05
And if you want more from David and I, you should check out our second show, ACQ2, where we interview founders, investors, and experts, often as deeper dives into topics that we covered on the main show.

00:03:24 Speaker_05
Recent episodes have been awesome with the CEO and the founder of Synopsys, of Starfish Space, further exploring the space industry, and we've got some great stuff in payments coming up next, too.

00:03:35 Speaker_01
We do.

00:03:36 Speaker_05
All right, so with that, this show is not investment advice. David and I may have investments in the companies that we discuss, and this show is for informational and entertainment purposes only. On to our episode with Howard Schultz.

00:03:49 Speaker_05
Well, I do have to tell you, and I think I've told you this off camera, for the last almost 10 years, every single day starts with a spinach and feta wrap.

00:03:59 Speaker_05
I assume there are other people like me in the world, but it's always an iced almond milk latte with whipped cream and a spinach and feta wrap. And so thank you for powering approximately a third of the cells in my body. That's a great start.

00:04:13 Speaker_05
Here's another stat that David... You've done the math on.

00:04:15 Speaker_01
I have done the math. Yes.

00:04:17 Speaker_05
I exported all of my credit card transactions since 2011. Of course you did. And I wish I had more history than that, but that was the oldest I could get. I've spent $23,000 at Starbucks since 2011. Oh, God. Okay. So we want to start with Starbucks 1.0. And

00:04:37 Speaker_05
Listeners may know that there were three founders of Starbucks. Yes. None of which were named Howard Schultz. Correct. So take us back, you know, in the Starbucks prehistory before you arrived. How did the company start?

00:04:53 Speaker_00
Well, since I wasn't there, this is what I know. There were three founders, Jerry Baldwin, Zev Siegel, and Gordon Bowker. And the story that was told to me is that one or both of them were going to school in California.

00:05:08 Speaker_00
in the bay area and they became enamored with pete's coffee company which alfred pete was yeah alfred pete was you know more than anyone else in the history of coffee in america was the true pioneer he brought

00:05:24 Speaker_00
specially coffee arabica coffee to northern california and jerry baldwin and zev became so interested in intrigued with what pizza was doing and given the fact that they were from seattle decided they would try and bring starbucks coffee.

00:05:43 Speaker_00
In the form of starbucks to seattle washington. Now what is not known is that when Starbucks opened in the Pike Place Market in 1971, they were using Pete's Coffee. Really? No one knows that. That's new. Wow. Because they were not roasting coffee.

00:06:00 Speaker_00
So they were bringing coffee from San Francisco to Seattle. They were not calling it Pete's, they were calling it Starbucks. So it was Pete's Coffee and Starbucks bags. Yeah, yeah. Again, I wasn't there, but that's kind of the folklore.

00:06:12 Speaker_00
After the three founders, built that store, opened that store. I get the sense that there was some kind of fallout between the three of them, and Zev Siegel eventually left the company.

00:06:27 Speaker_00
That brings us to 1979, 1980, around that time, when I came to Seattle, Washington for the first time. So I was working for a Swedish housewares company based in Sweden called Hammerplast.

00:06:45 Speaker_00
That company had a beautiful non-electric coffee maker, kind of a thermal unit. And we had a big customer in Macy's in Northern California.

00:06:57 Speaker_00
And I was in California on a sales call, and I had heard that there was a small company in Seattle, Washington, that was buying a lot of this product.

00:07:04 Speaker_00
So given the fact I'd never been to Seattle, I was already in the West Coast, I figured I'd come to Seattle and see what was going on. Was Starbucks buying it for use in their- They were selling it in their store.

00:07:16 Speaker_01
Now, but here's the thing- Because this was a consumer device.

00:07:18 Speaker_00
Yeah, yeah, but you have to remember, Starbucks coffee company from 1971 until around 85, 86, only sold pounds of coffee. There was no beverage. We're gonna get into the epiphany of that. Yeah, of course.

00:07:33 Speaker_00
And so I walked into the Pike Place store for the first time on a beautiful day just like this.

00:07:41 Speaker_00
The sun was out, there was snow on the mountains, the clean, fresh air, and I walked into the Pike Place Market, and I walked into the Starbucks store, and I was blown away by the experience, the romance of coffee, the education, and it just spoke to me.

00:08:01 Speaker_00
I had never met Jerry Baldwin, the founder, who was the CEO at the time. And I became interested and intrigued with what Starbucks was doing and asked if I can meet Jerry.

00:08:12 Speaker_00
One thing led to another, I met Jerry Baldwin, we really hit it off, and we established kind of a vendor-customer relationship over a course of a year or so. Starbucks had three stores at the time, only three.

00:08:26 Speaker_00
And over the course of the next year or so, I became more and more interested and intrigued with the possibility of leaving New York City. Sherry and I were dating, we're not married, and I kind of

00:08:42 Speaker_00
Maneuvered my way into a job working for starbucks and so sherry and i drove to seattle washington on labor day weekend In our old audi car with a golden retriever

00:08:55 Speaker_00
And we came here because I was offered the job as the head of marketing for Starbucks when they were getting ready to open their fourth store in 1982. Still just selling beans? Only beans. That's the whole, yeah, still the beans.

00:09:09 Speaker_00
The interest that the company had in me at the time, I think, was they were really interested in expanding, but their dream or the plan at the time was, could we expand to Portland, Oregon? Remember, it was a tiny company.

00:09:23 Speaker_05
It was a grand ambition.

00:09:24 Speaker_00
Yeah. And I never had any idea, of course, that what was about to happen and unfold over the subsequent years. But I arrived in 1982 as the head of marketing.

00:09:36 Speaker_01
So when you and Sherry arrive here, what was the coffee landscape? I mean, there were these three, soon to be four, Starbucks beans stores here in Seattle. Alfred Peet was down in the Bay Area. But what was coffee culture?

00:09:52 Speaker_01
I mean, it was like Folgers and Maxwell House, right?

00:09:54 Speaker_00
Yeah, it was de minimis. There was another coffee company, which was Seattle's Best Coffee, which was another retailer that was kind of at the same size and scale as Starbucks, both equal at the same time.

00:10:07 Speaker_00
But you can even get a new york times in seattle in nineteen eighty two eighty three it was not no good food to speak of and starbucks was a true pioneer where they were educating.

00:10:19 Speaker_00
Customer after customer about what good coffee taste like in the pipe place market gave them an interesting vehicle because of the tourists.

00:10:28 Speaker_00
And so starbucks actually started establishing a mail order business as a result of all the people who are coming into seattle.

00:10:36 Speaker_00
And I think if I remember, there was so many points that I can remember where people were talking about Starbucks way outside of Seattle as if it was some kind of iconic big company. I think people came to Seattle, is this it?

00:10:52 Speaker_00
This is the 800, 900 square foot store in Seattle, Washington in Pike Place Market.

00:10:57 Speaker_05
This is the Mecca. And so tourists would come, they would buy a bag, and then they would fill out some kind of information and say, I'd like to have this mailed to me, because I don't have anything like it in my city.

00:11:08 Speaker_00
Yeah, that's what happened. And because coffee has a shelf life of basically a week to 10 days, and we didn't have a vacuum bag at that time,

00:11:18 Speaker_00
We were shipping small amounts because to Jerry Baldwin's credit, he had such a fastidious point of view about quality and freshness, and I think that had a huge impact on me.

00:11:30 Speaker_01
But this couldn't have been like a great business. You're shipping small amounts.

00:11:35 Speaker_00
No, it wasn't.

00:11:36 Speaker_01
The logistics costs, the scale.

00:11:40 Speaker_00
This was a small business, but the equity of the brand, even back then, was much larger than the size of the business. And the opportunity that I saw, even when we had four or five stores, was well beyond Portland, Oregon.

00:11:55 Speaker_00
And I was always kind of pushing, we could do so much more. And then the whole thing blew up for me when I went to Italy in 83.

00:12:03 Speaker_05
OK, so before the Italy trip, I just want to really contextualize coffee in America. I think coffee had been declining since like 1940.

00:12:13 Speaker_05
It's still part of the American culture, but it's not that it's on the way out, but there's nothing new or interesting except for this little segment of... Especially coffee, which was tiny.

00:12:24 Speaker_00
And I think what you've just described, the reason for that is that coffee was terrible. It was instant coffee, stale coffee, and primarily robusta beans. which is the low-grade coffee that Starbucks was never involved in.

00:12:38 Speaker_00
Yeah, walk us through the two types of beans. There's mainly two types of agricultural coffee grown for commercial use.

00:12:46 Speaker_00
Robusta beans low end coffee primarily in instant coffee and high grade arabica coffee but even within the arabica coffee there's significant segments of quality and integrity and starbucks has always played from nineteen seventy one to today at the highest level

00:13:05 Speaker_01
And my understanding from our research is that the Robusta market really developed, as you say, with the instant coffee market. And that was kind of a product of World War II, right? It was like, hey, we got to get the troops this product to survive.

00:13:18 Speaker_01
And so we just need a lot of beans and we need to ground them up and create this instant product. I believe Maxwell House was involved in inventing.

00:13:25 Speaker_00
Yeah, you're exactly right. I mean, it was just fuel and bitter, acidic. And yeah, I think World War II and the GIs were kind of the impetus for that kind of quality coffee, or not quality coffee, to exist and have any kind of run after the war.

00:13:44 Speaker_05
So you show up at Starbucks. You know a little bit about the market because you've been a supplier of theirs, but you happen to be a pretty talented salesman from your time at Xerox. And I want to make a tie here.

00:13:57 Speaker_05
Our previous episode was the Microsoft episode, or at least Microsoft volume one. You were selling word processors made by Xerox. Tell me what word processors were in the mid-'70s.

00:14:11 Speaker_00
My territory was 42nd to 48th Street from 5th Avenue to the river. And I had to make 50 cold calls, physical cold calls a day. That was a job. The Xerox job taught me incredible amounts about not only selling, but humility.

00:14:33 Speaker_00
Humility because the rejection every day was so significant and you put on your suit and tie and you go in an office building There's no security at that time just go in and you go from the top floor to the bottom and then there are other people Selling other products who are doing the exact same thing and you had to get by the receptionist I was making a thousand dollars a month and living at home when I started and

00:14:58 Speaker_00
Okay, the word processor was a big machine in which you are editing on that machine to basically create a letter.

00:15:08 Speaker_05
And does it have a screen or has it like a typewriter?

00:15:10 Speaker_01
No, it's a typewriter, no screen. It's like a typewriter with like a, with a little bit of cash, right? So you could like fix mistakes for one line, right?

00:15:18 Speaker_00
Yeah. The job at Xerox at the time was like working for Google. I mean, Xerox and IBM were the two pillars of technology and high-tech companies.

00:15:27 Speaker_00
You told somebody you're working at Xerox, you had a whole different patina that you were, wow, that's working for Xerox, wow.

00:15:33 Speaker_05
And so you quitting, well, Hammerplast, but quitting what seemed like a… I hated it. …stable of pretty good jobs to drive across the country to provincial little Seattle. I mean, that's nuts.

00:15:46 Speaker_00
I knew after a couple of years if I stayed at Xerox for a longer period of time, I was going to be locked in there. But I'll tell you the story that got me to realize I've got to get out of here. At the end of the year,

00:16:02 Speaker_00
The performance appraisal at Xerox was basically a scorecard from one to five. So you'd have a qualitative discussion with your manager and then he would give you a number.

00:16:14 Speaker_00
And when I got a three, I said, I was just saying to myself, I worked all year. I just had a performance appraisal from my manager and I'm a three.

00:16:24 Speaker_01
This is amazing, Howard Schultz got a three. He's the inspiration for all entrepreneurs out there.

00:16:28 Speaker_00
I got a three, and as soon as I got the three, I swear, at that moment, I knew I've got to get out of here.

00:16:36 Speaker_00
And that's when I started putting myself in a position of meet other opportunities, and by and large, I was able to get the Hammerplast job, which was the general manager of the company, which was based in Sweden in the US. But I was a three.

00:16:51 Speaker_01
Do you think having that background at Xerox, did that give you a piece of perspective that helped build Starbucks to what it is today?

00:17:03 Speaker_00
When I hear the question, I have to go back to my childhood and think everything that I've experienced growing up in the projects in more or less a dysfunctional family because of the pressure of money.

00:17:20 Speaker_00
Getting the Xerox opportunity and having some level of success, but realizing I wanted more. The humility which came with rejection. The shame I had as a poor kid living in the projects. All of that, I think, crystallized in me.

00:17:38 Speaker_00
I give Sherry so much credit in realizing that together we wanted to build a different kind of life. And gave me the courage, the conviction, and the drive to try and do something that I felt I was destined to do. I didn't know what it was.

00:17:58 Speaker_00
I certainly didn't know moving to Seattle was going to create the opportunity of a lifetime. But I always felt I had to get out of that station in life where I was positioned not to get to the level that I thought I deserved to be.

00:18:12 Speaker_05
I don't think it is common with someone for your background, poor kid in the projects coming from nothing, to get a great job, two great jobs, and be wildly dissatisfied and not feel like, I've made it, but rather, no, there's got to be something more than this.

00:18:32 Speaker_05
There's something deep inside you that caused you to be willing to take a risk.

00:18:38 Speaker_00
I was really insecure about not succeeding. And I didn't view what I was doing as the success that I was not destined for, that sounds wrong, that I had the appetite for.

00:18:55 Speaker_05
All right, so we're getting to the big risk. So the year ticks over to 1983. Yeah. You are sent, or maybe you asked to go to an international housewares conference in Milan. Yeah. What do you discover?

00:19:09 Speaker_00
So I went to a trade show called Matcha. with a big convention center, and it's a giant houseware show with equipment and all kinds of stuff. And I was staying at a relatively cheap hotel in walking distance to the convention center.

00:19:26 Speaker_00
I get out of the hotel, I'd never been to Italy before, and I am all of a sudden being intercepted with the physical manifestation of one coffee bar after another in the business that I'm supposed to be in.

00:19:41 Speaker_00
But it wasn't the business that Starbucks was in. And I walk in like a normal person that's never seen this before. And I am just like, I'm in a black and white movie. And all of a sudden, everything was color. And it was so rich.

00:19:56 Speaker_00
I couldn't get enough of it. And I just went from one to the other to the other to the other. And I was just blown away and more or less raced back to America. sat down with Jerry and Gordon and said, holy shit.

00:20:14 Speaker_03
We gotta do this.

00:20:15 Speaker_00
What's happening in Italy is the business that Starbucks has to be in. And they had seen it. They've been in Italy. And they said, no, that's not what we wanna do. And I just said, seriously? And I banged on the door for two years.

00:20:32 Speaker_00
And in two years, they finally let me open up a coffee bar On the corner of fourth and spring in seattle and was the sixth starbucks store and out of about twelve hundred square feet i got a hundred feet.

00:20:46 Speaker_00
And i designed and open the coffee bar work behind the counter as a barista and. Starbucks probably had two to three hundred customers a day selling holding coffee we read five hundred in a week. with introducing lattes and cappuccino to an espresso.

00:21:04 Speaker_00
And there's nowhere else in town to get a cafe latte. Well, Cafe Allegro had it, and that was Dave Olson. And after a few months or six months or so, Jerry said, I don't want to repeat this. I don't want to do it.

00:21:18 Speaker_00
I don't want to be in the restaurant business. Yeah, what was the objection? Was it the stigma of the restaurant business? I mean, I don't want to speak for Jerry. I have so much respect for him, but he didn't think it was clean. He didn't like it.

00:21:30 Speaker_00
Now between 83 and 85, Jerry Baldwin, because of his love of Pete's and his relation with Alfred Pete, had an opportunity for Starbucks to acquire Pete's Coffee Company. And they did.

00:21:46 Speaker_00
Unfortunately, Starbucks buys Pete's and they get into financial trouble.

00:21:52 Speaker_05
And so really, at this point, it was like their mentor was retiring, this person who was a steward of the industry. We're operating six points of retail distribution in Seattle for our beans.

00:22:02 Speaker_05
Why don't we just buy your effectively the same business but in Northern California and keep them separate for now?

00:22:08 Speaker_00
Well, it's important to know that between the opening of the Fourth and Spring Coffee Bar inside of Starbucks. Starbucks number six. Yeah. And Jerry and Gordon saying, we don't want to repeat this. I was so frustrated.

00:22:21 Speaker_00
I said, I'm going to leave Starbucks. And what did I do? I had no money to open up a coffee store. So Jerry says, Starbucks does not want to open up coffee bars, but we will invest in Il Dronali.

00:22:40 Speaker_01
which was the company you started too.

00:22:41 Speaker_00
Yeah, so before they get into financial trouble, Starbucks is an investor. I've always thought he did that so I would sell and market Starbucks coffee in the coffee bar, which I would have done anyway. So Starbucks makes an investment.

00:22:58 Speaker_00
A couple of people that we know make an investment, but I didn't have enough money. So I go to see two Italian companies. I've never told this. One is the espresso company, Fiema. And one is the large Italian coffee company, Lavazza.

00:23:15 Speaker_00
And I asked them both to invest in my idea. And both of them turned me down.

00:23:22 Speaker_05
So at this point, you're in Italy and you're trying to get ideas and investors for what would become Il Giornale. For the first Il Giornale. And only Starbucks and a couple other people have committed. But I didn't have enough money.

00:23:32 Speaker_00
I still needed more money. And you were raising 1.6 million? Yeah, 1.6, 1.7 million. And they said, no one is going to buy Italian espresso in Seattle or in America. Which is stupid, because you watched it happen.

00:23:48 Speaker_05
You're like, I ran this store for six months, and it was flying off. Yeah, they didn't want to do it.

00:23:52 Speaker_00
So Lavazza and Faema, just to get that on the record, turned me down. Okay? They'll deny it, that's a fact. So then I go back to the US, I'm trying to raise money, and I hit the three titans in Seattle. Jack Benaroya, Herman Sarkowski, and Sam Strong.

00:24:16 Speaker_00
three of the leading citizens of Seattle, Washington at the time. And the three of them have a little bit of an investment together in other things, and they say, we're gonna believe in you, and they take me over the hump. Wow.

00:24:31 Speaker_00
Okay, and we opened three Ildrenalis, two in Seattle, one in Vancouver, BC. And all three are doing well, all three. But I didn't have enough money to expand.

00:24:45 Speaker_01
And needing the money to expand, just to pause on that for a minute, business-wise, Obviously, coffee bars are a much better business long-term than coffee beans, but probably more capital-intensive, right? Eating more staff.

00:24:58 Speaker_00
Yeah, more labor, yes. But the stores weren't that expensive to open, because they were small, less than 1,000 square feet. And we understood how to do it. And I was working as a barista with Dave Olson and other people to keep the costs down.

00:25:11 Speaker_00
We were behind the counter, and I had no salary. I had no salary for almost two years. while Sherry was working and pregnant with our first child.

00:25:19 Speaker_05
So looking increasingly worse from a traditional perspective of leaving a high quality job, moving across the country, then just a couple of years later, here you are not making any money again, while raising millions of dollars to try to start your own business.

