Starbucks

In 1998 Howard Schultz had ample reason to be proud of what Starbucks had accomplished during his past 11 years as the company's C !" #he company had en$oyed phenomenal growth and become one of the great retailing stories of recent history by making e%ceptional coffee drinks and selling dark&roasted coffee beans and coffee&making e'uipment that would allow customers to brew an e%ceptional cup of coffee at home" #he Starbucks brand was regarded as one of the best known and most potent brand names in (merica and the company had firmly established itself as the dominant retailer) roaster) and brand of specialty coffee in *orth (merica" It already had o+er 1),-- stores in *orth (merica and the .acific /im and was opening new ones at a rate of more than one per day" Sales in fiscal year 1990 were a record 1920 million and profits reached an all&time high of 1,0"3 million" #he company's closest competitor had fewer than 4-- retail locations" (nd since going public in 1995) Starbucks has seen its stock price increase nearly ninefold" %hibit 1 contains a summary of Starbucks key performance statistics for the 1995690 period"

Company Background
Starbucks began in 1901 when three academics7 nglish teacher 8erry 9aldwin) history teacher :e+ Siegel) and writer ;ordon 9owker7opened a store called Starbucks Coffee) #ea) and Spice in the touristy .ikes .lace <arket in Seattle" #he three partners shared a lo+e of fine coffees and e%otic teas and belie+ed they could build a clientele in Seattle much like that which had already emerged in the San =rancisco 9ay area" ach in+ested 11)4,- and borrowed another 1,)--- from a bank to open the .ikes .lace store" 9aldwin) Siegel) and 9owker chose the name Starbucks in honor of Starbuck) the coffee&lo+ing first mate in Herman <el+ille's Moby Dick>so company legend has it?) and because they thought the name e+oked the romance of the high seas and the seafaring tradition of the early coffee traders" #he new company's logo) designed by an artist friend) was a two&tailed mermaid encircled by the store's name" #he inspiration for the Starbucks enterprise was a @utch immigrant) (lfred .eet) who had begun importing fine arabica coffees into the Anited States during the 19,-s" .eet +iewed coffee as a fine winemaker +iews grapes) appraising it in terms of country of origin) estates) and har+ests" .eet had opened a small store) .eet's Coffee and #ea) in 9erkeley) California) in 1922 and had culti+ated a loyal clientele" .eet's store specialized in importing fine coffees and teas) dark&roasting its own beans the uropean way to bring out their full fla+or) and teaching customers how to grind the beans and make freshly brewed coffee at home" 9aldwin) Siegel) and 9owker were well ac'uainted with .eet's e%pertise) ha+ing +isited his store on numerous occasions and spent many hours listening to .eet e%pound on 'uality coffees and the importance of proper bean&roasting techni'ues" (ll three were de+oted fans of .eet and his dark&roasted coffees) going so far as to order their personal coffee supplies by mail from .eet's" #he .ikes .lace store featured modest) hand&built nautical fi%tures" !ne wall was de+oted to whole&bean coffeesB another had shel+es of coffee products" #he store did not offer fresh&brewed coffee by the cup) but samples were sometimes a+ailable for tasting" Initially) Siegel was the only paid employee" He wore a grocer's apron) scooped out beans for customers) e%tolled the +irtues of fine) dark&roasted coffees) and functioned as the partnership's retail e%pert" #he other two partners kept their day $obs