00:25:33 Speaker_00
It gets worse. Sherry is six, seven months pregnant. She's working. Her parents visits you. They're from Ohio. Father asked me to take a walk.

00:25:46 Speaker_01
Oh, no.

00:25:47 Speaker_00
God is my witness, true story. Take a walk, and he says, whatever you're doing, I respect it, but it's not a job, it's a hobby. You need to get a job. My daughter's pregnant, she's working, you're not. I start crying.

00:26:07 Speaker_05
I'm so embarrassed.

00:26:10 Speaker_00
And I come home, it's three, four o'clock in the afternoon, whatever it is, I don't say a word, completely shaken by the whole conversation. Her parents go to bed after dinner, I'm sitting with Sherry, and I said, I gotta tell you something happened.

00:26:23 Speaker_00
She was so angry at her dad and so upset, and she said, there's no way we're turning around, we are going. So she is the glue to everything that's happened And I don't know if she'd ever had a conversation with her father. I'm sure she did.

00:26:41 Speaker_00
But the whole thing could have been over.

00:26:44 Speaker_05
and that would have been a very understandable response if Sherry had said, I wasn't gonna say anything, but look at our situation objectively here.

00:26:52 Speaker_01
Putting ourselves in your father-in-law's shoes, how could you not feel that way for your daughter and her impending family?

00:26:58 Speaker_00
Yeah, and her father was a great guy, and I understood, but I was embarrassed and humiliated. How could I not be?

00:27:08 Speaker_01
I mean, I guess that's another dimension here too. This was not 2024. It's not like being an entrepreneur was a glorified profession here.

00:27:16 Speaker_00
In a business that he clearly did not understand, you know, a coffee store.

00:27:21 Speaker_05
The other interesting thing to point out around this time is for the people who were seeking high-risk business investments, this is the late 80s, it's time to look at tech.

00:27:34 Speaker_05
We're now 12 years into Microsoft, Apple's four years past the Macintosh, and you're trying to raise money for a coffeehouse chain.

00:27:44 Speaker_00
With names that people couldn't pronounce and serving it in a paper cup to go.

00:27:50 Speaker_05
That does not sound innovative to me. I don't know why I'm putting my risk capital into your… Yeah.

00:27:56 Speaker_00
You know, I would bring investors to the two or three stores, and I would make sure there was a fair amount of people in the space. And that's when I started talking about the language of community and the third place. And that's what I saw in Italy.

00:28:14 Speaker_00
The unlock and the epiphany, of course, it was the romance of espresso, but it was the sense of community. And that is what was happening very early on in the two stores in Seattle and the one in Vancouver. You could see it.

00:28:27 Speaker_00
What would people do after they bought the coffee? You said these are very small places. They would stand up. Because the two stores didn't have seating right away.

00:28:35 Speaker_00
They would stand up at the coffee bar at the window on Columbia Center, and it was at eight, nine o'clock in the morning, they were hanging out there.

00:28:44 Speaker_00
And then they, late morning, they were coming back, and you could just feel the relationship that people were having with one another around human connection. I know it sounds trite, but I could see it back then.

00:28:57 Speaker_00
And as I was talking to people about the investment opportunity, I was pointing out, look what's happening here. There's something happening. There's some magic going on here. It's not just the coffee. The coffee was the conduit. All right.

00:29:10 Speaker_00
So we're at the pivotal moment. Starbucks and Pete's gets into financial trouble. And the debt to equity was North of six to one for a company that was tiny. Jerry comes to me and says,

00:29:23 Speaker_00
Jane and I, his wife, are gonna move to California, and we're gonna keep Pete's, and I'm gonna sell Starbucks. And my heart is pounding. I said, okay. And then he finished it, and he says, I think you're the person to buy Starbucks.

00:29:41 Speaker_00
I said, that's fantastic, but I don't have any money.

00:29:44 Speaker_01
You're gonna give it to me?

00:29:45 Speaker_00
I have no money. How much is it? $3.8 million. Now we're in 86, 87. Now we get into a story I have told, but not 100%, because I've protected the guy. But I'm going to tell it. I go out to raise money. I'm having a hard time.

00:30:04 Speaker_00
So Jerry gave me about, I think he gave me 90 days to raise $3.8 million. Around the second month, he just came to me and said, where are you with all this? And I think I had about half of it raised.

00:30:18 Speaker_00
I might've fibbed a bit and said, I had a little bit more, but I didn't, I had about half. And he lays a bomb on me and says, Howard, listen, we're in a tight situation here.

00:30:30 Speaker_00
And one of your investors has put a cash, all cash offer on the table with no due diligence and wants to close right away for him to take it over.

00:30:41 Speaker_05
Not you.

00:30:41 Speaker_00
Yeah. Yeah. I'm out. I'd be out. And I said, who is it? And he told me, I'll save that. And I'm absolutely annihilated, crushed, because I didn't have the wherewithal, and I could just envision, as soon as I heard that name, I knew it was over.

00:31:03 Speaker_00
I was in a basketball league at the Seattle club. I'm playing basketball that night, my good friend, Scott Greenberg, who's an attorney at a prestige firm in Seattle, the Gates firm.

00:31:19 Speaker_00
I'm basically crying to him after the game and telling him the story. And he says, you've got to come to the office tomorrow and meet our senior partner and tell him the story, Bill Gates Sr. I said, well- A titan. Incredible.

00:31:34 Speaker_00
We foreshadowed this on the Microsoft episode. There were three titans there, but here is the titan. And Bill was six foot seven? He's six foot seven. He's a mountain of a man and very imposing. So nine o'clock in the morning, I put a suit on.

00:31:54 Speaker_00
I must've been sweating through my shirt. I was just so anxious, so nervous, and at the same time, so scared about what was gonna happen. I go in there, and I must've been trembling. I was just so nervous. I tell him exactly what I just told him.

00:32:12 Speaker_00
And he interrupts me and he says, Howard, I'm just gonna ask you two questions. Is everything you told me true? I said, Mr. Gates, yes. Have you left anything out? No. And he says, come back in an hour. And I said, OK, to do what?

00:32:31 Speaker_00
He says, I'll see you in an hour. And so we walk out. I'm walking around. I think we probably went to Columbia Center to get a coffee and come back. I go back with Scott. And Mr. Gates says, Scott, I'm going to see Howard alone. And Scott leaves.

00:32:47 Speaker_00
Now I'm alone in his office. I hardly sit down. And he says, we're going for a walk. And I said, where are we going? And he says, we're going to see the man who was Sam Strom.

00:33:07 Speaker_05
One of your investors.

00:33:08 Speaker_00
One of the investors. We walk across the street to the old Rainier Tower. I think Sam had one of the biggest offices. We walk in there, and I swear, even though it's so many years later, I have a perfect, vivid account for what took place.

00:33:29 Speaker_00
Sam is sitting behind his desk, and this is what happened. Because it was five minutes. Bill Gates, remember, he's a huge guy.

00:33:39 Speaker_00
leans over to the desk with his hands on Sam's desk and says, I don't know what you are planning, but whatever it is, it's not going to happen.

00:33:52 Speaker_02
Wow.

00:33:52 Speaker_00
And he says, Howard Schultz is going to acquire Starbucks coffee company and he's never going to hear from you again. That was it.

00:34:06 Speaker_05
And we walk out. That's it, that's the whole thing. And so did you hear from Jerry that the bid had been dropped?

00:34:14 Speaker_00
We walk out, and I say to Mr. Gates— There's one little problem, you still need the money, right? Yeah, so I say to Mr. Gates, what just happened? And he said, you're going to buy Starbucks Coffee Company, and my son and I are going to help you.

00:34:28 Speaker_03
Wow.

00:34:31 Speaker_00
And we raised the money, and that's the story. I never spoke to Sam Strom again, I've never mentioned his name publicly, I never mentioned his name in his book, and I say it respectfully. I'm not trying to... but that's the story.

00:34:45 Speaker_05
And Sam, I mean, for anyone who doesn't live in the Seattle area, his name is on buildings and community centers. I mean, this revered philanthropist, I actually don't know his business background. How did he become the titan that he was?

00:34:57 Speaker_05
He was involved in real estate and also in those auto stores. How did you get him off the Il Giornale cap table? Like, wasn't he an investor in your existing business?

00:35:06 Speaker_00
Yeah, he was still an investor. He and his family were investors to the end until they got out. Oh, wow. Until they got out. Wow.

00:35:12 Speaker_01
Looking back now, What do you think happened? Did he have any legitimate criticisms of you as running the company?

00:35:19 Speaker_00
No, he had a henchman who was his money guy who figured out we could just take this company and what do we need Howard Schultz for? He's a young kid. And Sam had experience with retail, with those auto stores.

00:35:33 Speaker_05
I see. So he could install some professional management from some other venture.

00:35:37 Speaker_00
Yeah.

00:35:37 Speaker_01
Run the playbook.

00:35:38 Speaker_00
Yeah. It would have been over. But the thing about Bill Gates is I saw him socially a hundred plus times. He never, ever said anything public about what he did. He never took credit for it.

00:35:54 Speaker_05
So for listeners, Howard's told this elsewhere, but you spoke at the Microsoft CEO Summit. You've recounted this story to the Fortune 500 CEOs. And Bill Gates III, Microsoft founder, comes up to you afterwards and says, yeah, who was the guy?

00:36:10 Speaker_05
But Bill did not know the whole story.

00:36:13 Speaker_00
He didn't know any of it. He didn't know what his father had done for me. He's hearing it for the first time.

00:36:19 Speaker_05
And this is, you know, 2015 or something. So Starbucks, like, you would think... No, he didn't know. ...someone would want to tell their family, I played some significant role in this, but that's not the type of guy he was.

00:36:29 Speaker_00
Bill Gates Sr. never told his soul what he did for me. Wow. Again, humility.

00:36:35 Speaker_05
incredible lesson about humility. It's amazing. Yeah. And so were Bill Gates Sr. and Bill Gates III investors in that $3.8 million round?

00:36:45 Speaker_00
Bill Sr.

00:36:45 Speaker_05
was, but I don't know if it was part of Bill or not. But yeah, Microsoft. Interesting. So I asked Sherry about this when I was preparing for the episode, and her recollection was it was something like

00:36:58 Speaker_05
one to two weeks before the three-month exclusivity for you was going to be up. And so you're basically like, this event happens, but now you need to come up with the money. And you have this unbelievably short period of time to do so.

00:37:10 Speaker_05
And so she said that you were calling everybody you knew. She was calling her clients, because she's a designer, calling her clients, trying to just, you know, find pockets of 50k here, 100k there, anywhere you could to make it happen.

00:37:24 Speaker_00
But I had another angel. who helped me by the name of Jack Rogers, who became a lifelong friend who passed away a couple of years ago. He was part of an investor group, and he brought them along. So the acquisition goes through. Yeah.

00:37:42 Speaker_00
August of 87, we bought the six Starbucks stores. We had the three Ildren Ollies, and there were two stores under construction. So at the end of the calendar year, we had 11 stores and 100 employees in 1987.

00:37:59 Speaker_01
All in the Northwest? Yeah. Meanwhile, the original Starbucks folks, they've now gone down to California. They went to California. When did Pete's open coffee bars?

00:38:10 Speaker_00
Many, many years later.

00:38:12 Speaker_01
So you weren't competing right away? No.

00:38:15 Speaker_05
But this is one of the great observations, David.

00:38:17 Speaker_05
Il Giornale buys the Starbucks stores, rebrands Il Giornale Incorporated as the Starbucks Corporation, and the original Starbucks had owned Pete's and now needs a new name, so it rebrands the company Pete's.

00:38:32 Speaker_05
So Pete's was actually Starbucks, Starbucks was actually Il Giornale. It's amazing. Some stats just for listeners to understand the gravity of this situation.

00:38:41 Speaker_05
For the initial 1.6 million that you raised for Il Giornale, you talked to 242 investors, 217 of which said no. So anybody who's griping about their fundraising journey, those are rookie numbers until you get to Howard's nose.

00:38:55 Speaker_00
No, but you asked me a question earlier about what did the years at Xerox teach me. So the rejection I was going through The Italians turned me down. People in the U.S. turned me down. Nobody would believe in the idea.

00:39:09 Speaker_00
It was like I was cold calling again at Xerox.

00:39:17 Speaker_05
The Starbucks company with the six stores, when they bought Pete's with that six to one debt to equity ratio, basically backed themselves into a corner where now they had these big debt service payments to make.

00:39:29 Speaker_05
There was really no risk they could take or innovation that they could do because the whole business needed to spit out a certain amount of cash every month so they could pay down the debt.

00:39:40 Speaker_05
And so when you're in that situation, Starbucks in the 40 years ahead from this point in the story has tried all sorts of crazy things to become the business that it is today.

00:39:51 Speaker_05
And when you first created this combined company, you were pretty religious about no debt. No debt. I don't want any debt again because of my childhood.

00:40:01 Speaker_05
I was gonna ask you, was that informed by what you had seen with the Starbucks situation or your childhood?

00:40:07 Speaker_00
No, it was totally my childhood. My parents were always in debt, bill collectors were always calling, and no, we never had any debt the entire time, never.

00:40:18 Speaker_01
This is probably a good point in time to talk about the business model a little bit. Okay. You've alluded to kind of a stigma, at least among potential investors and the original Starbucks founders of like the restaurant business.

00:40:31 Speaker_01
What did the economics of the coffee bar business look like when you bought the Starbucks stores?

00:40:38 Speaker_00
So what did we buy? We had the stores, we had the brand name, and we had a roasting facility on Airport Way in Seattle. The ability to source and roast coffee and put that through the supply chain of a beverage

00:40:56 Speaker_00
gave us probably at the time an 80% gross margin.

00:41:00 Speaker_01
Yeah, that is not the quote unquote restaurant business that people are imagining.

00:41:05 Speaker_00
And I could begin to see even early on the accretive nature of frequency. Where I can see what was going on here is people were not coming for coffee in the morning anymore. They were starting.

00:41:19 Speaker_00
The morning rush was getting bigger, the need for more labor, and I could sense that the business that Starbucks was in was going to be significantly in the back, and the beverage and the romance of the theater, and the third place was the hero.

00:41:37 Speaker_00
It didn't take us long to realize we had the beginning of lightning in the bottle.

00:41:43 Speaker_01
Even the best, most successful restaurant you could possibly imagine, how many times are their most loyal customers going to come there in a week? Yeah.

00:41:51 Speaker_00
Well, there was a time. in the northwest, when we were really at our peak, where the average customer was coming 18 times a month. I should rephrase it. Maybe the most loyal was coming 18 times a month.

00:42:04 Speaker_05
There's some magic to this idea that it's not a terribly expensive item. I think I saw some research that said that it's sub 1% of someone's household income and often far less than that, but it is repeat and it is high gross margin.

00:42:18 Speaker_05
And so when you say lightning in a bottle, there's a cultural lightning in a bottle, but there's also this ridiculous business model where the way it shows up is your stores, basically from this point forward for all of Starbucks's life, you build a new store and the profits from that store would totally cover the costs within two years and often a year and a half.

00:42:38 Speaker_00
But I'll tell you the economic model that we applied to every single store we were opening. By the way, I chose the first 500 locations myself, so I was in it in so many ways.

00:42:50 Speaker_00
But the economic model in Wall Street, when we went public in 92, when they heard the model, they said, well, we've never seen a model like that. And the model basically was a sales to investment ratio of 2 to 1. and a operating profit of 20%.

00:43:07 Speaker_00
So what does that mean, sales-to-investment ratio? So if the sales were a million dollars, the investment was $500,000. Just the sales-to-investment had to be a two-to-one.

00:43:17 Speaker_01
In year one of operation.

00:43:18 Speaker_00
Yeah, yes. And the operating profit was north of 20%. Wow. So the cash-on-cash return was just... So yeah, you get that two years at a less payback. The retail world had never seen a model like this before.

00:43:30 Speaker_01
There was no physical storefront that had this business model before this.

00:43:34 Speaker_00
Early on, it became clear to us that customers were also starting to customize the beverage on their own. So we were just, barista was behind the counter and somebody would say, can I, can you put something else in there? Yeah, what do you want?

00:43:50 Speaker_00
And then, so that just started, you know, the average ticket started growing as a result of the customers personalizing and customizing their beverage.

00:43:58 Speaker_05
And to be clear, like the era of Starbucks we are in right now, you produce drip coffee and you produce espresso, and you can put that espresso in frothed milk. And that's basically your options. Like none of this, you know.

00:44:11 Speaker_00
Yeah, exactly. But can I tell you a mistake I made? Please. Please. When Il Dronali was getting ready to open, the standard cup in the world was that terrible styrofoam cup that is used in diners in New York City. Remember that cup?

00:44:27 Speaker_03
Yeah.

00:44:29 Speaker_00
I put boiling water into that cup. Five minutes later, the cup is starting to turn like a golden color because of the chemical. That can't be good for your insides. Or the taste of the cup. And so we had to find, we had to change the cup.

00:44:45 Speaker_00
This was such a smart move in retrospect, but we were just trying to figure out, now, no one in America that is in the paper business had any kind of cup or lid that was compatible with what I was trying to do. In fact, they didn't understand it.

00:45:04 Speaker_00
Why not just use the cup that exists? I said, no, because it doesn't taste good and it doesn't feel right.

00:45:09 Speaker_05
Right, why go to the trouble of this perfected roast of these beautifully sourced arabica beans from all these farmers if you're gonna pour it into styrofoam? Yeah.

00:45:18 Speaker_01
Okay, so- Did people think you were a hippie? Like when you would tell these, like are you on LSD or something?

00:45:21 Speaker_00
I think they just dismiss me. We went to Chicago to the International Paper Company, and they had a cup, but the cup didn't have a lid, a compatible lid. And so we found, they found a lid, that beautiful SIP lid, which is now ubiquitous in the world.

00:45:45 Speaker_00
Howard Schultz should have said to them, I want an exclusive on that lid. Because that lid became the standard for the world. If I would have just understood that. The other thing I didn't do is we introduced cafe latte to America.

00:46:00 Speaker_00
We didn't trademark it. You know, we trademarked Frappuccino later on, but we didn't trademark cafe latte. I wasn't thinking. You got enough right. You don't need to get them all right.

00:46:09 Speaker_01
No, I just, I missed it. When the sizing. Grande, Venti.

00:46:15 Speaker_00
Oh, that was. The Hidden Trainter.

00:46:17 Speaker_01
Yeah, right. When did that start?

00:46:20 Speaker_00
There was a brilliant, brilliant guy who was the architect of the name Starbucks, named Terry Heckler, in Seattle. And he's a fantastic design guy. And we're just sitting one day, and I'm just talking about the importance of language.

00:46:37 Speaker_00
We gotta get the language right. And we got the cup, gotta get the language. And we just started talking about changing it from the pedestrian words of small, medium, large, to what it became, which was short, tall, and grande.

00:46:53 Speaker_00
People made fun of it, but they loved it. Was Venti not an original? Venti, we didn't have that size when we started. That was later on. Wow. Who would have thought somebody wanted to- This is America.

00:47:03 Speaker_01
Yeah, this is America. So my one more question on this, writing the customer's name on the cup.

00:47:10 Speaker_00
That didn't come from me. As the stores got busier and busier, the baristas were having a hard time with whose cup is it? What are we going to do? And someone at Starbucks, I don't know who it was, started writing names on the cup, writing names.

00:47:25 Speaker_00
And it just became standard. So much of Starbucks success came from customers asking for things we weren't doing and Starbucks employees who became partners in 91. understanding the business better than me.

00:47:44 Speaker_01
And this is all like, you know, to my mind, just starting to create this incredible flywheel, right?

00:47:48 Speaker_01
If you've got this 80% gross margin business where the key lever is repeat loyal customer visits, you've got customization that is making customers more loyal and increasing your margin at the same time because you can charge more for it.

00:48:04 Speaker_01
You've got the interpersonal relationship with The barista is sure, but also even as you scale, I mean, the name on the cup, that's something that scales even as thousands and thousands of people come into the store.

00:48:17 Speaker_00
The intimacy with the customer and the barista became a very powerful component of the equity of the experience. And I've always thought in so many ways, Starbucks became the first experiential brand at scale.

00:48:35 Speaker_00
We didn't spend any money on marketing, zero. There was no money for marketing. And the cup, the iconic cup, became a badge of honor because people were doing something that was new and novel and walking in the street with it.

00:48:51 Speaker_00
And people, you know, what is that? It was a lot of that kind of stuff.

00:48:54 Speaker_01
It's your free billboard. Yeah.

00:48:55 Speaker_00
That people are proud of. Perfect.

00:48:56 Speaker_01
Wow.

00:48:57 Speaker_05
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00:50:30 Speaker_01
So in this era, I mean, you must just be getting more and more excited every day. Oh, I was out of my mind.

00:50:37 Speaker_05
So David Howard sent me, there's a 1988, I can't believe this was filmed, but a 1988 shareholder and employee meeting where it's great. The whole thing's like an hour and a half It's all there.

00:50:51 Speaker_05
And you are using all the same language that you used today back in 1988. We focus on our people. Those people delight the customer. The customer delights the shareholder or satisfies the shareholder.

00:51:02 Speaker_05
And the conviction that you have, it's like watching a preacher. You're up there. You've got, I think, 11 stores or something. And you're like, you have no idea what we have here.

00:51:17 Speaker_05
We are on top of something that is going to change, and you don't say the world, America. And this thing can become America's coffeehouse.

00:51:26 Speaker_05
And it was interesting because I think the whole room was already scared of your ambition of going nationwide with this thing that there did not exist another example of a national coffeehouse chain.

00:51:38 Speaker_05
Everything was just these little cities, these small markets. And there's this great quote that you have at the end of the meeting that says, the company since 1971 has been growing at a very, very slow pace.

00:51:50 Speaker_05
As a result of that, you combine Il Giornale and Starbucks together, we're going to take your six stores that you've built in 17 years, and we're going to go to 26 in one year, and we're going to go to over 100 in five years.

00:52:02 Speaker_05
And that must have just sounded bonkers, but that is literally what happened. That's what happened. Like the pace of growth, approximately you just doubled stores year over year over year.

00:52:13 Speaker_05
Was there some moment in 88, 89, 90 where you're just like looking around realizing, We must expand as fast as we possibly can because this concept is the concept the world needs now.

00:52:27 Speaker_05
And if we don't pull out all the stops, someone else is going to do it.

00:52:31 Speaker_00
There were regional competitors who were making noise about doing what we were aspiring to do. And I was very mindful because one of them was franchising. That was Gloria Jeans out of Chicago.

00:52:47 Speaker_00
And at one point, I think they had more stores than we did because of the franchising opportunity. And that's one of the reasons why I went to Chicago as well in 87, 88.

00:52:55 Speaker_05
Because Chicago was the first market outside of Seattle and Vancouver, right?

00:52:59 Speaker_00
Yes. Even before LA. Yeah. And it didn't work right away. How hard be hard should be credited with so much of the cultural texture and the tapestry of the humanity of the company. Set i will go to chicago and fix it.

00:53:18 Speaker_00
He went to chicago and stayed in chicago through the winter. and recalibrated the mistakes we were making.

00:53:27 Speaker_00
And of course, he and Oren were so instrumental into the loneliness that exists as an entrepreneur and their ability to help me build the company that you know today.

00:53:41 Speaker_05
Yeah, so I have in my script here, this is literally labeled the H2O era. And for anyone who was a partner at Starbucks sort of knows what I'm talking about, and anybody else outside has no idea. But there's two Howards.

00:53:51 Speaker_05
There's Howard Schultz and Howard Behar. And Howard Behar joined in 1989. Orrin Smith joined in 1990. And the way that it looks to me from the outside, and you can tell me if this is right, you were sort of the vision and ambition that would almost like

00:54:05 Speaker_05
Take any ambition that anybody else had and force them to think bigger and faster. Okay, and then Howard Behar Was in many ways the soul like he brought the idea of servant leadership.

00:54:15 Speaker_05
He brought the idea of Nothing else matters if we aren't people first and obviously that became a huge Tenet of Starbucks as we knew it through the 90s and 2000s, but that seems like it really arrived with him and then Orin is like a numbers God

00:54:30 Speaker_00
No, he was the adult in the room, more than the numbers. He had the style. He was quiet. He was a gentleman. He was the only MBA in the company. But he was the wise man who behind the doors could say to me and Howard, you're both full of shit.

00:54:47 Speaker_00
We're not doing that.

00:54:49 Speaker_05
And we listened, more or less. And was it true that the three of you had dinner every Monday night for a decade?

00:54:59 Speaker_00
More or less, that is true. Sometimes more than once, if we had a crisis or two, which generally we did, or we had a disagreement.

00:55:06 Speaker_00
There's a lot of creative conflict, especially between Howard and I. Because he had to operate what we were trying to do, and at times he thought we were growing too fast or ahead of the resources.

00:55:21 Speaker_05
Because he was basically training all these operators, the sort of management fleet of the company.

00:55:27 Speaker_00
Yeah, he was building the operating system for us to be able to open the store, design the stores, which more or less I had done, build them, operate them, train them, and create the system to handle the flow of customers.

00:55:40 Speaker_00
So his job was much harder than mine.

00:55:43 Speaker_01
Speaking of system, what did your technology look like at this point?

00:55:48 Speaker_05
Don't embarrass him. No, there was no technology.

00:55:52 Speaker_01
No. Were you running like a Oracle system?

00:55:55 Speaker_00
Not at that time.

00:55:56 Speaker_01
No.

00:55:56 Speaker_00
Wow.

00:55:57 Speaker_01
No. We're talking paper? It was mostly manual.

00:56:01 Speaker_05
I mean, eventually when they did get point-of-sale terminals, they were DOS-based all the way through, like 2008, right? Yes, yes. Like the iPhone was out and you guys had DOS-based point-of-sale systems. Sounds right.

00:56:14 Speaker_05
But obviously technology was not the usual. Technology was not the secret sauce to start with.

00:56:17 Speaker_01
I'm foreshadowing here of the future of the company. Yeah.

00:56:20 Speaker_05
So let's take it forward from this 88, 89, 90. The first market after Chicago, after you sort of righted that ship, that you decide to enter on the West Coast is LA.

00:56:30 Speaker_00
That's the big fight between Howard and I. I don't think I realized it was a big fight. I just felt in my bones we had to go to LA. Why? And he said, we're not ready for LA. We're going to San Diego. I said, San Diego? Triple A. Who's in San Diego?

00:56:46 Speaker_00
No, we're not going to San Diego. We're going to LA. And I've got the location. You wanted to play in the majors. Yeah. So we had a meeting about it, and it erupted, erupted into a Bad, a bad scene. And one thing led to another. We did go to LA. I'm shocked.

00:57:07 Speaker_00
We did go to LA, and it was fine. And your conviction of, we have to go to LA, was that for?

00:57:13 Speaker_00
The equity of the brand, I could see, I could envision the warm weather, and everyone walking around with our cuffs, and the media, and the celebrities, and just the iconic way. And there was nothing in the market, nothing at all.

00:57:27 Speaker_00
that even appeared to be in the business that we were in. And anyone who was doing it was not doing it well. And we had to go. And even though we maybe were not ready, we just had to do it. And we did.

00:57:39 Speaker_00
And I think Howard would agree today that that ended up being the right decision. And LA The halo on Starbucks from Seattle to Vancouver and Chicago was nothing. When we went to LA, it just exploded because celebrities embraced Starbucks.

00:58:00 Speaker_05
Was there an intentional strategy to create sort of a luxury brand out of Starbucks that like the cool people were carrying the Starbucks cup? It might be a little bit expensive, but you can afford it.

00:58:12 Speaker_00
No, there was no, I can never remember a discussion about segmentation of the brand, because we wanted Starbucks to be accessible to all.

00:58:24 Speaker_00
You'd have a CEO of a company, and the person behind him was a blue-collar truck driver, because everyone could afford the affordable luxury of Starbucks at the time. When you say affordable luxury, what about it was luxury?

00:58:38 Speaker_00
The quality of the coffee, the experience, and what it felt like to walk around with that cup at the time. It was a badge. It was like you were in the know. It wasn't a badge of luxury.

00:58:53 Speaker_05
It was just like something new. So it became a trope for decades now that, you know, it's, oh, it's a $6 latte or an $8 latte. Where does that come from? In your mind, is Starbucks premium priced?

00:59:09 Speaker_05
Is there actually a Starbucks gets to charge a little bit more because the brand has more cachet? Or is that just completely a farce?

00:59:18 Speaker_00
Myth, I think the pricing of Starbucks Was directly linked to the economic model that I alluded to earlier in the rising costs of labor rent and the fiduciary responsibility that we all felt to achieving The promise we had to our shareholders.

00:59:42 Speaker_00
I'm now we're talking about as a public company and There certainly was a fair amount of discussion all the time about the sensitivity of the price points.

00:59:52 Speaker_00
And I think in later years, maybe in the last couple of years, given the consumer inflationary time, I think it's become a bit of a problem.

01:00:05 Speaker_00
And certainly, I've always said, as Starbucks was growing, that the ubiquity of Starbucks was an enemy to the company. And the challenge was we have to figure out a way to ensure the fact that we are getting smaller as we're getting bigger.

01:00:24 Speaker_00
And specifically, how do we maintain intimacy and the currency of trust with our customers and our people?

01:00:32 Speaker_00
That unto itself is kind of the capsule of making sure that the growth doesn't become so intoxicating and so seductive that we lose sight of the really secret of the company, which was the internal culture and values which built the brand and built a relationship with the customer.

01:00:52 Speaker_01
Yeah, can you tell us about the people? This is such a huge pillar to our minds of building Starbucks.

01:00:59 Speaker_00
Again, we started this conversation talking about childhood. I really want to build a different kind of company. And how do I do that in a way that provides respect and dignity

01:01:13 Speaker_00
Because I was so imprinted with how my father felt disrespected, devalued, and kind of vilified as a uneducated,

01:01:25 Speaker_00
blue-collar veteran working in a series of jobs that he just never made it and living through the dysfunction of a poor family always under pressure with money. And so I wanted to kind of crack the code on how do we create

01:01:46 Speaker_00
benefits that would, in a way, take the company in a direction no one's ever been in before. And so early on, we started talking about exceeding the expectations of our people so they can exceed the expectations of the customer.

01:02:02 Speaker_00
And the first time we actually were able to manifest that was a year before the IPO. And that was an incredible struggle because I had on my board to venture capitalists. And I was proposing something that had never been done before.

01:02:17 Speaker_00
And that was, I wanted to give equity in the form of stock options to every single employee in the company. And they just said, what? What are you talking about? We're not doing that.

01:02:26 Speaker_00
And so the fight became, ultimately, we gave 14% of everyone's base pay in the form of stock options at the end of the year based on the strike price. And I had to do it the year before the IPO. Had to. So everyone wouldn't miss it.

01:02:40 Speaker_00
And I think the turning point of the culture of the company was the day we announced that and we became partners. And to the credit of Craig Foley, who was the VC, and Jamie Shannon.

01:02:55 Speaker_00
they believed that performance would be enhanced, attrition would be lowered, and that the brand would just elevate as a result of that. And it was true, completely true. That changed Starbucks for decades.

01:03:09 Speaker_00
And along with some other events based on doing the right thing. I mean, the healthcare for part-time workers. So then, you know, healthcare, I think,

01:03:21 Speaker_00
25 years before the Affordable Care Act what we did was company for health insurers and that also I grew up in a family with no health insurance and I saw what happened So all of that is that origin story of mine.

01:03:36 Speaker_00
And the tragedy is my father passed away and never saw what we were able to do.

01:03:40 Speaker_05
Do you want the stats on that initial employee stock grant? I'd love to hear it. So the program was called Beanstalk, listeners.

01:03:49 Speaker_00
Another great name.

01:03:50 Speaker_05
Howard was alluding to. Amazing name. So in 1988, the health benefits roll out even to part-time employees, including gay couples in domestic partnerships, I believe the first of its kind. That was a 33-store company at that point.

01:04:05 Speaker_05
A few years later, you had grown to 55 stores. You did the LA expansion. And then in 1991, which is the year before the IPO, Beanstalk happens. Equity in the form of stock options goes out to everyone working 20-plus hours a week.

01:04:20 Speaker_05
There were 1,300 employees at the time. And I believe it was the first time in history that part-time employees were offered a program like this. So those initial grants, the strike price was $6 per share.

01:04:34 Speaker_05
Today, as we speak, the share price is $77, but there have been six splits since then, which comes out to a 64X. So that initial grant has 800Xed.

01:04:47 Speaker_00
Since even the part-time employees and baristas were offered the opportunity to buy Starbucks stock Yeah a lawyer I think Scott Greenberg at the time came to me and said we can't do this unless we get approval From the SEC because we were over 500 shareholders so, you know, we've studied lots of amazing companies on this show who have lots and lots of different business models, but one thing that just kept

01:05:12 Speaker_01
striking us as we were preparing for Starbucks are the similarities to your neighbor here in the Northwest and Costco. Costco, right. And how you treat your people specifically. That's not by accident.

01:05:25 Speaker_05
Both from a, uh, it's the right thing to do perspective and the amazing business model benefit of the retaining employees. I mean, it's so expensive to train a new employee. It's not expensive to keep an existing employee.

01:05:37 Speaker_05
And so you can just pay people more if you keep them for longer. You know, you just, basically have extra money lying around is what Costco discovered. There's so much about Starbucks, to David's point, that's similar to Costco.

01:05:49 Speaker_05
Did you ever speak with Jeff Brotman or Jim Senegal or any of those guys about this concept? Do you know the answer to that?

01:05:55 Speaker_00
I actually don't. No, we don't know the answer.

01:05:57 Speaker_05
I assume the answer to this, but I don't know it.

01:05:59 Speaker_00
First, Jeff Brotman invested in Starbucks in the round to buy Starbucks.

01:06:05 Speaker_04
No way.

01:06:06 Speaker_00
Yeah, in that 87 round. That's when I met Jeff for the first time. Jeff became a board member of the early imprinting of Starbucks. and clearly a mentor, mentor of mine. And then he introduced me to Jim Senegal.

01:06:24 Speaker_00
And so there were many moments of me sitting with Jeff and Jim, including the huge decision to put Starbucks coffee in Costco, which there was a revolt inside the halls of Starbucks saying, no effing way. Wow. And we did it.

01:06:46 Speaker_00
And Jeff and Jim took me to a parking lot in Kirkland when I said, I don't know if we can do this. I don't know if I can sell it inside. Meet us on a Sunday morning, whatever it was. Look at the cars. These are your customers.

01:07:03 Speaker_00
In fact, putting Starbucks in Costco, we were able to measure directly the increase in volume in the stores on the east side as a result of the proximity to the Costco store. You sold beans. We sold beans. In Costco. Yes.

01:07:22 Speaker_05
And that brand awareness of I buy Starbucks beans at home meant that that group of people went to the stores more often.

01:07:29 Speaker_00
Coffee bar business. Because we introduced thousands of beverage customers to Costco through the beans. So Jeff and Jim were instrumental in so many things, and were so kind to me as a young kid. Then we went nationwide with Costco.

01:07:48 Speaker_05
So this is a thing that I think many people don't realize. Now that Starbucks is ubiquitous, we sort of forget about this time when it wasn't, and where people had to find some way to experience Starbucks.

01:08:04 Speaker_05
You know, you only get a few stores in each of these cities. You're only in a few cities. But there are ways to scale brand awareness. And so you can do things like become the official coffee of United Airlines, or be in Costco's all over the US.

01:08:20 Speaker_05
You did this a number of times, and I feel like the rest of the world did not catch on to what you were doing, was just finding little billboards everywhere where you could put the Starbucks logo and sort of create that ubiquity.

01:08:32 Speaker_00
Yeah. If you thought the Costco revolt was high, you can imagine. When I said, we have an opportunity for United Airlines, people thought that was absolutely blasphemy. Don't do that.

01:08:44 Speaker_00
And again, the exposure and the opportunity to surprise and delight customers in places that they've never had anything close to good coffee. All these things, when you consider we didn't spend a dollar, a dollar of marketing dollars, ever.

01:09:02 Speaker_00
And so the reputation of the company was built basically word of mouth, both inside our stores and exactly right in places that we could surprise the customer. And then we also started putting Starbucks coffee in grocery stores.

01:09:17 Speaker_00
which was the other thing. Because remember, we were building a beverage business. And we were then going back to our core business in new channels of distribution.

01:09:27 Speaker_05
It's like the ultimate goal is to capture those margin dollars from selling cups of coffees in the stores that you operate.

01:09:32 Speaker_05
But there's all these other things that you can do that actually might spit off some profit dollars, but at the very least, it's a break-even way to do customer acquisition and brand building in the rest of the world.

01:09:42 Speaker_00
I don't know what our cost of customer acquisition was back then, but it was low. But you weren't spending any money on marketing.

01:09:49 Speaker_05
But United Airlines was paying you for coffee, I assume. I don't know exactly how that came down. Yeah, they were. I have to assume the Barnes & Noble payment was basically the same thing.

01:09:59 Speaker_00
Barnes & Noble is a different deal. I met Len Riggio, the founder of Barnes & Noble, very interesting guy, very smart guy, great merchant. And we just started talking. He was from Brooklyn. I was from Brooklyn. We had a natural kind of relationship.

01:10:14 Speaker_00
And I said, what do you think about us opening Starbucks inside Barnes & Noble, given you are the ultimate third place is what we are? And it just, again, became a natural extension of our stores.

01:10:27 Speaker_01
We have a fun piece of trivia that you may know related to Costco. Do you know where Jeff Bezos and Jim Senegal met for the first time? Sounds like in a Costco. Not in a Costco, in the Starbucks in the Barnes and Noble in Bellevue. Did not know that.

01:10:45 Speaker_01
And that, you know, led to so many things, Amazon Prime among them.

01:10:49 Speaker_00
Yeah, did not know that.

01:10:51 Speaker_05
And I still am friendly with Jim Senegal today. I mean, your companies rhyme in so many ways. That's not surprising at all. I want to talk a little bit, before we get to the IPO here, about what the strategy was when you expanded market by market.