but came by at lunch or after work to help out" @uring the start&up period) 9aldwin kept the books and de+eloped a growing knowledge of coffeeB 9owker ser+ed as the Cmagic) mystery) and romance man"C1 #he store was an immediate success) with sales e%ceeding e%pectations) partly because of a fa+orable article in the Seattle Times" In the early months) each of the founders tra+eled to 9erkeley to learn more about coffee roasting from their mentor) (lfred .eet) who urged them to keep deepening their knowledge of coffees and teas" =or most of the first year) Starbucks ordered its coffee beans from .eet's) but then the partners purchased a used roaster from Holland and set up roasting operations in a nearby ramshackle building" 9aldwin and 9owker e%perimented with (lfred .eet's roasting procedures and came up with their own blends and fla+ors" ( second Starbucks store was opened in 1905" 9y the early 198-s) the company had four Starbucks stores in the Seattle area and could boast of ha+ing been profitable e+ery year since opening its doors" 9ut the roles and responsibilities of the cofounders underwent change" :e+ Siegel e%perienced burnout and left the company to pursue other interests" 8erry 9aldwin took o+er day&to&day management of the company and functioned as chief e%ecuti+e officerB ;ordon 9owker remained in+ol+ed as an owner but de+oted most of his time to his ad+ertising and design firm) a weekly newspaper he had founded) and a microbrewery he was launching >the /edhook (le 9rewery?" Howard Schultz Enters the Picture In 1981) Howard Schultz) +ice president and general manager of A"S" operations for Hammarplast7a Swedish maker of stylish kitchen e'uipment and housewares7noticed that Starbucks was placing larger orders than <acy's was for a certain type of drip coffeemaker" Curious to learn what was going on) he decided to pay the company a +isit" #he morning after his arri+al in Seattle) Schultz was escorted to the .ikes .lace store by Dinda ;rossman) the retail merchandising manager for Starbucks" ( solo +iolinist was playing <ozart at the door) with his +iolin case open for donations" Schultz immediately was taken by the powerful and pleasing aroma of the coffees) the wall displaying coffee beans) and the rows of red) yellow) and black Hammarplast coffeemakers on the shel+es" (s he talked with the clerk behind the counter) the clerk scooped out some Sumatran coffee beans) ground them) put the grounds in a cone filter) poured hot water o+er the cone) and shortly handed Schultz a porcelain mug filled with the freshly brewed coffee" (fter three sips) Schultz was hooked" He began asking the clerk and ;rossman 'uestions about the company) about coffees from different parts of the world) and about the different ways of roasting coffee" *e%t) Schultz met with 8erry 9aldwin and ;ordon 9owker) whose offices o+erlooked the company's coffee&roasting operation" #he atmosphere was informal" 9aldwin) dressed in a sweater and tie) showed Schultz some new beans that had $ust come in from 8a+a and suggested they try a sample" 9aldwin did the brewing himself) using a glass pot called a =rench press" 9owker) a slender) bearded man with dark hair and intense brown eyes) appeared at the door and the three men sat down to talk about Starbucks" Schultz was struck by their knowledge of coffee) their commitment to pro+iding high&'uality products) and their passion for educating customers about the merits of dark&roasted coffees" 9aldwin told Schultz) CEe don't manage the business to ma%imize anything other than the 'uality of the coffee"C5 Starbucks purchased only the finest arabica coffees and put them through a meticulous dark&roasting process to bring out their full fla+ors" 9aldwin