01:11:08 Speaker_05
Did you try to sprinkle a few stores in and see? Did you try to move into a market with force and be the dominant coffeehouse chain in that city? And in particular, it could be worth talking about Boston.

01:11:21 Speaker_00
Well, Boston's an anomaly because of the acquisition. But Bihar was so strident in not expanding to multiple markets at once. And he was 100% right. And so we went to Chicago. Went to L.A. and we stayed there for quite a while. Went to Portland.

01:11:41 Speaker_00
We weren't ready for New York City in terms of the issues there, but we were very diligent. You went to D.C. first before New York City. Went to D.C.

01:11:49 Speaker_00
We were not expanding to multiple markets until we had enough evidence in the existing market that we had success and we weren't gonna compound the growth in another market with problems that we're having in the existing one.

01:12:04 Speaker_00
And I think that's all be her. Because he was managing all the operations. Boston was very different.

01:12:11 Speaker_00
We had a very strong, high-quality competitor called the Coffee Connection in Boston with a owner-operator in George Howell who was, not unlike Alfred Peet, kind of a gospel of coffee culture on the East Coast.

01:12:30 Speaker_00
And we knew Boston was gonna be tough for Starbucks to enter. We also had Dunkin' Donuts there. Like a lot of the good real estate was taken by the coffee connection, right? Yeah, yeah.

01:12:39 Speaker_00
And so George and I never saw eye to eye, but it was clear that if we came to Boston in a significant way, we were gonna impact his business. And I think to his credit, he was willing to sell. So Coffee Connection was the first acquisition.

01:12:59 Speaker_00
And we had to tread very lightly after the acquisition because of the loyalty and be careful with the name and solicit George's help and advice. And also, we needed him to kind of validate for us what we were trying to do.

01:13:14 Speaker_00
And ultimately, it ended up being a very good strategy.

01:13:18 Speaker_05
It seemed like, I think the numbers are, it was a little bit after IPO in 94, $23 million. They had 23 locations and they were doing 16 million a year in revenue. If you just look at the purchase- I think it was one-time sales.

01:13:34 Speaker_05
Maybe a little over one-time sales. The original Starbucks, ironically enough, was exactly a one-time sales. That's what you bought it from the founders for.

01:13:41 Speaker_05
if they had the lock on all the best real estate and they had burned all the capital figuring out what stores we should be in, what stores we shouldn't be in, and then you just get to move into that market for one-time sales, 1.5, whatever it is, with all that already figured out, that's pretty amazing.

01:13:57 Speaker_05
It probably seemed high at the time, though. I'm sure it did. Well, isn't that the thing about valuations? It always seemed like in the good old days, everything was undervalued. Yeah. Okay, let's talk about the IPO.

01:14:09 Speaker_05
So it seems like you knew the moment that you bought Starbucks from the founders, this is going to be a public company.

01:14:19 Speaker_00
I thought so. There was no... I think there was so much about being a public company that meant something to me personally. That it validated the company, it validated me. My own shame, insecurity as a kid.

01:14:35 Speaker_00
So that was a, I was a driving force all along. Certainly the year before with Beanstalk is an indication what I was planning. If Beanstalk was turned down, I would have waited. I just, I had to, that had to be done.

01:14:51 Speaker_00
I think we only had a couple of quarters of profitability. And I think we had about 130 stores. And what was the revenue at the time? I don't remember exactly. I know what the market cap was the day we went public.

01:15:04 Speaker_05
I think you ended up doing 93 million that year, but the year before, it was 50 million or something like that. Companies went public when they were smaller back then, but you were a small cap IPO.

01:15:17 Speaker_00
Yeah, we were, and we got turned down by Goldman Sachs. You know that? I did not know that. I couldn't believe it. I wanted Goldman Sachs as the – they were the

01:15:29 Speaker_05
patina on the prospectus to have Goldman Sachs. It would be a very Starbucks thing for Goldman Sachs to be the lead left.

01:15:36 Speaker_00
Well, Blankfein, I had a good friend who was a senior partner there who's since passed away. I thought I had it locked. I mean, it was just so many things about it, New York, everything. And they said, no, you're too small.

01:15:52 Speaker_05
Well, the thing that Dan Levitin told us years ago when we did an episode on the Starbucks IPO was that you were really only considering smaller banks because it was going to be a smaller IPO.

01:16:01 Speaker_00
Well, I was considering it because Goldman Sachs turned me down. I had no choice. I had no choice. And Brotman at the time was not a big fan of Wertheim Schroeder, which was Dan Levitin's thing. And so Alex Frown became the lead.

01:16:15 Speaker_00
But I also, you know, I had my own ego attached to this. I had so much fun on the, you know, on the roadshow.

01:16:21 Speaker_05
I was just in my element, you know. I was looking up, I was trying to figure out, you know, your public comps at the time. I think there were zero publicly traded coffee companies, not bean companies, not retailers, not coffee house chains.

01:16:33 Speaker_05
I mean, truly unheard of. So when you're going on this roadshow, I think people of course are mystified. There's like, there's literally no public companies like yours.

01:16:40 Speaker_01
You have a huge, you know, investor education problem, right?

01:16:43 Speaker_00
Yeah, I think we had to take them through everything. We had the product there. We served coffee. I gave them the whole show. We had a short video that was probably in black and white. The comp always was a restaurant, and I was always fighting.

01:16:56 Speaker_00
We're not a restaurant. We're a hybrid retailer. I never referred to us as a cafe. It was always a store. We are a store. We are merchants.

01:17:07 Speaker_05
Fascinating. I mean, I go there and eat many, many meals sitting in your store. Yeah, well. But as we've been talking about, I mean, the economics, you were a store. We were a store.

01:17:16 Speaker_01
We were a retail store.

01:17:18 Speaker_05
So Howard, I'm going to take us through the IPO. You're the first publicly traded coffee company. You do end up doing $93 million in revenue that year. Do you remember the exact price that you IPO'd at?

01:17:29 Speaker_00
Yes. We went out at $17, and the price was $21. The market cap, I think, was $250 million.

01:17:37 Speaker_05
Can you imagine today a 250 million dollar market cap company going public and people considering that a success? I mean, this is a great at the time for your employees. How crazy is that? What?

01:17:46 Speaker_05
12, 18 months before they, I guess 12 months before it was six bucks a share, triple their money. Yeah. Fantastic. And that was when you started calling them partners, right? When they became... 91.

01:17:58 Speaker_00
As soon as Beanstalk was instituted, everyone was a partner.

01:18:01 Speaker_05
And is that when you did the lowercase, when titles all became lowercase also?

01:18:05 Speaker_00
No, everyone was lowercase from the beginning.

01:18:07 Speaker_05
Oh. Out of respect. Everyone's lowercase. Listeners, when you look up a Starbucks employee on LinkedIn, it always looks like, is that a typo?

01:18:15 Speaker_00
And then you realize there's a pattern.

01:18:17 Speaker_05
All employees always put lowercase titles. So another interesting thing about the, I was reading the S1 last night, the management team inclusive of you owned 18%, but only 9 to 10% of that was you personally.

01:18:34 Speaker_05
So the rest of the management team owned just as much as you did as the founder.

01:18:39 Speaker_03
Yeah.

01:18:40 Speaker_05
That does feel unusually high. Do you think that that played a role in sort of getting people's buy-in and getting them to bleed Starbucks as much as you did.

01:18:52 Speaker_00
Not intentionally, no. Okay, not a strategy.

01:18:54 Speaker_05
No, that was not a strategy. Interesting. So then from there, you opened in Washington, D.C. on the East Coast. I think that the reason you picked D.C.

01:19:03 Speaker_05
was because your mail order business was strong there, so you sort of had proprietary data to know that that was going to be a good coffee city. I don't know how you found that out, but that's accurate. In 1995, you crossed 500 stores.

01:19:15 Speaker_05
You had just bought the Coffee Connection, as we talked about, in Boston. They had one asset that was perhaps much more valuable than any of the real estate or any of the sales that you would generate from there.

01:19:28 Speaker_05
They owned the trademark on the word Frappuccino.

01:19:31 Speaker_00
I'm so smart that I looked at that Frappuccino with disdain.

01:19:36 Speaker_00
Really i didn't like the name i didn't like the beverage i didn't think it was appropriate for starbucks and because i just you know i just saw starbucks is such a purity with regard to coffee and i was wrong dead wrong obviously putting myself in your shoes back then.

01:19:55 Speaker_01
Now, Starbucks and Frappuccino, it's like a synonym. It's like you can't disentangle them, but yeah, it's very different than coffee.

01:20:04 Speaker_00
Completely different. A blended cold drink. That was the first cold drink we've ever introduced. It was not a coffee-forward beverage. When we introduced it in Southern California, it went crazy. So what changed your mind to greenlight it?

01:20:18 Speaker_00
I didn't have a choice. I mean, it was, Coffee Connection had it, then we had it in Boston, people wanted it, and I just went along. And you ended up reformulating it, right? It wasn't exactly what the coffee was.

01:20:30 Speaker_00
A store manager in Santa Monica reformatted it, and she was on it. I think Howard Behar loved it, people in California loved it. There's a fantastic story about Frappuccino because of what we did with it.

01:20:43 Speaker_00
Not in its existing form at retail, but what we ended up doing with it in terms of leveraging the brand and distribution. That's another great story.

01:20:53 Speaker_01
Was that your first bottled drink in retail?

01:20:56 Speaker_00
Yeah. So I went to Atlanta and Pepsi in the same day. I went to Coke, I went to Pepsi on the same day. The Coke meeting was a meeting, lasted less than 30 minutes. I can't remember who I met with.

01:21:14 Speaker_00
They dismissed me, didn't view Starbucks, didn't understand what I was trying to do and didn't give me much time to even explain it. And then I went to Pepsi. And this is 95-ish? Mid-90s.

01:21:26 Speaker_05
So you had 500 stores, your public company.

01:21:30 Speaker_00
But in East Coast, Starbucks wasn't really well known. So I went to Pepsi and purchased New York.

01:21:37 Speaker_00
Met roger rico the iconic ceo And craig weather up the president of pepsi They love the idea and we started talking about this Subsequently craig weather up and I on a napkin.

01:21:51 Speaker_00
I swear shook hands and created a multi-billion dollar business for pepsi and starbucks and a 50 50 jv and bottle frappuccino And craig weather up deserves all the credit for that and then craig became a board member of starbucks

01:22:07 Speaker_05
Oh. Wow.

01:22:09 Speaker_00
And Roger and I were friends until his death. Wow. And served on the DreamWorks board together.

01:22:14 Speaker_01
How did you find yourself at Coke and Pepsi pitching a bottled beverage?

01:22:17 Speaker_05
And was there an internal revolt? Because I could imagine people saying, this is a bridge too far.

01:22:21 Speaker_00
I don't think people knew what I was even doing. I mean, I think maybe a few people, you know, I just had the thought, we got to put this in a bottle. We have to put this in a bottle.

01:22:31 Speaker_05
And this product, if I'm remembering right, was so successful, the instant that it hit store shelves, you had to pull it all off because you needed to create new manufacturing processes and spin up new factories in order to make enough to actually satisfy demand.

01:22:46 Speaker_00
Basically correct. And we also, early on, had a recall where they found glass in the bottle. And Pepsi, to its credit, took all the blame for that and fixed it.

01:22:58 Speaker_00
But yeah, it was from minute one, the power of Starbucks and bottle Frappuccino and doing something we had never, no one, it was no bottle of coffee, let alone.

01:23:11 Speaker_00
And again, just like the Costco story and the United Airlines story, the flywheel of the awareness and people drinking something they could enjoy at home or at work. Again, it just created another Level of velocity on the brand.

01:23:31 Speaker_05
I mean just thinking about between the cups but then United Airlines and Costco and the CPG products it's gonna have been like 50 billion Starbucks logos printed.

01:23:44 Speaker_00
I'm sure that was I'm just I'm sure I could estimate it better and you can see where the the the the size of the equity of the brand was much bigger than the size of the company, much bigger. Right, because at this point you were like 800 stores.

01:24:02 Speaker_00
And then something else happened. And that is we wake up one day and someone says, Starbucks is in a movie. And we said, what movie? You've got mail. That wasn't coordinated? First of all, Starbucks never paid for placement. Someone must have approved it.

01:24:21 Speaker_00
I knew nothing about it. And then someone said, you've got to see this movie, Starbucks all over it. I said, what movie? Tom Hanks, You've Got Mail with Meg Ryan. I knew nothing about it.

01:24:32 Speaker_00
It was just another thing where it was just like a little fairy dust on the brand.

01:24:36 Speaker_01
Did you know that it was like the good old days where you're like, this is just like?

01:24:40 Speaker_00
We were so in the mud. I was so in it that we didn't have time to look up. And we were just running so fast, so hard. When you're growing at this pace, it's almost virtually impossible to catch the growth in terms of the infrastructure.

01:24:59 Speaker_00
And so you're constantly back and forth trying to create that fragile balance between the seductive nature and the intoxication of growth and success and the foundation necessary to support it and not falling too far behind where you lose it.

01:25:22 Speaker_00
But you never are in a position, at least we were never in a position, we were ahead of it, never. And so there was a constant push, and I think this is where Oren was the wise man in the room to say, Howard, we just can't do that now.

01:25:38 Speaker_00
We don't have the infrastructure, we don't have the people, we don't have the systems. And I'd be screaming, we gotta do it. If we don't do it, someone else is gonna do it, we gotta do it. And that takes us to international, we weren't ready for that.

01:25:50 Speaker_05
Yeah, so I wanna, putting a bow on Frappuccino, the year after it launched in 1996, Frappuccinos were 7% of revenue, which I can attest to, maybe freshman year of high school.

01:26:00 Speaker_01
Seven-year-old Ben is like, hit me with that Frappuccino.

01:26:02 Speaker_05
I had my first tall mocha Frappuccino with whipped cream and a little chocolate drizzle on top. And now here I am drinking, what are we drinking here? You're drinking coffee from India. Yeah, and no cream, no sugar.

01:26:15 Speaker_00
No, no, only black. Yeah.

01:26:17 Speaker_05
And so the Frappuccino began my journey to the good stuff. So that's the Frappuccino story, 96, 97, 98. I mean, this is the international story. So I love the Japan story. You've told this to me before, but I'd love to hear about it more.

01:26:35 Speaker_05
Okay, and there's a couple of things about this.

01:26:38 Speaker_00
I started taking a couple of trips to Europe and Asia just to get a sense of what the opportunity would be and how would we do it. I quickly wrote off Europe because coffee was there. I didn't think we could possibly enter as an American company.

01:27:01 Speaker_00
And so we just took your coffee.

01:27:01 Speaker_01
This would be like a American luxury leather goods company coming in and competing with Hermes.

01:27:07 Speaker_00
Yeah, not gonna happen. And so we said, we just took it off the map. And then we narrowed our focus very quickly on Japan. Japan had a couple of thousand coffee stores named Dotour.

01:27:23 Speaker_00
You walk in there and it was smoke filled, mostly men, dark, but they were successful. And so I said to the board, we want to go to Japan. The board was incredibly resistant to the idea. Why? You've got all this white space in America.

01:27:40 Speaker_00
There's no need to do this at the time. And I just said, OK, well. And so one thing led to another. And a board member said, if you're considering this, hire an outside resource to do a study. I was livid about that.

01:27:58 Speaker_00
Aren't there some consultants you could possibly pay to help this? Yeah. And so we hired a consultant who came back with a big book, presented it to the board. I had a preview, and it basically was, this is a nonstarter.

01:28:14 Speaker_00
You can't possibly succeed there. And in the meeting, I was just, I could feel my blood just boiling, because with every statement, it was getting worse. Like, the economics won't work.

01:28:26 Speaker_00
No one in Japan will ever walk in the street with a cup of coffee, they would lose face. Your no smoking policy, which we had from the beginning, is a non-starter. And you can't afford the economics to rent. Don't go.

01:28:42 Speaker_00
Well, that only made me more furious. It's like they've never met you. And more intentional. And so

01:28:51 Speaker_00
We were we kept thinking about this and then one day we get a handwritten letter From a Japanese company and the founder of the company Yuji son had a LA restaurant and He was enamored with Starbucks. Hmm. We sit down with him. We fall in love with him

01:29:15 Speaker_00
And, uh, we weren't ready, but we decided we're going to give it a shot. We go to Tokyo, we meet him.

01:29:24 Speaker_00
We ended up forming a JV and you know, the folklore at Starbucks, which is not that unrealistic is the reason we went to Japan as an international market is because it had direct flight to Seattle. That was the extent of our understanding. Now.

01:29:44 Speaker_00
We open up in august If you've been to tokyo in august, it's hot It's like 95 degree temperature and a hundred percent humidity It's like getting out of a new york city subway in the middle of august as soon as you walk out.

01:30:01 Speaker_00
You need a shower It's going to be a tough opening because of the hot weather I'm, very concerned about it back to my hotel room and I have a message that CNN is covering the opening live. Or they got cameras. High risk, high reward. Wow. I'm so nervous.

01:30:22 Speaker_00
At 6 a.m., we get in the car. It's so hot. The tie around my neck, it feels like a noose. We're driving up to the store in the Ginza, and it's like 200 people online. And I turned to the translator, and I said, did he hire extras?

01:30:43 Speaker_00
I cut the ribbon, and a young man who slept over the night before to be the first person as a college student speaks no English. He rushes to the front of the line, and I follow him. No English, and he says, double tall latte.

01:31:00 Speaker_00
as God as my witness, just like that. And I said, holy shit. How did they know? And Japan was a extraordinary success from minute one. We got 2,000 stores there. I was there two months ago. Incredible. We have a roastery there.

01:31:19 Speaker_05
Why were there people lined up around the block? Why did it work so well instantly? Was it a strong coffee culture or?

01:31:26 Speaker_00
No, the coffee, no, it was the iconic reputation and anticipation of something that they had convinced themselves was unique, proprietary, not in Tokyo, not in Japan, that they wanted to have.

01:31:44 Speaker_00
And that cup, and by the way, the research, that cup was all over Tokyo in months. Everyone was walking around with that cup.

01:31:54 Speaker_05
And this is nine years after you bought the six stores. It has turned into this icon in all the events we just covered. Starbucks has already become Starbucks. It is already this like globally desirable brand there by 1996.

01:32:12 Speaker_05
I honestly haven't thought about it in that way, but that's so fast. I mean, to build something that seemed fast to us, I bet.

01:32:21 Speaker_01
The parallels to the Microsoft story are just so apt. Japan was Microsoft's first international market. It was half their business, and it started in the same way.

01:32:30 Speaker_01
Bill and Paul got a cold call from Kei Nishi, who was a guy in Japan who had somehow gotten a hold of the basic interpreter, loved it, and said, I'm so passionate about this, I want to bring it to Japan.

01:32:41 Speaker_01
50% of Microsoft's revenue for the first at least five years.

01:32:46 Speaker_05
And they stayed 50% international permanently.

01:32:49 Speaker_01
And that's what took them, right. You know, from this Albuquerque to like, Hey, we're international. All right, listeners. Our next sponsor is a new friend of the show. Huntress.

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01:35:06 Speaker_05
Our huge thanks to Huntress. So Japan's 96. In 97, you cross 1,000 stores globally. You're getting your feet under you. You're saying, okay, international is gonna be a thing. In 1999, you... 2,000 stores. 2,000 stores.

01:35:17 Speaker_05
Because we had a goal of 2,000 by 2,000. We beat it by a year. 99, you also open in Beijing. What's the calculus on entering China? And did you realize it could become such a pillar of the company like it is today?

01:35:36 Speaker_00
I honestly don't think we had any real understanding of what we were getting into. And we went there with a partner that didn't work out. I should tell you that we had a theory of the case

01:35:52 Speaker_00
that any international market that we opened that didn't speak English, we needed a partner. And so Japan was a partner, successful.

01:36:01 Speaker_00
And we entered in a partnership in China early on that was not successful, did not share our values, and we got out and ended up going.

01:36:11 Speaker_05
So you closed all the stores?

01:36:13 Speaker_00
No, no, we got out of the partnership, bought them out, and became company owned. And so that was legal to do that, to be an American-owned company operating in China. Yeah, but we struggled in China for almost a decade, lost money.

01:36:27 Speaker_00
There was tremendous pressure inside the company to close China until Belinda Wong, maybe the most valuable person in the company, from my view.

01:36:40 Speaker_05
Really? Yeah. When did Belinda get involved with Starbucks?

01:36:44 Speaker_00
Belinda was working. She started with Starbucks in Singapore, but she was working in Hong Kong. We were open in Hong Kong. And I saw something in her who was just an extraordinary operator and had a touch with people.

01:37:00 Speaker_00
And I said, and we were dying in China. We were really in trouble. Would you come to China and run it?

01:37:07 Speaker_00
And she said I would do I would consider doing that But you've got to decentralize it and we couldn't do that right away it was just too much But she changed the course of history for Starbucks in China

01:37:22 Speaker_05
What year was that? That she took over the role?

01:37:25 Speaker_00
I think it's about a decade after we opened. She's still there today.

01:37:30 Speaker_05
I ask because I want to come back to it. There's a whole interim between 2000 and 2008 where you are not the CEO of the company. If you've been listening to this episode,

01:37:43 Speaker_05
the theme that should be occurring to you is, oh my God, basically everything worked.

01:37:48 Speaker_05
And I know it didn't feel like that on the inside, but you read all those investment banking reports and it's like, hey, Starbucks, here's all these price targets for Starbucks and here's what we think they're going to do in earnings.

01:37:57 Speaker_05
And up, they beat it again. And like, I don't know, 30, 40 quarters in a row, it's just like this, I would say perfectly predictable, except you actually kept exceeding the expectation. So it wasn't predictable.

01:38:09 Speaker_00
I did 100 quarterly conference calls. As CEO, a hundred.

01:38:17 Speaker_05
Yeah, that's a lot. I bet. That's a lot of earnings prep because each one of those has what, two weeks before it of. The truth is the majority of those were no script. which became, the lawyers took over after that, many years, but no script.

01:38:30 Speaker_05
Which is your preferred communication style. It seems like whenever I see you up speaking, there's no teleprompters, it's from the heart.

01:38:38 Speaker_05
So at this point, I don't wanna say, it would be incorrect to say Starbucks is running itself, but like, it's in a great place. And you step into the role of, is it executive chairman, chairman? Yes, executive chair, with Oren as the CEO. In 2000. Yeah.

01:38:55 Speaker_00
What was your? I was I was I think I was physically and emotionally exhausted. Kids were getting older. I had missed a lot. Just think about all the things we're doing, and I had so much confidence in orange, so it was no problem.

01:39:13 Speaker_00
And so that's what I did. But I was still engaged, but I was not running it day to day.

01:39:19 Speaker_05
At this point, it's 3,500 stores. The company's doing 2.2 billion in revenue. It kind of feels like, okay, I can get some distance. I can do other things in life. It's going to work out.

01:39:30 Speaker_05
At some point, Oren transitions the CEO role to Jim Donald, which I assume you're also very involved in working with him. What was that transition about?

01:39:41 Speaker_00
Oren never wanted to be the CEO. He's not a front guy. In fact, he's shy and never wanted to be on the stage as a CEO. So he said, I'll do it for a couple of years. But he's always kind of knocking on my door saying, we need a new CEO.

01:40:00 Speaker_00
And we didn't have anyone internally. VR didn't want it. And so we did a search. We met Jim Donald, great, great guy, had all this operational experience.

01:40:13 Speaker_00
And then certain things started appearing and we just weren't hitting our stride the way we usually do. The economic environment was getting tougher. things just kind of unveiled itself that it wasn't going to work out.

01:40:29 Speaker_00
By the way, but Jim is a great guy, like a really good person, but it just wasn't the right fit.

01:40:35 Speaker_05
And so how long had he been in that role of CEO? I'd say less than three years, two years maybe. But basically the 2008 happens.

01:40:46 Speaker_00
And so the cataclysmic financial crisis is unfolding. And that plus the cracks that we were experiencing, board meeting.

01:40:55 Speaker_00
And I don't think the board meeting was set up for me to return, but it just kind of happened in the meeting about, OK, we got all these problems. What are we going to do? Do you want to come back? Yeah, I'm gonna come back.

01:41:10 Speaker_05
And that was never your intent. When you stepped away, you thought you were really stepping away.

01:41:13 Speaker_00
It was not my intent to come back, and it was certainly not my intent that we're gonna run into problems. And so in the Christmas vacation of 2007, I knew I was gonna return in January.

01:41:25 Speaker_00
So I was on holiday, and I was starting to think through what I was gonna do. On that holiday, a friend of mine,

01:41:34 Speaker_00
Not I didn't know he was there, but it was Michael Dell was there and I must have talked to him almost every day About the transformation of Starbucks and he was going through a similar thing at Dell almost at the same time so we had so many things to talk about and we were comparing notes and everything and so and Early 2008 I spoke to Jim and I came back in 2008

01:42:01 Speaker_05
And when you came back in 2008, I mean, this is the whole crux of your book onward. There's an entire book's worth of material here, so we're not going to do it all.

01:42:09 Speaker_05
But suffice to say, just to put some numbers on it, the market cap had dropped from $30 billion to less than $7 billion.

01:42:17 Speaker_05
Same-store sales, the comparables number when you compare the store this year to last year, had dropped, growth began to slow, and so you come in and you have to make these really horrible decisions.

01:42:32 Speaker_05
You're faced with two terrible options and you've got to make the right decisions for the business.

01:42:37 Speaker_00
I, uh, first of every rock I turned over was worse than I thought. There were a lot of unperforming stores that should have never been opened that we need to close. I think we closed a thousand stores and I had a company-wide meeting.

01:42:55 Speaker_00
I remember it vividly because I started crying and apologized to everybody that we've got to close doors, we've got to lay people off.

01:43:04 Speaker_00
And I mean, just think about, you know, we were on a trajectory for all this time and all of a sudden we not only hit a speed bump, but the world, the music was just stopping. The stock price, I think, broke $6.

01:43:16 Speaker_00
I was so afraid that we were going to get acquired, but the only cover we had is that the world was coming undone, so no one had any resources. But I was terrified. I just stood up and apologized and said, we've let you down.

01:43:29 Speaker_00
I promise I'm going to do my best, but we're trying to save the company. And literally, we were trying to save Starbucks. Things were that bad.

01:43:38 Speaker_05
You say that we were trying to save Starbucks, and in my head I always thought, well, it couldn't have been that bad. This is a big, successful company. It's fast-growing. It's profitable. Then I read you were seven months from being insolvent.

01:43:50 Speaker_00
We didn't have enough cash. We never had negative comps in the history of Starbucks. So negative, I didn't- Every single quarter was better than 12 months. Yeah, never had a negative comp month in my history of the company. I didn't understand it.

01:44:07 Speaker_00
It's such an anomaly. So we closed all those stores, and then you got to decide, okay, how do we turn it? What do we do?

01:44:21 Speaker_00
Going back to your line of questions in the past about the people is of all the things that I could point to that demonstrates what Starbucks is, has been, and needs to be, it's the humanity and the people of the company.

01:44:41 Speaker_00
The company was built on being a performance-driven company through the lens of humanity. That's how it was built. And whenever we've lost our way, we've lost our way because people in power didn't understand that equation.

01:45:03 Speaker_00
And so I just said, I need to be in front of every store manager. I need a meeting with 10,000 people. It's a big conference room. And so in 2008, no American company was traveling.

01:45:19 Speaker_00
And so the municipalities were hungry for Starbucks to potentially have a meeting at a discount. And so we had Detroit come in, we had Houston come in, and then New Orleans came in.

01:45:32 Speaker_00
What they presented to us was the need for Starbucks to come as a result of Katrina. And when we heard that, we realized we've got to go to New Orleans.

01:45:43 Speaker_00
And in fact, what we're going to do in New Orleans is we're going to have one full day of 50,000 hours of community service in the Ninth Ward.

01:45:52 Speaker_00
Next day, we walked through and we built basically a tutorial on how to restore the business and have people walk through it. And we had classes and we had all these things going on. And the third day,

01:46:07 Speaker_00
was my speech in the basketball coliseum to 10,000 people. About an hour before, I was really feeling the burden of how important what I was gonna say is.

01:46:23 Speaker_00
And the CFO at the time, who subsequently resigned a week later, wasn't my guy, asked me what I'm gonna say. And I said, I'm gonna tell him the truth. And he says, you can't possibly do that. You're gonna scare the shit out of them.

01:46:41 Speaker_00
I went up there and I laid it out, chapter and verse. I think we have seven months left. We are going to be in Solomon.

01:46:53 Speaker_01
I can see why he was freaked out about this.

01:46:54 Speaker_00
Like if word got out to Wall Street that you... Yeah, well, social media didn't exist at that time, but I just laid it out. What if that store was the difference between the food on your table and its success?

01:47:07 Speaker_00
And then I had this economic formula of how many customers it would take per store to turn comps around. And the number was low. It's like less than 10 per day or 11 per day. And so I said, let's just talk about New Orleans.

01:47:26 Speaker_00
You know how many new incremental customers it'll take in your store? And it was manageable and tangible.

01:47:35 Speaker_05
Anyway.

01:47:36 Speaker_05
Right, because you could actually imagine, okay, if 10 more people walk in the door today, and I delight them in a particular way that brings them back tomorrow, like, we're turning this thing around, or we're turning this one store around, and if everybody does that.

01:47:48 Speaker_00
Yeah, and the problem when you get this big is you start thinking about large numbers. But if you reduce it to the lowest common denominator, one store, one cup of coffee, one customer, one partner, and what if all of that works?

01:48:04 Speaker_00
We rushed out of New Orleans like an effing tidal wave. And we never looked back. And less than a year was turned.

01:48:14 Speaker_05
And you did crazy, I mean, the tactics involved in the turnaround. We closed the stores. For what, noon onward, right? For an entire afternoon and evening.

01:48:23 Speaker_00
Because the previous administration had done things that diluted the integrity of coffee to maximize yield.

01:48:35 Speaker_05
Like what, what does that mean?

01:48:36 Speaker_00
Well, let's say you're making a batch of brewed coffee. Well, what if that brewed coffee was based on a number of ounces of coffee? What if you just reduced this a little bit? No one's gonna know. It's little things.

01:48:51 Speaker_05
Little 10,000 little- Yeah, sounds good in theory. Scratches of efficiency that dilute the experience.

01:48:57 Speaker_01
Huh. But that does seem like a reflects a misunderstanding of the fundamental business that this is a business about a store with high gross margins based on customer loyalty.

01:49:12 Speaker_00
But we were beginning to face headwinds. And what are the headwinds? Headwinds were the level of attrition of customers.

01:49:24 Speaker_01
As the financial climate deteriorated, spending that $6 on the latte daily habit gets harder to justify.

01:49:31 Speaker_00
And we weren't as good as we were when we were small.

01:49:33 Speaker_01
Yeah. Then it makes it easier to give up.

01:49:35 Speaker_00
And this goes back to what I said earlier, growth covers up mistakes. And success breeds hubris. And it did.

01:49:43 Speaker_05
How could it not? I mean, how could you? Starbucks today is so fricking ubiquitous, which again, is one of the things I love about it.

01:49:49 Speaker_05
It's consistent anywhere I travel in the world, I can count on it, I can mobile order and pay, there's all these wonderful things. But when you become like government level scale in the world, people assume it's a piece of public infrastructure.

01:50:03 Speaker_05
I assume employees even must feel that way during some periods of time of like, we're so big, we're just.

01:50:08 Speaker_00
But the worst thing that Starbucks could have become And the worst thing that Starbucks could become is a utility. Scale and ubiquity creates complexity. Complexity demands efficiency.

01:50:25 Speaker_00
But we are in a business where that touchpoint between the customer and the barista has to be protected and has to be elevated. Now, then you get stores that are so busy where the barista can't even look up, can't look up.

01:50:43 Speaker_00
And then you get mobile order and pay, which we haven't even talked about.

01:50:45 Speaker_05
Which is, you know, is a thing I love and do every day and depersonalizes the experience by definition.

01:50:51 Speaker_00
Yes. Starbucks demands nurturance. It's a company that has to be nurtured like a young child. That is an anomaly inconsistent with scale. And you get people coming into the company with different experience, different language,

01:51:09 Speaker_00
the immersion doesn't quite hit them in the heart or the soul or the conscience of the company. They feel like they're doing a good job, but it's not the job that's consistent with the integrity and heritage of what the company has been.

01:51:24 Speaker_00
Metaphorically, let's say that's a giant reservoir. If you're taking a deposit on a consistent basis out of the reservoir and it's getting dry, you better stop. you better make sure you're making a deposit so they're equal and it's balanced.

01:51:42 Speaker_00
When you get this, that's when the company loses the plot. And if you get this, and you're making a lot of money, and the stock price is high, people say, it's okay, we're fine. And that's fool's gold.

01:51:57 Speaker_00
It's a camouflage, because eventually, it's gonna bite you in the ass.

01:52:01 Speaker_05
Have you ever figured out a way to measure these things in a way that, as long as these numbers, that the numbers are a direct tie to our values, are good, we can actually put a KPI against them, we know that the core is solid?

01:52:17 Speaker_00
I haven't been smart enough to figure that out. But I mean, I think the interesting thing to me today is that the Asian business is operating at a much higher level of the soft side of Starbucks than we are in the US.

01:52:38 Speaker_05
Now I understand your Belinda Wong comment.

01:52:42 Speaker_00
That doesn't answer your question about quantifying it. But when I am in Asia, I see things that are very elevated to the brand that speak to the financial performance of those markets, which are very high.

01:52:57 Speaker_05
Okay, before we get to today, I want to talk about some other things that happened in 2008. 2008 was a big year. So 2008, 2009, 2010, there's no way to put it other than a wildly successful turnaround.

01:53:04 Speaker_05
Your low point in 2008 profits were $315 million and by 2010 they were $945 million. I mean,

01:53:15 Speaker_00
I don't know how we did that.

01:53:17 Speaker_05
Well, we just went through a lot of the ways of how you did that. There's a couple other things here, one of which is technology, but I'm told there's a story you have about Steve Jobs around this point in time too.

01:53:29 Speaker_00
Yeah, there's a funny story, another story. And so, In Hawaii, when I was on vacation, I'm talking to Michael Dell and Benioff. And you're cycling with Michael Dell. Yeah, cycling with Dell almost every day. And I'm talking to Benioff.

01:53:45 Speaker_00
Michael introduced me to Benioff, didn't know him. It's a pretty good Hawaii crew. So I get back, and Adam Brotman, who's a key person in all this, in terms of mobile order and pay, He ran digital for Starbucks. Yeah, he ran digital.

01:54:05 Speaker_00
I'm trying to make sure I got the sequencing of this right. I think there was a future meeting scheduled for Starbucks and Apple around mobile order and pay and other things. And I met Steve on a phone call.

01:54:25 Speaker_00
I never met him, I was talking to him on the phone, and I'm telling him what's going on. He said, you should come down, and he had a whole thing about walking. He would go out and we'd walk around the building. Have you heard this before?

01:54:36 Speaker_00
Yeah, of course.

01:54:36 Speaker_05
This is Infinite Loop at their old campus?

01:54:38 Speaker_00
Yeah, yeah.

01:54:38 Speaker_05
Yeah.

01:54:39 Speaker_00
And so I went down there and basically went down and we took a walk. And I just told him all my problems, everything that was going on, and he just stopped me and he said, this is what you need to do.

01:54:47 Speaker_00
He just looked at me and he said, you go back to Seattle and you fire everyone on your leadership team. I thought he was joking. I said, what do you mean fire? What are you talking about? Fire everybody. He said, I just told you.

01:55:01 Speaker_00
F and fire all those people. He's like screaming at me in my face. Fire all those people. That's what I would do. I said, Steve, I can't fire all those people. Who's going to do the work?

01:55:11 Speaker_00
He said, I promise you in six months, maybe nine, they'll all be gone. He was right, except for one, the general counsel. They were all gone.

01:55:22 Speaker_05
Your whole leadership team turned over after?

01:55:23 Speaker_00
Yes, they were all gone. Wow. That's the story about Steve Jobs. Wow. Did you ever call him back and tell him? Oh, I talked to him since then. And we were on stage together at an event. And I told him, they're all gone.

01:55:36 Speaker_00
He said, well, you're six months, nine months late, man. Think about all the things you could have done. Of course.

01:55:41 Speaker_05
All right.

01:55:43 Speaker_00
That's that story.

01:55:44 Speaker_05
So while we're in technology land then, I think today 33% of Starbucks orders are done with mobile order and pay. So obviously this huge pillar of Starbucks as it exists in our world. How did that start?

01:56:00 Speaker_01
Yeah. Yeah. You had been on pen and paper, then you moved to DAS. And now you have the most sophisticated technology platform of probably any retailer.

01:56:09 Speaker_00
At the time. So you're talking to a non-tech person. So I'm not focused on anything other than the customer experience. Yeah.

01:56:20 Speaker_00
Adam Brotman, to his credit, along with Steven Gillette, who was at Starbucks very shortly, came to us with the idea of building a mobile app. I didn't even know what it was. Honestly, we're in a meeting.

01:56:37 Speaker_00
I'm trying to figure out what are you actually talking about? How are they going to do that?

01:56:42 Speaker_05
They created- And apps at this point, I mean, if it came out in 2009, which was the first version, the iOS SDK came out in- Summer 2008. Summer 2008.

01:56:52 Speaker_05
So it's like, you know, you're one of the very, if they're having this idea and bringing it to you, it's like months after apps exist.

01:57:00 Speaker_00
Well, they get complete credit for assembling the pieces of all this, convincing us to fund it, And we were off and running. I don't think any of us, honestly, for myself, really knew what they were actually going to create.

01:57:21 Speaker_00
They explained it to us, but I didn't really, I didn't get it until I saw it. And then, holy shit. Overnight, it was just an unbelievable new vehicle. Now, if we fast forward, I don't know if you wanna do that here, of what it's become.