e%plained that the cheap robusta coffees used in supermarket blends burn when sub$ected to dark roasting" He also noted that the makers of supermarket blends prefer lighter roasts because they allow higher yields >the longer a coffee is roasted) the more weight it loses?" Schultz was struck by the business philosophy of the two partners" It was clear from their discussions that Starbucks stood not $ust for good coffee) but rather for the dark&roasted fla+or profiles that the founders were passionate about" #op&'uality) fresh&roasted) whole&bean coffee was the company's differentiating feature and a bedrock +alue" It was also clear to Schultz that Starbucks was strongly committed to educating its customers to appreciate the 'ualities of fine coffees) rather than $ust kowtowing to mass&market appeal" #he company depended mainly on word&of&mouth to get more people into its stores) then relied on the caliber of its product to gi+e patrons a sense of disco+ery and e%citement" It built customer loyalty cup by cup as buyers of its products de+eloped their palates" !n his trip back to *ew Fork the ne%t day) Howard Schultz could not stop thinking about Starbucks and what it would be like to be a part of the Starbucks enterprise" Schultz recalled) C#here was something magic about it) a passion and authenticity I had ne+er e%perienced in business"C4 Di+ing in the Seattle area also had a strong appeal" 9y the time Schultz landed at Gennedy (irport) he knew he wanted to go to work for Starbucks" #hough there was nothing in his background >see %hibit 5? that prepared him for the e%perience) Schultz asked 9aldwin at the first opportunity whether there was any way he could fit into Starbucks" #he two 'uickly established an easy) comfortable rapport) but it still took a year of numerous meetings and a lot of con+incing to get 9aldwin) 9owker) and their silent partner from San =rancisco to agree to hire Howard Schultz" Schultz pursued a $ob at Starbucks far more +igorously than Starbucks pursued him" #here was some ner+ousness at Starbucks about bringing in an outsider) especially a high&powered *ew Forker) who had not grown up with the +alues of the company" *onetheless) Schultz continued to press his ideas about the tremendous potential of e%panding the Starbucks enterprise outside Seattle and e%posing people all o+er (merica to Starbucks coffee7arguing there had to be more than $ust a few thousand coffee lo+ers in Seattle who would like the company's products" Schultz belie+ed that Starbucks had such great promise that he offered to take a salary cut in e%change for a small e'uity stake in the business" 9ut the owners worried that by offering Schultz a $ob as head of marketing they would be committing themsel+es to a new direction for Starbucks" (t a spring 1985 meeting with the three owners in San =rancisco) Schultz once again presented his +ision for opening Starbucks stores across the Anited States and Canada" He flew back to *ew Fork thinking a $ob offer was in the bag" 9ut the ne%t day 9aldwin called Schultz and indicated that the owners had decided against hiring him because geographic e%pansion was too risky and because they did not share Schultz's +ision for Starbucks" Schultz was despondentB still) he belie+ed so deeply in Starbucks' potential that he decided to make a last&ditch appeal" He called 9aldwin back the ne%t day and made an impassioned) though reasoned) case for why the decision was a mistake" 9aldwin agreed to reconsider" #he ne%t morning 9aldwin called Schultz and told him the $ob of heading marketing and o+erseeing the retail stores was his" In September 1985) Howard Schultz took on his new responsibilities at Starbucks"

Starbucks and Howard Schultz: The 1 !"#!$ Period

In his first few months at Starbucks) Schultz spent most of his waking hours in the four Seattle stores7working behind the counters) tasting different kinds of coffee) talking with customers) getting to know store personnel) and educating himself about the retail aspects of the coffee business" 9y @ecember) 8erry 9aldwin decided that Schultz was ready for the final part of his training7roasting coffee" Schultz spent a week at the roaster e%amining the color of the beans) listening for the telltale second pop of the beans during the roasting process) learning to taste the subtle differences among 9aldwin and 9owker's +arious roasts) and familiarizing himself with the roasting techni'ues for different beans" <eanwhile) he made a point of acclimating himself to the informal dress code) blending in with the culture) and gaining credibility and building trust with colleagues" <aking the transition from the high&energy) coat&and&tie style of *ew Fork to the more casual ambience of the .acific *orthwest re'uired a conscious effort on Schultz's part" !ne day during the busy Christmas season that first year) Schultz made real headway in gaining the acceptance and respect of company personnel at the .ikes .lace store" #he store was packed and Schultz was behind the counter ringing up sales when someone shouted that a customer had $ust headed out the door with some stuff7two e%pensi+e coffeemakers it turned out) one in each hand" Eithout thinking) Schultz leaped o+er the counter and chased the thief up the cobblestone street outside the store) yelling C@rop that stuffH @rop itHC #he thief was startled enough to drop both pieces and run away" Schultz picked up the merchandise and returned to the store) holding up the coffeemakers like trophies" +eryone applauded" Ehen Schultz returned to his office later that afternoon) his staff had strung up a banner that read C<ake my day"C3 Schultz was o+erflowing with ideas for the company" arly on) he noticed that first&time customers sometimes felt uneasy in the stores because of their lack of knowledge about fine coffees and because store employees sometimes came across as a little arrogant" Schultz worked with store employees on de+eloping customer&friendly sales skills and produced brochures that made it easy for customers to learn about fine coffees" Schultz's biggest idea for Starbucks' future came during the spring of 1984 when the company sent him to <ilan) Italy) to attend an international housewares show" Ehile walking from his hotel to the con+ention center) Schultz spotted an espresso bar and went inside to look around" #he cashier beside the door nodded and smiled" #he barista >counter worker? greeted Howard cheerfully) then gracefully pulled a shot of espresso for one customer and handcrafted a foamy cappuccino for another) all the while con+ersing merrily with those standing at the counter" Schultz $udged the barista's performance as Cgreat theater"C 8ust down the way on a side street) he entered an e+en more crowded espresso bar) where the barista) whom he surmised to be the owner) was greeting customers by nameB people were laughing and talking in an atmosphere that plainly was comfortable and familiar" In the ne%t few blocks) he saw two more espresso bars" Ehen the trade show concluded for the day) Schultz walked the streets of <ilan e%ploring espresso bars" Some were stylish and upscaleB others attracted a blue&collar clientele" Ehat struck Schultz was how popular and +ibrant the Italian coffee bars were" <ost had few chairs) and it was common for Italian opera to be playing in the background" nergy le+els were typically high) and the bars seemed to function as an integral community gathering place" ach one had its own uni'ue character) but they all had a barista who