01:57:42 Speaker_00
It is the biggest Achilles heel for Starbucks. Really? And it's not even a close second. And so the mobile app created unbelievable convenience for our customers. But remember, we are an experiential brand. And so as this thing was growing,

01:58:12 Speaker_00
There was never an opportunity because it became so seductive for the company.

01:58:21 Speaker_01
It also created an even better business model for you, right? It was more efficient and you get the float with customer funds.

01:58:28 Speaker_00
All that is true, but it was beginning to deteriorate at a rapid rate, the third place experience and the sense of community.

01:58:39 Speaker_00
And then it became, it overflowed to the point where it disproportionately created an environment in our stores where the mobile app became the primary vehicle, as well as the primary vehicle for dissatisfaction.

01:58:58 Speaker_00
Because people couldn't get their drink on time, People were confused whether that was their drink. A lot of anxiety. And the thing I remember the most is that we were in Chicago at 8 a.m. because people wanted to show me the problem.

01:59:15 Speaker_00
And so everyone is getting off the loop, the train, at 8 a.m. And everyone who ordered on their app, it says the same thing. Your drink's gonna be ready in seven minutes. And everyone shows up. And all of a sudden we got a mosh pit.

01:59:31 Speaker_00
And that's not Starbucks. And so the company did not do a good job of anticipating the technological refinements that needed to be put in place to avoid what was happening. And I want to be fair to everyone who's managed the company.

01:59:53 Speaker_00
For about a five-year period, remember, I wasn't involved in the company from basically 2018 to 2022. I was not involved.

02:00:05 Speaker_05
You stayed CEO from 2008 until 2017. Then I left.

02:00:10 Speaker_00
And there were no bad people, and no one had bad intentions. But the heritage and tradition of what I've described, which is so vital to the nurturance, was lost.

02:00:24 Speaker_01
Well, it must have been so seductive.

02:00:25 Speaker_00
Yeah, the stock was at record high. And the company was not investing ahead of the curve and not paying attention to the velocity of the mobile app and what it was becoming until it was too late.

02:00:42 Speaker_00
And the company has that problem today, which they will solve. But it's late, and also everyone has caught up to, we were the only game in town.

02:00:52 Speaker_05
And the novelty of that and the uniqueness of it, especially for our product and everyone pretty much copied it It is interesting to David keep saying is so seductive to put some numbers for listeners wondering, you know Why is the mobile app such an interesting thing David pointed out the float?

02:01:07 Speaker_05
So of course if you look at Starbucks Financial statements right now at any given time there's about 1.8 billion dollars of cash that Starbucks has gotten in the form effectively of as an advance from customers that Starbucks can use to operate.

02:01:23 Speaker_01
It's like this amazing growth, capital, you know, store expansion, etc, etc.

02:01:26 Speaker_05
Right.

02:01:27 Speaker_00
So it's the only one.

02:01:28 Speaker_05
I mean, everyone, like, you know, the Amazon has this.

02:01:32 Speaker_01
Apple has this. Berkshire has this, the insurance business.

02:01:35 Speaker_05
But it's effectively interest-free loan from customers and a loan that's not all going to get called at once. Some of it will never get called. Right. The breakage.

02:01:45 Speaker_05
And so there's this benefit of it's a reasonably predictable amount of cash that comes in that you get to use for your advantage. In terms of velocity, about $14 billion a year gets loaded onto gift cards. It's unbelievable.

02:02:05 Speaker_05
If you actually look at all of the banks in America, if Starbucks were a bank and you treated the gift cards as deposits, it would be in the top 10% by deposits of banks in the United States.

02:02:19 Speaker_05
It's this unbelievable business model that happens to exist inside of this experiential business, that powers this experiential business. But to your point, you have to keep it from eating the core.

02:02:31 Speaker_00
Yeah. So let's just go back, not to the economics, but the idea itself. And I think whether we talked about bottle frappuccino, the cup, you just thread all these things, there is a common, through line.

02:02:47 Speaker_00
And that is, we took a commodity business and we transformed it into a premium product, brand, and experience.

02:02:58 Speaker_00
But when you are disrupting the market, there has to be some governor on the disruptive innovation to monitor how is it being used, how is it being abused, and the era of judgment

02:03:14 Speaker_00
in the period where this was really kind of, where we really took hold, this five-year period between 2018 and 2022, it's a government that didn't exist. Oh, you feel like it wasn't really taking hold in that whole run before. It was taking hold.

02:03:31 Speaker_00
And I'm not criticizing anyone because we're all, everyone's trying to do a good job. But the result is, the unbelievable success, it disrupted the experience.

02:03:47 Speaker_05
And now you have stores that are entirely built to just pick up mobile orders.

02:03:51 Speaker_00
Yeah, and so, and my view is, we should not succumb to the mobile app.

02:03:59 Speaker_01
Looking back now, I'm not, when you were in the moment and you and others in the management team, things happened, but knowing what you know now.

02:04:05 Speaker_03
Yeah.

02:04:06 Speaker_01
Are there a couple of key design decisions or things that you would re-architect differently about the mobile app experience?

02:04:14 Speaker_00
I don't think I would have allowed the mobile app to be on demand 24 hours a day.

02:04:23 Speaker_02
Hmm.

02:04:24 Speaker_00
I would have slow rolled the availability of it and then understood how it was being used and whether or not it was gonna disrupt the experience. But now it's on demand, whenever you want it. And now you can't, you can't shut it off from 8 to 9.

02:04:42 Speaker_05
No, you just can't. Whenever I get that message, mobile order ahead is not available at this time, I'm like, oh, but it's available 99% of the time. It's not available now?

02:04:53 Speaker_00
Yeah, I won't even go to a store if it doesn't happen. The store is overrun. You wouldn't go. Yeah. That breaks my heart. I hate to hear that.

02:05:00 Speaker_01
I went to the Presidio store yesterday in San Francisco, and I would go there no matter what.

02:05:06 Speaker_05
I only agree with you in airports. In airports, I'm so time constrained that I'm like, if mobile order isn't working, the line's too long.

02:05:13 Speaker_01
Oh, but I've had plenty of times where I'm looking at stores in the radius. I'm traveling, I'm in a new city, and it's like, well, I'm only going to go to the one that's open for mobile order and pay. I'm not even going to try.

02:05:24 Speaker_05
I gotta hit one other, Howard, I know you hate it, but one other amazing business model benefit of mobile order and pay.

02:05:31 Speaker_05
If I'm buying $6 lattes over and over again with my Visa card, and Starbucks is getting hit with $0.30 every time, instead if I'm buying $25 gift cards, well that's now three out of four times I'm going and buying my coffee and Starbucks doesn't have to pay Visa $0.30 or the bank $0.30.

02:05:49 Speaker_05
That's a pretty amazing business unlock. I'm aware it degrades the experience, so you have to find ways to deal with that.

02:06:00 Speaker_00
I'd be more than willing to sacrifice economics to go back to ways to enhance the experience myself. But I'm not in charge.

02:06:13 Speaker_05
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02:06:23 Speaker_05
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02:06:36 Speaker_01
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02:08:05 Speaker_01
Moving on from technology and mobile order and pay, there's one more to my mind, key pillar of the Starbucks tapestry and that's real estate.

02:08:15 Speaker_01
And maybe this is a good time because I feel like around this era is when people started looking at Starbucks and scratching their heads and being like, there's two Starbucks across the corner from one another. These guys must be insane.

02:08:26 Speaker_01
Uh, talk to us about real estate.

02:08:31 Speaker_00
Uh, The basic idea early on, given the beverages velocity in AM, was to find a corner location in an urban setting where we could physically see pedestrian traffic in a significant way. And so we would go to cities and count

02:09:00 Speaker_00
Just physically count how many people are walking by, what hours they're walking by. And once we had a model of success, it became clear to us what we needed.

02:09:12 Speaker_00
And also, once we became aware of co-tenancies, of certain tenants that would be interesting to us, we also were very intrigued with being next to a grocery store early on because of the frequency in which people were buying food.

02:09:30 Speaker_00
Anytime we were in an office building where there was 3,000 to 4,000 people in a building, that was a home run.

02:09:35 Speaker_00
But then it became very clear that there were locations that we never imagined we could be in that became wildly successful and just opened up an aperture to us that basically we had opportunities to do things that were not traditional for a retailer.

02:09:57 Speaker_00
Now the other thing, which we haven't talked about, is a decision I made early on not to franchise, which I'm surprised you haven't mentioned that. Oh, well, there were franchises.

02:10:08 Speaker_00
But let me explain that if I can, which is all part of the real estate strategy. I never believed that we could build, maintain,

02:10:19 Speaker_00
and elevate the culture of the company, which I viewed as the thing in a franchise system, where we had individual franchisees who had their own subculture.

02:10:31 Speaker_00
And so even though there was pressure early on because of the cost of capital, and we didn't have a lot of money, Franchise is we'd have no capex.

02:10:40 Speaker_00
I said no we resisted that and I don't think we'd be having this conversation if Starbucks was a franchise system because McDonald's Extraordinary company, but they're in there a commodity based product.

02:10:55 Speaker_01
Well, as you've been saying, from the beginning, it was about elevating. McDonald's, great company, but nobody would ever accuse them of elevating, I don't think.

02:11:02 Speaker_00
Yeah, and that's why I don't want Starbucks to become transactional. Coffee is personal. The biggest magic and the lightning in the bottle is when you go to Japan or Shanghai or Malaysia and you see the culture in a way that you just can't believe.

02:11:23 Speaker_00
Like, how did it happen that we were able to transfer this to another country, different language, different culture, different policy, how'd we do it?

02:11:31 Speaker_05
That's actually quite befuddling to me, because so many food and beverage concepts do not transfer geographies.

02:11:37 Speaker_00
And I think it's transferred because young people around the world, we all want the same thing. They want opportunity. They want to be respected. They want dignity. They want to make their parents proud.

02:11:56 Speaker_00
They want to work for a company that they believe in. And when I see what we've done around the world, I'm moved emotionally because the humanity I speak of is universal.

02:12:07 Speaker_00
That's why when I came back from China, what I said was, I just want to say something about China and the US. I know all the rhetoric and the propaganda

02:12:17 Speaker_00
about our two countries, but what I see is that we have so much more in common than we have differences. And that should be the theme of the world right now.

02:12:27 Speaker_05
I want to pick up the thread on China now that we're sort of into the 2010s. This decade saw huge, ridiculous growth in China store openings. So there were 500 stores in 2011, right when you're sort of coming out of that, the rut.

02:12:41 Speaker_05
By 2017, there were 3,000. Today, there's almost 7,000. And there was a stat that was reported that a new store opened in China every 15 hours in 2017. True.

02:12:53 Speaker_00
Now bring us to that seed that you planted earlier with Belinda being the single most important employee China presented the enormity of opportunity with the significant challenge of pioneering and It's a tea drinking culture tea drinking culture.

02:13:15 Speaker_00
No morning business people eating rice in the morning and We got real estate wrong, we got breakfast wrong, but it was all coming from the control of Seattle.

02:13:27 Speaker_01
Did you go in with essentially the Starbucks concept?

02:13:30 Speaker_00
Yeah, it was exactly what you see right now. There's no different. But they didn't know, the Chinese people hardly knew what coffee was. There was no morning traffic. And in the early days of our partner, we didn't see eye to eye, so we got them out.

02:13:46 Speaker_00
When Belinda came along, we had a world-class operator who had succeeded in Singapore and Hong Kong. She's a strong person who believed that Seattle the way we were organized was not a formula for success.

02:14:03 Speaker_00
You can't have people in Starbucks in Seattle designing the breakfast menu who have never been to China, who think we're gonna make any blueberry muffins. And so when she said to me, I will do it if I'm in control of everything.

02:14:20 Speaker_00
So I wanted to centralize China. I report to you, it's you and me, And John Culver, who runs International, takes Seattle out of the equation. We were failing. What choice did I have? She turned it. She single-handedly built the China business.

02:14:44 Speaker_05
Today, 18% of Starbucks' revenue is China.

02:14:46 Speaker_00
Yeah. She deserves all the credit. John and I have been to China almost every quarter during the building years of turning it with her. And all the government meetings to tell the Starbucks story, and then we did things in China disruptively.

02:15:07 Speaker_00
Well, Belinda decided that she could go to the government and go to an insurance company and come back to Starbucks and get government approval for Starbucks to do something that had never been done before and provide health insurance to the parents and grandparents of our partners.

02:15:28 Speaker_00
Cool. Chinese government so intrigued Sitting down with them saying can can you explain? Why do you want to do this?

02:15:41 Speaker_05
Right, you don't have to yeah, right.

02:15:42 Speaker_00
Yeah, because it's the culture of our company. We want to do everything we can to benefit our people Humanity and it's universal But it's so, I think, important to just create some guardrails.

02:16:03 Speaker_00
So one day, in the early stages of Starbucks, Howard Beer comes to my office one day. Remember, we're small at this stage. And he says, we've got a terrible situation.

02:16:18 Speaker_00
The manager of the Seattle Trust Store on 2nd and Madison, Seattle, Tom Kerrigan, has AIDS. Now, AIDS at that time was like leprosy. Leprosy. So Tom comes in and he says, I need to resign from Starbucks. And he's crying. Do you have any health insurance?

02:16:46 Speaker_00
No. And so we covered Tom Kerrigan from that point on, but it was those kinds of imprinting moments. And there were many like that.

02:16:59 Speaker_05
Right. I think it's funny. So I have heard,

02:17:03 Speaker_05
that story probably five times because I've consumed an incredible amount of Starbucks content over the last couple months and I've heard a story about Starbucks employees wanting to buy a cow for a farmer in Africa and

02:17:20 Speaker_05
stories about Flint, Michigan, and stories about the initiative to bring the company together to try to bring the country together when the government was shut down in 2013, whenever that was.

02:17:30 Speaker_05
And I was getting frustrated watching all these stories because I kept thinking, This is not the answer to why Starbucks worked.

02:17:38 Speaker_05
These are these one-off anecdotes that are – sure, they're emblematic of some broader theme, but at the end of the day, the answer to why Starbucks works has to be something about the business model and every time you walk into the store, XYZ happens and here's the economics.

02:17:55 Speaker_05
But it turns out there are thousands of these stories and it's the humanity seeping through.

02:18:01 Speaker_05
And it's hard for the company to tell the story because everyone just feels like a random one-off example, but they're happening in every community in every part of the country.

02:18:10 Speaker_05
And I think that is the, for me as like a business historian, that's been the thing that jumps out is there's no other company that we've studied that has this sort of obsession with people and humanity the way that Starbucks does.

02:18:23 Speaker_00
And we're not perfect. And so we do make mistakes. And when the brand is being shined so brightly... It's a high standard to be held to.

02:18:33 Speaker_00
We live in an environment where if you do make a mistake, and we are human and we're going to make mistakes, unfortunately that becomes the thing. Yep. And it's tough to fight that.

02:18:44 Speaker_05
Are you open? I'd love to kind of flash forward. You were CEO through 2017. Kevin Johnson took over 2017 to 2022. You came back for one year as interim CEO, and now Laxman is the CEO and has been in the seat for about a year.

02:19:01 Speaker_05
You came in after a tumultuous COVID era and tried to basically figure out who the successor was going to be and patch the ship in the meantime. A lot of stuff has happened in that last five years, notably with labor unions.

02:19:17 Speaker_05
I don't want to make this a podcast about labor unions, but I do want to ask you, what have you learned from the experience of having to do a deep dive into how we got here?

02:19:27 Speaker_00
That's a very tough, complex question. I think my personal relationship with the company and how personal it is to me and the things that we, not I, but we have tried to do to build a different kind of company.

02:19:55 Speaker_00
when the country started moving in a post-COVID era to a direction that I didn't recognize, very, very hard to understand why Starbucks would be under assault or just being challenged this way.

02:20:18 Speaker_05
Particularly when you had built a reputation on a very progressive pattern in the history of being unbelievably, you know, kind to your people.

02:20:26 Speaker_00
Yes. Yeah. I entered Starbucks as the interim CEO when this was already going on. And I think the company made some early mistakes. some of which were COVID related. Again, no textbook had to deal with COVID issues, health issues, safety issues.

02:20:48 Speaker_00
And then I think underestimated the groundswell of public sentiment for this movement in America. then became vilified for trying to defend the company in a way that I thought was appropriate.

02:21:11 Speaker_00
I think what's lost in all this is the percentage of stores that have been petitioned and the number of people is very small in relationship to the whole.

02:21:22 Speaker_00
And then all of the people in Starbucks who were depending on me to defend the company and trying to do that in a world of disinformation is very difficult. At the time when I was trying to restore the company back to health.

02:21:40 Speaker_00
Clearly, mistakes were made. This story is still unfolding. And my heart's with the company. But the thing that I think was lost in the story is the shareholder is not the primary person.

02:21:57 Speaker_00
It's the Starbucks partner in the green apron, which is the cloth of the company. And if we exceed the expectations of the cloth of the company and our people, shareholders and customers are going to win. That's been my whole life story.

02:22:10 Speaker_05
And that's basically worked for decades and decades. It also seems like when you, Starbucks has become such an institution in our society that leading a small disruptive organization

02:22:23 Speaker_05
Everyone gives you the credit for all the positives and all the exciting things you're doing and you sort of get a pass on Anything that didn't work move faster great things when you're at this scale Everyone expects you to be wildly successful all the time because you always have been but anything that's misaligned that is where a hundred percent of the focus is and

02:22:45 Speaker_00
Well, I think if you take a step back, not from Starbucks, but if you say to yourself, what company has gotten big in the food business and stayed true to its core purpose and reason for being, and then stayed positively inclined to its customers?

02:23:03 Speaker_00
So what are you going to name? And so the odds on getting this big and still being revered for who you once were is very, very difficult. And I would argue, in so many ways, we are better today than we were when we were smaller.

02:23:21 Speaker_00
That is expected of us. But I don't think we get much credit. Maybe we shouldn't. Maybe this is our responsibility. The elements, the characteristics that build the Starbucks business, the culture, is compassion, empathy, and love.

02:23:39 Speaker_00
Those are not just words. It's like real things that are not being taught in business schools. And people on the outside view it as not true. I'm telling you.

02:23:50 Speaker_00
The reason we've succeeded is because the underpinning of the company's purpose has been just that. And it's much harder today to execute that because you're dealing with cynicism as the first order of defense that you have to overcome.

02:24:10 Speaker_00
But the responsibility as leaders is to do just that.

02:24:15 Speaker_05
All right, I'm going to take us to Starbucks today. I'll kind of map that out and give you the stats.

02:24:22 Speaker_05
And then we're going to go into playbook where we basically try to take all the lessons we just learned over the last few hours and figure out why did Starbucks work. and at such a grand scale that it did.

02:24:33 Speaker_05
So to catch listeners up on the business today, Starbucks does $36 billion in revenue, $4.1 billion in net income. There are 380,000 employees. You gave me a stat. I think over 450,000. 450,000 now. Globally. I must be using an old number.

02:24:51 Speaker_05
And over the lifetime of the company, has employed over 5 million.