performed with flair and e%hibited a camaraderie with the customers" Schultz was particularly struck by the fact that there were 1),-- coffee bars in <ilan) a city about the size of .hiladelphia) and a total of 5--)--- in all of Italy" His mind started churning" Schultz's first few days in <ilan produced a re+elationI #he Starbucks stores in Seattle completely missed the point" Starbucks) he decided) needed to ser+e fresh&brewed coffee) espresso) and cappuccino in its stores >in addition to beans and coffee e'uipment?" ;oing to Starbucks should be an e%perience) a special treatB the stores should be a place to meet friends and +isit" /e&creating the Italian coffee&bar culture in the Anited States could be Starbucks' differentiating factor" Schultz remained in <ilan for a week) e%ploring coffee bars and learning as much as he could about the Italian passion for coffee drinks" In one bar) he heard a customer order a caff latte and decided to try one himself7the barista made a shot of espresso) steamed a frothy pitcher of milk) poured the two together in a cup) and put a dollop of foam on the top" Schultz concluded that it was Cthe perfect drink)C and thought to himself) C*o one in (merica knows about this" I'+e got to take it back with me"C, Schultz%s &rowing 'rustration !n Schultz's return from Italy) he shared his re+elation and ideas for modifying the format of Starbucks stores with 9aldwin and 9owker" 9ut instead of winning their appro+al) Schultz encountered strong resistance" 9aldwin and 9owker argued that Starbucks was a retailer) not a restaurant or bar" #hey feared that ser+ing drinks would put them in the be+erage business and dilute the integrity of Starbucks' mission as a coffee store" #hey pointed out that Starbucks was a profitable small) pri+ate company and there was no reason to rock the boat" 9ut a more pressing reason for their resistance emerged shortly79aldwin and 9owker were e%cited by an opportunity to purchase .eet's Coffee and #ea" #he ac'uisition took place in 1983B to fund it) Starbucks had to take on considerable debt) lea+ing little in the way of financial fle%ibility to support Schultz's ideas for entering the be+erage part of the coffee business or e%panding the number of Starbucks stores" =or most of 1983) Starbucks managers were di+iding their time between their operations in Seattle and the .eet's enterprise in San =rancisco" Schultz found himself in San =rancisco e+ery other week super+ising the marketing and operations of the fi+e .eet's stores" Starbucks employees began to feel neglected and) in one 'uarter) did not recei+e their usual bonus due to tight financial conditions" mployee discontent escalated to the point where a union election was called) and the union won by three +otes" 9aldwin was shocked at the results) concluding that employees no longer trusted him" In the months that followed) he began to spend more of his energy on the .eet's operation in San =rancisco" It took Howard Schultz nearly a year to con+ince 8erry 9aldwin to let him test an espresso bar" (fter 9aldwin relented) Starbucks' si%th store) which opened in (pril 1983) became the first one designed to sell be+erages and the first one in downtown Seattle" Schultz asked for a 1),--&s'uare&foot space to set up a full&scale Italian&style espresso bar) but 8erry agreed to allocating only 4-- s'uare feet in a corner of the new store" #here was no pre&opening marketing blitz and no sign announcing *ow Ser+ing spresso7the lack of fanfare was part of a deliberate e%periment to see what would happen" 9y closing time on the first day) some 3-- customers had been ser+ed) well abo+e the 5,-&customer a+erage of Starbucks' best&performing stores" Eithin two months the store was ser+ing 8-- customers per day" #he two baristas could not keep