02:24:54 Speaker_00
Yes.

02:24:55 Speaker_05
5 million alone. At a scale right there. 39,000 stores globally in 86 countries, almost half of which are in North America, 18% in China. And about half of those are licensed franchise and half are company operated. And so while we're not

02:25:15 Speaker_05
you mentioned we don't franchise in the traditional McDonald's sense. You do these joint ventures and you do this way of entering countries where you don't need to own and operate the entire store yourself. They're not franchises in the typical sense.

02:25:30 Speaker_05
Yeah, so tell us about that.

02:25:31 Speaker_00
I think we should talk about that.

02:25:32 Speaker_05
Yeah.

02:25:33 Speaker_00
The joint venture relationships that we've established, and some goes back almost 30 years, in the Middle East, in Latin and Central America, now in Italy, in the EU, in India. And what does it mean to be your partner?

02:25:53 Speaker_00
Every country is different depending on the economics of that country, the political issues. Some countries have been an 80-20, Starbucks owns 80, they own 20, some are 50-50.

02:26:07 Speaker_00
Some of the 80-20 started out as 80 for us and they bought it in over the way. It depends. But the key thing is, whether it's Alberto Tirado in Latin and Central America, Mohammed Al-Shayyah in the Middle East,

02:26:21 Speaker_00
the Tata group in India, the Percassi family in Italy, they understand the culture and values of Starbucks.

02:26:30 Speaker_05
And so tactically, you said it's not a franchise in the traditional way. What are Starbucks responsible for and what is the partner responsible for?

02:26:41 Speaker_00
Starbucks is responsible for roasting the coffee, for all the recipes which are consistent with Starbucks worldwide, A co-design of the store where we're designing the store with the JV or the licensed partner and they control all the operations.

02:26:59 Speaker_05
And so all of Starbucks's franchise or licensed stores are done in this way where there's a partner in a country. Yes.

02:27:06 Speaker_00
There are no individual licensed franchises of any kind unless it's certain real estate that we can't get that we want access to, like a roadway on a highway in Switzerland. There's something odd. I see. And airports are this way, right?

02:27:25 Speaker_00
Airports are master license with the master licensee, whoever has it, like Marriott or whoever has it. I gotcha. Or Target that has 2,000 Starbucks stores. And those are Target operated? Yes. I see. And great partner.

02:27:41 Speaker_05
And Brian Cornell, great guy. And it's interesting, basically, half of Starbucks stores look like the platonic ideal of coming out of the Starbucks HQ, here is how we imagine this store to be.

02:27:56 Speaker_05
And half of them are, there's some reason why we alone can't do this and need a partner. And you spend a lifetime building this.

02:28:02 Speaker_00
Yeah, with the customer experience. I mean, ideally, you want the customer experience to be the same worldwide, regardless of the shape and size of the store where it's located.

02:28:11 Speaker_05
Makes sense.

02:28:11 Speaker_00
Which is not always the case. I admit that.

02:28:14 Speaker_05
So one market that we haven't talked about that I want to ask you about while we're in this, and then we'll get to playbook, is Italy. Yeah. The whole thing came out of Milan. Right. And yet, for decades, 50 years, no Starbucks in Italy.

02:28:31 Speaker_05
And the belief, at least as I see it, is they've perfected the coffeehouse concept. Don't bring an imitation in here. But it's worked. It's working phenomenally well. Why is Starbucks being so well received in Italy?

02:28:47 Speaker_00
So I know I'm going to be chastised for what I'm about to say, but it's true. By and large, coffee in Italy is not as good as it once was.

02:29:01 Speaker_00
There are certain coffee companies that have maintained the standard, but by and large, the coffee is not as good. I'm going to be killed for that, but that's my truth.

02:29:13 Speaker_01
If you don't believe you have a better product, who does?

02:29:15 Speaker_00
Yeah.

02:29:16 Speaker_00
I didn't think we earned the right to go to Italy until we were really ready to present ourselves in the best possible way, because I knew the knives would be out for us in ways that we couldn't even possibly imagine, given the history and the cultural relevance of espresso in the coffee bar.

02:29:37 Speaker_00
And so we waited and waited and waited until the roastery. And so before we get to Italy, I have to explain the roastery for you. Please.

02:29:47 Speaker_05
I mean, the first time I went in there, you know, kid in a candy store, wide eyes.

02:29:50 Speaker_00
So there are six roasteries starting in Seattle, Chicago, New York, Tokyo, Shanghai, and Milan. The roastery itself is probably the most entrepreneurial, creative project that I could recall in my history of Starbucks.

02:30:10 Speaker_00
What is the experience we could create that just absolutely blows people away? So what did I do? As a kid, I've loved this movie. And so I invited the most creative people in the company to my house. And I said, we're going to watch a movie.

02:30:30 Speaker_00
Of course, they thought I was nuts. And I turned on Willy Wonka. I was going to say that. It has to be. It's got to be. Turned on Willy Wonka with Gene Wilder. And we went to work starting to design a space. Now, we realized early on.

02:30:45 Speaker_00
And this was what, 2013? 8 years ago. Now, we realized economically, this is a tough business model. So what are we trying to do?

02:30:56 Speaker_00
We're trying to create an experience that is accretive to the brand and significantly elevates Starbucks, which is fighting ubiquity all the time, every day.

02:31:09 Speaker_00
We created this 30,000 square foot space in Seattle, which we opened seven years ago, which is the most dynamic, entertaining vehicle of theater, romance, seduction,

02:31:26 Speaker_00
And we open it to rave reviews, and we're manufacturing, like Willy Wonka did, we're manufacturing and roasting coffee in the space. Which makes the smell of the, it's just amazing. Yeah, it's amazing.

02:31:37 Speaker_00
So we open it up, and then over time, we start opening a couple more. We get approval from the Chinese government to manufacture in the center of Shanghai. We open up a 40,000 square foot in Shanghai. We open up an incredible space in Tokyo.

02:31:53 Speaker_00
We open up in the old crate and barrel space in North Michigan Avenue in Chicago. We open up in the meatpacking business in New York. But the shrine has to be Milan. This is the way to go back. And this is the way we open on Italy.

02:32:07 Speaker_00
Now, our partner in Italy, The Percasi family fantastic people who are in the real estate business and they are showing me I'm going back and forth to Milan like all the time because they've got real estate. I got to see it I got to touch it.

02:32:22 Speaker_00
I can smell it. I keep going back and back and back No, not the right site. Not the right site and I'm standing on the corner of Cardozo Square and I look at this space and I said what about that and And he says, that's the post office.

02:32:40 Speaker_00
You can't get the post. I said, well, it's empty. It's empty. You can't get it. So I said, can I meet the landlord? He said, Howard, it's the government. I said, well, who's responsible for it? So they arrange a meeting for me.

02:32:54 Speaker_00
And I meet the broker who's involved in this, but it's empty space. And I find out the story is that these government buildings during the financial crisis were sold to private equity. So I said, who's the landlord? I'm not, I can't tell you.

02:33:11 Speaker_00
You have to tell me you're the landlord.

02:33:13 Speaker_05
Private equity that's letting real estate sit empty?

02:33:15 Speaker_00
It's empty.

02:33:16 Speaker_01
I know where this is going.

02:33:17 Speaker_00
Okay, it turns out, I know I'm gonna get killed for this story, you're gonna have to fix this. Turns out the owner of the space is Blackstone.

02:33:29 Speaker_03
No. I knew it. I knew it.

02:33:31 Speaker_00
Of course. Of course. So I said, why am I in Italy? I called John Gray. Gotta go to New York. I called John Gray up front of me. No way. I said, John, I'm in Milan. Do you realize you own this space in Cartuso Square that used to be a post office?

02:33:44 Speaker_00
He said, I don't know. Let me check. I said, John, I'm coming to see you tomorrow.

02:33:51 Speaker_01
I'm on the next flight.

02:33:52 Speaker_00
We do the deal with John Gray. Amazing. Unbelievable.

02:33:56 Speaker_01
John Gray, of course, being the number two person at Blackstone.

02:33:59 Speaker_00
So, uh, and John's a big fan of Starbucks. He had previously been in Seattle for a wedding or bar mitzvah or something, and he saw the roastery. So you knew exactly what I was talking about. And so that is how we entered in Milan. Now we have 30 stores.

02:34:16 Speaker_00
We have 30 traditional stores in Italy.

02:34:19 Speaker_01
Did they already exist before the roastery opened?

02:34:21 Speaker_00
No, Milan opened first. Then 30 stores, we're in Milan, we're in Rome, we're in Florence, and two, three years later, what do you think the number one beverage is? It's espresso. For Starbucks. Straight espresso. Espresso is the number one beverage. Wow.

02:34:45 Speaker_00
And so I don't take the success in Italy for granted. We've got to continue to earn it. But what I'm most proud of is that we've respected the Italian people and coffee culture for 50 years.

02:34:58 Speaker_05
And they embraced us. And so the implication of espresso being the number one beverage is it's not tourists. It's the Italians coming to Starbucks.

02:35:05 Speaker_00
Yes. There's a lot of tourists coming into the roastery, but yes. And that they're choosing to get their espresso at Starbucks, not it. Yeah. Yeah. Yeah. I'm going to Italy, I think, next week, but I'm just

02:35:18 Speaker_00
For me, the gratification, the satisfaction of complete full circle from 1983 is just beyond belief for me.

02:35:29 Speaker_01
I'm wondering, another backdrop to the roastery, and really throughout all the 2010s, must have been third wave coffee. And I'm sure it was on your radar screen. Yes. At the same time, it doesn't seem like it's ever made a dent in Starbucks.

02:35:48 Speaker_00
There has always been stories that all these competitors were going to steal business from Starbucks. But from 1983 to all the way today, The consumption of specialty coffee is still a small amount relative to the macro opportunity.

02:36:04 Speaker_00
So all those people have expanded the market with and for Starbucks. Now, we created an industry that didn't exist, and they have followed us and done really good things, but we're not threatened by that.

02:36:16 Speaker_01
Interesting. Third Wave Coffee brought consumers into the coffee culture market that have then also become Starbucks consumers and maybe they wouldn't have been coffee culture consumers at all.

02:36:29 Speaker_05
Yes. How do you define Third Wave Coffee? Actually, Howard is probably the best person to ask.

02:36:34 Speaker_00
I mean, it's a very

02:36:38 Speaker_00
intentional independent coffee store that is small enough that they're roasting their own coffee or getting coffee from a small proprietary roaster and creating a very unique handcrafted experience that in many ways Starbucks can't do in scale.

02:37:02 Speaker_03
Right.

02:37:03 Speaker_00
And so I tip my hat to them, but there's no coffee experience in the world that comes close to the roastery, any of them.

02:37:12 Speaker_05
And do those roasteries break even, or are they this marketing showpiece that loses?

02:37:17 Speaker_00
Some are making money, and some aren't. Wow. But I've never viewed it that way. It's like the billboards. You couldn't put a price on the hundreds of thousands of people that come into this roastery. and have an experience of a lifetime.

02:37:32 Speaker_00
And I took Mr. Arnault to the roastery. Really? I did, yeah. In Milan? In Seattle. In Seattle? He and his son, yeah. Wow. And I spent a good amount of time with him. I've taken a lot of retail CEOs and iconic business people to the roastery. I bet.

02:37:51 Speaker_00
Who want to see it.

02:37:53 Speaker_05
Wow. What was Bernard doing in Seattle?

02:37:56 Speaker_00
I don't know what he was doing in Seattle, but I spent a fair amount of time with him and his son. His son now runs Tiffany.

02:38:01 Speaker_03
Oh, great.

02:38:02 Speaker_00
Wow. And his level of curiosity was very high. I remember he kept looking at the leather railing and the stitching, and I just said, you're spending a lot of time on the leather. I bet he was.

02:38:15 Speaker_05
Maybe there's a partnership to be done. Okay, so now the question sort of becomes, what are the set of circumstances that had to be true in order for Starbucks today to exist? And the one thing we haven't talked about, or one of the things is,

02:38:32 Speaker_05
How much of what Starbucks has accomplished could have happened if it wasn't an addictive substance?

02:38:41 Speaker_05
It's kind of this incredible thing that it's a legal drug that all the research anyone's ever done into caffeine is, by and large, it's neutral to helpful.

02:38:53 Speaker_05
And like every other drug that at some point people have enjoyed, whether it's smoking or drinking, as research comes out over time, we find out, shoot, that wasn't good for us. That's not the case for coffee.

02:39:05 Speaker_05
We're an amazing thing to get to build a business on this delightful thing we have to consume every day because we're addicted, and it's pretty good for us.

02:39:12 Speaker_01
And it gives you superpowers. Yeah.

02:39:15 Speaker_00
I'd like to believe It's not based on what you are characterizing as an addictive beverage. I'd like to believe it's the experience that has been created. around the enjoyment of the coffee and the experience that happens.

02:39:35 Speaker_00
I also think, and we haven't really spoke that much about it, is I can't state enough over the last two decades what customization meant to the company and how customers created a personal beverage. well beyond what the menu was.

02:39:56 Speaker_00
And I don't know any other business in which the incrementality of the price has been dictated by the consumer.

02:40:07 Speaker_05
The base price is X, but most people are doing something in X plus Y. I have a very specific drink that I like, and when I go to coffee shops that are not Starbucks, I can't get it because it feels taboo to order.

02:40:21 Speaker_05
I like an iced almond milk latte with whipped cream, and when I go to most coffee houses, I'm like, I can't ask for whipped cream on top of that, but Starbucks, they're like, of course, that's what we do here.

02:40:33 Speaker_01
This is something that I think is translated incredibly well to the mobile app. Yes. And that no other food company has, really, the level of customization.

02:40:42 Speaker_00
And I think the mobile app actually added velocity to customization. It powered customization.

02:40:52 Speaker_00
And I think the Starbucks barista deserves so much credit because they are dealing with so many different variations of beverages, some of which they're making for the first time on the fly. Hard to do, it's a hard work.

02:41:10 Speaker_05
It has to be a good number because there's, I don't know if it's, I haven't done the math, billions, trillions of combinations of possible drinks. And so it has to be every single day as a barista, you're making something for the first time.

02:41:24 Speaker_00
Yes, I think the number that people use inside the company is 100,000 different variations of beverages that are being made consistently. 100,000 different beverages.

02:41:39 Speaker_01
This is actually a really interesting way to lead into playbook because on the surface, it's like an obvious question, right? Like, yes, it's an addictive substance, caffeine, of course. On the other hand, you're in a highly competitive market.

02:41:55 Speaker_01
Selling a commodity. And the market actually is not just coffee. It's, let's stick with this theme, it's caffeine broadly. There's Coca-Cola, there's Pepsi, there's, you know.

02:42:06 Speaker_00
Well, not only that, but every food company, every retail food business from McDonald's on took a page out of Starbucks, went to school on us, put espresso machines in their stores and started doing coffee beverages. That also expanded the market.

02:42:21 Speaker_01
And I think the real question is,

02:42:22 Speaker_01
for us here, nobody has built Starbucks despite decades in a highly competitive market with whether it's third wave or competitors in other geographies or domestic competitors or McDonald's getting into the business or Folgers and Maxwell House.

02:42:40 Speaker_01
There is a unique tapestry that we've been weaving throughout this episode that, you know, in Hamilton Helmer's terms has power here.

02:42:50 Speaker_05
Yes. Coffee. So here's my second one in addition to the it's addictive but delightful. It is perceived to be virtuous to be a barista, where it is not perceived to be virtuous to flip burgers. And I don't know if that's something Starbucks created.

02:43:12 Speaker_05
I don't know if that's something inherent to the product. I don't know if that's because it has this Italian lineage. But there's all these incredible benefits that Starbucks and any other coffeehouse chains get to enjoy because

02:43:30 Speaker_05
it's respected to do that work. And I'm curious, why do you think that's respected when similar ways of spending your hours in restaurant work isn't?

02:43:42 Speaker_00
First of all, I've never heard it quite like that, and I think that's a very interesting insight. There is craft and art to the expression of making the beverage. I also think the intimacy of the relationship with the customer is so different.

02:44:04 Speaker_00
And baristas know the names of their customers. They know their dog's name.

02:44:10 Speaker_00
We have a drive-thru and I saw a video where the barista knows the name of the dog and knows that it's just the whole thing is just like a magical dance that happens when the cars pull in and all of a sudden it's not a transaction.

02:44:28 Speaker_00
One of the beauties that we have been able to do is elevate the experience of the drive-thru, not all the time. So I think your question is steeped in one is a commoditized environment and the other clearly is not.

02:44:45 Speaker_00
And the challenge for Starbucks is continuing to innovate for the barista.

02:44:53 Speaker_05
And when you, in this category, to extend that point, you start from a place of, this is a good job. and you can sort of improve the experience for that employee so they can improve the experience for your customers.

02:45:08 Speaker_05
Whereas in other things that are commoditized, they start from a position of, I have to do this job. And it's a really tough uphill battle to invest in your people, whereas Starbucks kind of has a tailwind.

02:45:20 Speaker_00
But it is a hard job. Certainly. And we have to honor the people who are doing it, more so today than ever before. Yep.

02:45:29 Speaker_05
Another one that I have is, it's funny, it flies in the face of some of the pitfalls of ubiquity that we were discussing before. The fact that it is everywhere almost cheapens the experience. To me, Starbucks' ubiquity is a massive feature.

02:45:45 Speaker_05
The fact that I can go anywhere in the world and get basically my same order, or certainly anywhere in America and get my same order. I can even do it from the mobile app in a way that I'm very familiar with ordering It's reliable, it's predictable.

02:45:58 Speaker_05
It's the same reason I bank with Chase and I buy Apple products. It's this thing that I just know works everywhere and I never have to take any risk on.

02:46:10 Speaker_05
Starbucks didn't have that when it was starting, but it really feels like it's reached this scale that no one else can really compete with the level of ubiquity.

02:46:20 Speaker_00
So ubiquity, earlier on in our conversation, I said ubiquity is an enemy of Starbucks. And it's an enemy because we can't be defined by our ubiquity.

02:46:33 Speaker_00
We have to be defined by the one store you come into, not based on the thousands, but that experience you have in the store. So if the ubiquity is driving trust and driving convenience,

02:46:49 Speaker_00
we have to ensure the fact that we are providing that intimacy in the store and not allowing ubiquity to commoditize the experience. That is the framework of the daily challenge of the company.

02:47:05 Speaker_05
Frustratingly, for those of us who are trying to analytically put this puzzle together, the humanity is actually the answer. Scaling humanity is actually the answer.

02:47:14 Speaker_05
You know, along with, I've got this long list here, this obsessive quality of product, the fact that product isn't just product, but experience is the product. It's everything you experience around consuming the beverage itself.

02:47:26 Speaker_05
It's a bunch of the things we've already talked about. You invest in your employees, they take care of the customers, who takes care of the shareholders, but the shareholders are last.

02:47:34 Speaker_05
It's the fact that, oh yeah, we talked about the store cash flow dynamics that you can scale in a really cash efficient way when you're paying the stores back in less than two years every time. Every store is a billboard.