up with orders during the early morning hours) resulting in lines outside the door onto the sidewalk" <ost of the business was at the espresso counterB sales at the regular retail counter were only ade'uate" Schultz was elated by the test resultsB his +isits to the store indicated that it was becoming a gathering place and that customers were pleased with the be+erages being ser+ed" Schultz e%pected that 9aldwin's doubts about entering the be+erage side of the business would be dispelled and that he would gain appro+al to take Starbucks to a new le+el" +ery day he went into 9aldwin's office to show him the sales figures and customer counts at the new downtown store" 9ut 9aldwin was not comfortable with the success of the new storeB he belie+ed that espresso drinks were a distraction from the core business of selling fine arabica coffees at retail and rebelled at the thought that people would see Starbucks as a place to get a 'uick cup of coffee to go" He adamantly told Schultz) CEe're coffee roasters" I don't want to be in the restaurant business " " " 9esides) we're too deeply in debt to consider pursuing this idea"C2 Ehile he didn't deny that the e%periment was succeeding) he didn't want to go forward with introducing be+erages in other Starbucks stores" Schultz's efforts to persuade 9aldwin to change his mind continued to meet strong resistance) although to a+oid a total impasse 9aldwin finally did agree to let Schultz put espresso machines in the back of two other Starbucks stores" !+er the ne%t se+eral months) Schultz7at the age of 447made up his mind to lea+e Starbucks and start his own company" His plan was to open espresso bars in high&traffic downtown locations that would emulate the friendly) energetic atmosphere he had encountered in Italian espresso bars" Schultz had become friends with a corporate lawyer) Scott ;reenberg) who helped companies raise +enture capital and go public" ;reenberg told Schultz he belie+ed in+estors would be interested in pro+iding +enture capital for the kind of company Schultz had in mind" 9aldwin and 9owker) knowing how frustrated Schultz had become) supported his efforts to go out on his own and agreed to let him stay in his current $ob and office until definiti+e plans were in place" Schultz left Starbucks in late 198,"

Schultz%s (l &iornale )enture

Ironically) as Schultz was finalizing the documents for his new company) 8erry 9aldwin announced he would in+est 11,-)--- of Starbucks' money in Schultz's coffee&bar enterprise) thus becoming Schultz's first in+estor" 9aldwin accepted Schultz's in+itation to be a director of the new company) and ;ordon 9owker agreed to be a part&time consultant for si% months" 9owker urged Schultz to make sure that e+erything about the new stores7the name) the presentation) the care taken in preparing the coffee7was calculated to lead customers to e%pect something better than competitors offered" 9owker proposed that the new company be named Il ;iornale >pronounced ill jor-nahlee ? Coffee Company) a suggestion that Schultz accepted" In @ecember 198,) 9owker and Schultz made a trip to Italy during which they +isited some ,-- espresso bars in <ilan and Jerona) obser+ing local habits) taking notes about decor and menus) snapping photographs) and +ideotaping baristas in action" ;reenberg and Schultz then drew up plans to raise an initial 13--)--- in seed capital and another 11"5, million in e'uity7enough to launch at least eight espresso bars and pro+e the concept would work in Seattle and elsewhere" #he seed capital was raised by

the end of 8anuary 1982) primarily from Starbucks and two other in+estors who belie+ed in Schultz and his ideas) but it took Schultz until the end of the year to raise the remaining 11"5, million" He made presentations to 535 potential in+estors) 510 of whom said no" <any who heard Schultz's hour&long presentation saw coffee as a commodity business and thought that Schultz's espresso&bar concept lacked any basis for sustainable competiti+e ad+antage >no patent on dark roast) no ad+antage in purchasing coffee beans) no way to bar the entry of imitati+e competitors?" Some noted that consumption of coffee had been declining since the mid&192-s) others were skeptical that people would pay 11",- or more for a cup of coffee) and still others were turned off by the company's hard&to&pronounce name" 9eing re$ected by so many potential in+estors was disheartening >some who listened to Schultz's presentation didn't e+en bother to call him backB others refused to take his calls?" *onetheless) Schultz continued to display passion and enthusiasm in making his pitch and ne+er doubted that his plan would work" He ended up raising 11"2, million from about 4in+estorsB most of this money came from nine people) fi+e of whom became directors of the new company" !ne of Howard Schultz's earliest mo+es during the start&up process was to hire @a+e !lsen) who in 1903 had opened a coffee bar) CafK (llegro) near the busiest entrance to the Ani+ersity of Eashington campus" !lsen was a long&standing Starbucks customer) ha+ing disco+ered the 'uality of Starbucks' coffee beans) gotten to know the owners) and worked with them to de+elop a custom espresso roast for use in his cafK" !lsen's successful CafK (llegro had become known for caf au lait, a concoction e'ui+alent to the Italian caff latte" Ehen !lsen heard of Schultz's plans for Il ;iornale) he called Schultz and e%pressed an interest in being part of the new company7he was intrigued by the Italian coffee&bar concept and was looking for a more e%pansi+e career opportunity" !lsen not only had coffee e%pertise but also had spent 1- years in an apron behind the counter at CafK (llegro" Schultz immediately picked up on the synergy between him and !lsen" His own strengths were in forming and communicating a +ision) raising money) finding good store locations) building a brand name) and planning for growth" !lsen understood the nuts and bolts of operating a retail cafK) hiring and training baristas) and making and ser+ing good drinks" .lus) !lsen was fun to work with" Schultz put !lsen in charge of store operations) made him the coffee conscience of the company) and ga+e him the authority to make sure that Il ;iornale ser+ed the best coffee and espresso possible" #he first Il ;iornale store opened in (pril 1982" It had a mere 0-- s'uare feet and was located near the entrance of Seattle's tallest building" #he decor was Italian) the menu contained Italian words) and Italian opera music played in the background" #he baristas wore white shirts and bow ties" (ll ser+ice was stand&up7there were no chairs" *ational and international papers hung from rods on the wall" 9y closing time on the first day) 4-customers had been ser+ed) mostly in the morning hours" Schultz and !lsen worked hard to make sure that all the details were e%ecuted perfectly" =or the first few weeks) !lsen worked behind the counter during the morning rush" 9ut while the core idea worked well) it soon became apparent that se+eral aspects of Il ;iornale's format weren't appropriate for Seattle" Some customers ob$ected to the incessant opera music) others wanted a place to sit down) and many didn't understand the Italian words on the menu" #hese CmistakesC were 'uickly fi%ed) without compromising the style and elegance of the store" Eithin si% months) Il ;iornale was