02:47:47 Speaker_05
So you're intentionally picking real estate in these places where you're building familiarity with people. They're walking by over and over and over. You're extending the brand by doing United Airlines, by going to grocery stores.

02:48:00 Speaker_05
Everything is a billboard. Everything is a billboard. Yeah, that's the, like, why pay for customer acquisition when you can, you know, get a product in people's hands.

02:48:08 Speaker_00
Yeah.

02:48:10 Speaker_05
The third place, you know, very novel idea at first. Turned out that was something basically the entire country and then the world wanted to participate in. not obvious at first.

02:48:21 Speaker_05
And it's so easy to think about these things that now we take completely for granted. Like Starbucks is infrastructure in our society. It is assumed, like when I go to an airport or a city and there's not an easy way to get to a store, I'm like, what?

02:48:36 Speaker_05
What is this place? What backwoods place am I in? Like it's, it's, it's expected. And when you live with something, you know, most of your life, you forget that it was once a crazy idea.

02:48:49 Speaker_01
I think the other piece that you didn't just list off there that we've covered in depth is the Costco-like investment in your employees and the people, and the reduction of turnover. In Costco's case, I think it's pretty

02:49:06 Speaker_01
probably much more so the reduction of turnover. In Starbucks's case, it really is like, that's like the key element to building the humanity, right? Like, I don't know the employees at my Costco store.

02:49:21 Speaker_05
What's the stat that you have on, I've heard you say it a number of times, on employee tenure at Starbucks versus others in the category? It's a 2x is what I believe. That employee tenure is 2x longer or turnover is half of what it is industry-wide?

02:49:35 Speaker_05
Yes. It makes a huge difference.

02:49:38 Speaker_00
And you've talked about Beanstalk, you've talked about comprehensive health insurance.

02:49:43 Speaker_00
When I think about the most important thing we probably have done in the last 20 years, it's been the unique relationship that we established with Arizona State University and its president, Michael Crow.

02:49:57 Speaker_00
Could we create free college tuition, a four-year free college tuition through Arizona State for every single partner at Starbucks? And we did it. And thousands of Starbucks partners are engaged and going to school, and thousands have graduated.

02:50:15 Speaker_00
The college achievement plan demonstrates going back to the early years of the speeches I was giving about what is the responsibility for a for-profit company in the world we're living in. And it's not just to make money.

02:50:30 Speaker_05
Here's one that we haven't talked as much about. You were part of this secular trend of gourmet coffee. And I'm curious if you view that to be a true statement or if you're saying, no, we created this entire wave. It wasn't going to happen.

02:50:49 Speaker_05
It wasn't just like.

02:50:51 Speaker_00
I don't want to sound arrogant at all, but I think it's so clear that Starbucks created an industry that did not exist. And as a result, tens of thousands of stores have followed in our wake and we created an employment industry that did not exist.

02:51:11 Speaker_00
Not to mention there's five million alum. Yeah, that's a lot of people who have gone on to do other things after. And I think one thing that's always been missed is that Starbucks has always been a great first job.

02:51:26 Speaker_05
So in your mind, then, let's say there's a parallel universe where Howard Schultz doesn't exist. The year is 1995. nationwide chain not called Starbucks with gourmet coffee taking off in the United States because the conditions were perfect for it.

02:51:48 Speaker_00
I would assume that there would have been a national franchised business that would have occupied the coffee space, but would have been more commoditized. A Dunkin' Donuts, for instance.

02:52:04 Speaker_00
Yeah, I don't think anything would have been executed like Starbucks. But I think someone would have showed up. The opportunity was just too much white space.

02:52:16 Speaker_05
There was clearly demand there. We were coming off this horrible Folgers and Maxwell House era, and there was this growing demand. But that doesn't mean that a company like Starbucks would have been created.

02:52:28 Speaker_05
It means just in some way that consumer demand would have been satisfied.

02:52:32 Speaker_00
But you have to remember, our intent was not to build a global business. You know, the first business plan, and I've said this many times, when I was raising money, it was 100 stores.

02:52:44 Speaker_00
And I wasn't raising the money, and I couldn't afford to reprint the whole document, whatever that was at the time. And I whited it out. No one even knew what that means. Why did you white it out? I whited it out 175.

02:52:56 Speaker_00
When was the last time you used a whiteout? Yeah.

02:52:58 Speaker_05
It's been a while.

02:52:59 Speaker_00
It's been a while. Wait, really? So you- Yeah, I whited it out at 75 because I couldn't- Did it feel too ambitious? Yeah, people didn't believe. Think you're crazy?

02:53:07 Speaker_00
But we never, we, you know, Japan was the turning point of thinking we could build an international business, but none of us had any international experience. No one in the whole entire company.

02:53:22 Speaker_00
I mean, in many ways, you could say this shouldn't have happened.

02:53:26 Speaker_05
Yeah. Okay. So this brings us to the absolute magic of founder led businesses.

02:53:33 Speaker_05
I mean, when you have a founder at the helm, you get all this leeway from shareholders, from employees, you can take crazy risks and people know it's because you're you, but for you it wouldn't exist at all. So run with it.

02:53:50 Speaker_05
What are the biggest innovations that have happened at Starbucks not under Howard Schultz?

02:53:56 Speaker_00
What a question. I'm pausing, not because there hasn't been any, because I'm sure there has been, but I'm hard pressed to kind of think about what it was.

02:54:10 Speaker_05
I don't think you were running the show when the pumpkin spice latte came out. Yes, I was. You were.

02:54:16 Speaker_03
I thought I had won.

02:54:18 Speaker_05
Yeah, yes, I was. I didn't like it.

02:54:20 Speaker_03
Oh.

02:54:20 Speaker_05
Yeah. It does feel like you were obsessed with the purity of the Italian coffee bar for a long time, and then at some point you were like, actually, what I'm obsessed with is serving customers in whatever they want from us.

02:54:36 Speaker_00
Well, the Il Gennale store only played Italian opera and had no chips. Had no chairs. I mean, I wouldn't have scaled as well.

02:54:43 Speaker_05
I'm recalling my time from Rome two years ago. That's literally, I'm walking around Rome and that's everywhere.

02:54:48 Speaker_00
Yeah.

02:54:48 Speaker_05
It's completely different than.

02:54:49 Speaker_00
No, I think I had to see the light. I had to understand we were not a business to please me, but please the customers.

02:54:55 Speaker_05
I mean, what is it? 70% of drinks are now iced beverages. And it was when you started 0%. Didn't have a cold beverage. For the first decade, it was zero. Yeah.

02:55:06 Speaker_05
So to me, there's this thread of, um, at some point shaking off your own opinions and saying, we're going to do what the customer wants us to do to a degree. Yeah. But I was clearly leading, there was a leading question around innovations, not under.

02:55:23 Speaker_05
Yeah.

02:55:24 Speaker_00
So what's the point? What's the, what's your, It's not that there hasn't been innovation. I think there's a burden that the organization has and a reliance on the founder that over time can become unhealthy. And not that I didn't want succession.

02:55:46 Speaker_00
I just wasn't really on my mind.

02:55:52 Speaker_00
And the marketing and the merchant mentality of Starbucks was always with me and probably did not allow others who were well-intended and could have done good things were following and leaning on me, which is not the healthiest thing.

02:56:13 Speaker_00
over the longevity of the company. And I think that has covered up mistakes. That's covered up things and then was revealed when I left.

02:56:24 Speaker_05
I mean, it's the very things that make the business successful, the founder bets, that then at some point in the company's second act kind of hold it back. You have all this muscle memory as a company of relying on founder maverick acts.

02:56:40 Speaker_05
At some point you need to figure out how as a company to not.

02:56:44 Speaker_00
Well, the other thing about that is most founder led companies are entrepreneurially driven. They're not, it's not that they're not following the rules, they're making the rules. Especially if you're creating an industry that did not exist.

02:57:05 Speaker_00
Founder leaves, I'm not talking about me, it's historically. And companies lose not only the extent of the entrepreneurial DNA, but they lose the ability to be on offense. And the worst thing that a company can do, like a sports team,

02:57:25 Speaker_00
is start playing defense because you're afraid to fail. That is a disease, not unlike another disease which has happened at Starbucks, which is hubris.

02:57:37 Speaker_00
The worst thing that could happen to a company is believing that you are incapable of doing anything but succeeding, and you deserve the success. But if you start playing defense and don't have the offensive mind It's, it's not going to go well.

02:57:57 Speaker_00
And I think over time that has happened at Starbucks.

02:58:01 Speaker_05
You've transitioned from being the CEO to someone else three different times. If you could go back, let's even just say the first time, if you could go back, the year is 1999 or 1997. So you can start working on some talent development.

02:58:16 Speaker_05
Um, what would you do differently to make sure that succession,

02:58:21 Speaker_00
I would have believed Orin when he said, I only want to do this for a couple of years. And I convinced myself I could just get Orin to do this for five years, maybe 10 years. And so when he kept saying, I don't want to do this anymore.

02:58:34 Speaker_00
So I was stuck because I was not prepared. to look around the room and say, God, I think he could do it. And if I would have spent maybe a year or two, but I didn't. I was very, I believe that I could convince Norman to stay longer.

02:58:50 Speaker_00
And so I think, and also Jim Donald's a great guy, but I think the immersion of an outsider at that time, given we were moving into a crisis, not a Starbucks crisis, but the financial crisis, very difficult.

02:59:09 Speaker_00
So it's on me, I think, when I look back, and I just did not do a very good job of recognizing the internal talent and cultivating it. But I want to say one more thing about Starbucks and the complexity of it. We're in multiple businesses.

02:59:27 Speaker_00
So we're in the agricultural business. We are buying coffee from 30 producing countries around the world. We are subject to weather and the agricultural issues, many of which are not in our control, political, all kinds of stuff.

02:59:45 Speaker_00
Second, we are manufacturing. a commodity that is very, very challenging because it's coming from 30 producing countries. And each coffee from every country has its own proprietary taste profile that has to be roasted differently.

03:00:08 Speaker_00
And when you're blending it like a winery, it's art. And so we're an agricultural buyer. We are a manufacturer. We are a retailer. We are a wholesaler. We are managing JV relationships in 80 countries.

03:00:29 Speaker_00
We have JVs with two behemoth companies, Nestle and Pepsi-Cola. And above all else, we are in the people business, managing the behavior, the motivation, and the opportunity creation for almost 500,000 people.

03:00:48 Speaker_00
And we're a public company in which the expectations based on our success have been higher than most.

03:00:56 Speaker_01
Not to mention you're a quasi-financial institution, too.

03:00:58 Speaker_00
Yeah. And we've got all of that. And lastly, I think the personal responsibility of a founder, in my case, who loves this company as much as I love my family. And so it's a challenging, fragile thing on a very personal level, and you can't escape it.

03:01:26 Speaker_00
You've made your point. You wanna go somewhere and get, I mean, you can't escape it, so it's always around you.

03:01:32 Speaker_01
I'm so glad you're bringing this up. It really resonates to us hearing you say that. It's the way we feel about acquired in our show. And to imagine, that's easy for us. We have no stakeholders.

03:01:44 Speaker_01
We never would expect that this would scale to 500,000 people. If it did, I can't even imagine the complexity of that.

03:01:52 Speaker_00
But you also have, now that you've achieved this level of success, you have an expectation that you've got to keep Not reinventing, but you've got to make sure that you're as good as you've been. No better. Yeah, better. You got to be better.

03:02:07 Speaker_00
Again, your success is not an entitlement, like Starbucks. It just isn't. And when you have success, it gets harder, because the bar keeps getting higher.

03:02:18 Speaker_05
Yeah, that's just human expectations. Going into this, I was thinking, I had some funny thing occur to me, which was, at some point, why does Starbucks need to grow anymore? It's already everywhere.

03:02:27 Speaker_05
And of course, it's a public company, so it literally just has to keep growing. But it's just human expectation that things keep getting better than they were last year. They should. People should just figure it out and make it better.

03:02:41 Speaker_05
We all think that about every product and experience that we have.

03:02:44 Speaker_01
Indeed.

03:02:46 Speaker_05
Well, listeners, we were thinking about how to land this episode. And in our normal episodes, we land the plane in some way or come up with the one thing you really can't leave the episode without thinking about.

03:02:58 Speaker_05
And I feel like we covered a lot of those in Playbook. And so rather than drilling into that again, we were talking with Howard, and he threw out this idea. I really do have one more thing to say.

03:03:09 Speaker_01
Yeah, given this moment that Starbucks is in right now, here in summer of 2024, this felt like the right way to address that.

03:03:17 Speaker_05
Back to the interview. Well, Howard, we're at the end here. I think listeners may be wondering, OK, but what about Starbucks today? And the last few years have seen you come back as interim CEO for a year, transition to a new CEO.

03:03:33 Speaker_05
It's been about a year after that. And it's been a rough couple of years. I mean, part of it is coming out of the pandemic. But I think anybody who tuned in the last earnings call is wondering, what's up with the future of this company?

03:03:47 Speaker_05
Can you give us a little bit of narration on what brought you back, the things you did, and where the company is today?

03:03:54 Speaker_00
Let me try and go back to when I returned as an interim CEO in April of 22. I was asked by the board to come back to the company and I said no. My life has changed. I have no desire to come back. I have no intent to come back.

03:04:15 Speaker_00
But it was clear to me as the weeks were going on that the company was heading into an existential crisis.

03:04:24 Speaker_00
If your listeners take anything away from what we've talked about is my love of the company is so significant that I changed my life and I came back to the company. Now when I came back, And I want to be fair. I don't want to criticize anyone.

03:04:43 Speaker_00
But when I came back, I saw things that really surprised me about the lack of investment over a four to five year period. And also, I didn't like the way the stock buybacks were being used to basically increase EPS. It's no way to run a company.

03:05:04 Speaker_00
So the first first day I came back and I knew what the market would do is I I announced that we were suspending the stock buybacks and stock went down I Expected it and I announced that we were gonna take basically the money we're using to stock buybacks for the year and I think north of two billion dollars and invest back into the people of Starbucks the partners which I did the most important thing I did though is

03:05:30 Speaker_00
I'm not a messiah, but I have an instinct about the company and I know the inner workings of the company better than anyone else. I know the people. And so in a year's time,

03:05:40 Speaker_00
despite the underinvestment and the challenges, we brought the company back to a much healthier place operationally. And certainly, the stock price was significantly higher when I left. I think when I came back, when I started, it was in the 70s.

03:05:54 Speaker_00
When I left, it was, you know. But that's an output. That's investors voting on the performance. Yeah, yeah. We don't have to talk about stock price if you don't want to. Nevertheless, again, succession. The board led a succession process.

03:06:15 Speaker_00
You have to remember, I wasn't on the board for four or five years, and I resigned when I decided to leave the company after a year, despite the board asking me to stay another year. I just said, I've done my duty. We have to find a new CEO.

03:06:34 Speaker_00
They wanted you to be interim CEO for a second. Yeah, it was up to me. And so the board led a search. There was a number of candidates. Laxman was chosen. I met him. I approved his hiring. But the search committee was driving the process.

03:06:58 Speaker_00
So now we're a year later. Um, and I think we'll probably, let's just fast forward. It hasn't been a great year for Starbucks in fairness to Laxman.

03:07:07 Speaker_00
There's a lot of external issues that have contributed to the pressure, like on every company, but the company has not executed the way that I think it should have.

03:07:22 Speaker_00
I go into the stores, you know, like I, I know the company and I think we're, we're not, we're not at our best right now. Why did I write the letter? I didn't write the letter because he had a bad interview on Kramer. This is on LinkedIn? Yeah.

03:07:36 Speaker_00
I wrote the letter because I had written a couple of other letters. Probably the iconic letter I wrote was entitled The Soul of the Brand.

03:07:46 Speaker_00
And I was writing that letter because I don't get financial information, so I don't have any understanding whether the company's making the quarter or not. I was as surprised as anyone else to see the dramatic drop in revenue and in profit.

03:08:01 Speaker_00
But I wrote the soul of the brand because I could smell instinctively that there were things going on that just did not feel right to me, that the shine was off the brand, that partners were maybe not as inspired as they had been.

03:08:16 Speaker_00
The first thing I want to say is I've made it clear to the Starbucks board, Howard Schultz, and I've made it clear to Laksma, Howard Schultz has no desire or intent to return as CEO of Starbucks. If you want, I'll say it again, but I don't.

03:08:34 Speaker_00
But I can't ignore what we've just discussed for the last few hours. If the company is doing a drift towards mediocrity, And I hold leadership and the board responsible for that. And my letter was not accusatory. My letter was not predatory.

03:08:55 Speaker_00
My letter was steeped in counsel and advice based on 40 plus years of experience in building this company. That's the advice and counsel I'm giving you. If you want to take the advice, it's up to you. If you don't, you're responsible for the outcome.

03:09:13 Speaker_00
And so I have no operational role. I'm not on the board. And I'm watching from afar and rooting and cheering for Starbucks. And I wrote the letter in hope that it would be a catalyst for a positive interpretation.

03:09:29 Speaker_00
And what were your recommendations in the letter? The one thing is we're not a beverage company serving coffee. We are a coffee company serving people. And we need to be much more coffee forward.

03:09:47 Speaker_00
And we cannot continue to allow the mobile app to be a runaway train that is going to consistently dilute the integrity of the experience of Starbucks. We're not in the transaction business. We have to execute transactions.

03:10:06 Speaker_00
But that has to go through the lens of being an experienced business, an experienced place. People are longing for human connection, even if they're on a mobile app. Let's provide it. But I also recognize this is a complex time. It's difficult.

03:10:24 Speaker_00
But that's your job.

03:10:26 Speaker_01
Yeah.

03:10:27 Speaker_00
Makes sense.

03:10:31 Speaker_05
To finish the episode, I can definitely say, as a unabashed fan, the same way I opened the episode, root and fir everyone over a few miles away to pull it off.

03:10:44 Speaker_00
Thank you very much. And I think Starbucks is so resilient. Starbucks has had many, many challenges. I have great faith in the company and the equity of the brand and the people who wear the cloth of the company, the green apron.

03:11:00 Speaker_05
Thanks, Howard.

03:11:01 Speaker_01
Thanks, Howard.

03:11:01 Speaker_00
Thank you. Great.

03:11:03 Speaker_01
Really enjoyed it.

03:11:04 Speaker_05
All right, well, listeners, thank you for being on the journey with us. That was super fun to do with Howard. If you want to talk about this episode, come to the Slack, acquired.fm slash Slack.

03:11:15 Speaker_05
And if you want to keep going with Acquired, you're out of episodes, you've decided that I've listened to the entire back catalog, and I really wish they had a second show, good news, we have one.

03:11:26 Speaker_05
So check out ACQ2, lots more interviews there, and I know the backlog, and it's only getting better from here, and you can imagine that

03:11:34 Speaker_05
having a great piece in the Wall Street Journal, and hitting number one on Apple and Spotify, which we will reflect on at some point. A totally surreal few weeks here.

03:11:42 Speaker_05
Certainly primed the pump for a whole bunch of great interviews that we've got coming on ACQ 2. And listeners, we will see you next time. We'll see you next time.

03:11:51 Speaker_04
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now?