ser+ing more than 1)--- customers a day and regulars had learned how to pronounce the company's name" 9ecause most customers were in a hurry) it became apparent that speedy ser+ice was a competiti+e ad+antage" Si% months after opening the first store) Il ;iornale opened a second store in another downtown building" ( third store was opened in Jancou+er) 9ritish Columbia) in (pril 1980" Jancou+er was chosen to test the transferability of the company's business concept outside Seattle" #o reach his goal of opening ,- stores in fi+e years) Schultz needed to dispel his in+estors' doubts about geographic e%pansion" 9y mid&1980 sales at the three stores were e'ual to 11", million annually" (l &iornale *c+uires Starbucks In <arch 1980 8erry 9aldwin and ;ordon 9owker decided to sell the whole Starbucks operation in Seattle7the stores) the roasting plant) and the Starbucks name" 9owker wanted to cash out his coffee&business in+estment to concentrate on his other enterprisesB 9aldwin) who was tired of commuting between Seattle and San =rancisco and wrestling with the troubles created by the two parts of the company) elected to concentrate on the .eet's operation" (s he recalls) C<y wife and I had a 4-&second con+ersation and decided to keep .eet's" It was the original and it was better"C0 Schultz knew immediately that he had to buy StarbucksB his board of directors agreed" Schultz and his newly hired finance and accounting manager drew up a set of financial pro$ections for the combined operations and a financing package that included a stock offering to Il ;iornale's original in+estors and a line of credit with local banks" Ehile a ri+al plan to ac'uire Starbucks was put together by another Il ;iornale in+estor) Schultz's proposal pre+ailed and within weeks Schultz had raised the 14"8 million needed to buy Starbucks" #he ac'uisition was completed in (ugust 1980" (fter the papers were signed) Schultz and Scott ;reenberg walked across the street to the first Il ;iornale store) ordered themsel+es espresso drinks) and sat at a table near the window" ;reenberg placed the hundred&page business plan that had been used to raise the 14"8 million between them and lifted his cup in a toast7CEe did it)C they said together"8 #he new name of the combined companies was Starbucks Corporation" Howard Schultz) at the age of 43) became Starbucks' president and C !"

Starbucks as a Pri,ate Company: 1 !-# "

Part " #he following <onday morning) Schultz returned to the Starbucks offices at the roasting plant) greeted all the familiar faces and accepted their congratulations) then called the staff together for a meeting on the roasting&plant floor" He beganI
(ll my life I ha+e wanted to be part of a company and a group of people who share a common +ision " " " ILm here today because I lo+e this company" I lo+e what it represents " " " I know youLre concerned " " " I promise you I will not let you down" I promise you I will not lea+e anyone behind " " " In fi+e years) I want you to look back at this day and say CI was there when it started" I helped build this company into something great"C9

Schultz told the group that his +ision was for Starbucks to become a national company with +alues and guiding principles that employees could be proud of" He indicated that he wanted to include people in the decision&making process and that he would be open and honest with them"

Schultz said he belie+ed it was essential) not $ust an intriguing option) for a company to respect its people) to inspire them) and to share the fruits of its success with those who contributed to its long&term +alue" His aspiration was for Starbucks to become the most respected brand name in coffee and for the company to be admired for its corporate responsibility" In the ne%t few days and weeks) howe+er) Schultz came to see that the unity and morale at Starbucks had deteriorated badly in the 5- months he had been at Il ;iornale" Some employees were cynical and felt unappreciated" #here was a feeling that prior management had abandoned them and a wariness about what the new regime would bring" Schultz determined that he would ha+e to make it a priority to build a new relationship of mutual respect between employees and management" #he new Starbucks had a total of nine stores" #he business plan Schultz had presented in+estors called for the new company to open 15, stores in the ne%t fi+e years71, the first year) 5- the second) 5, the third) 4- the fourth) and 4, the fifth" /e+enues were pro$ected to reach 12- million in 1995" 9ut the company lacked e%perienced management" Schultz had ne+er led a growth effort of such magnitude and was $ust learning what the $ob of C ! was all about) ha+ing been the president of a small company for barely two years" @a+e !lsen had run a single cafK for 11 years and was $ust learning to manage a multistore operation" /on Dawrence) the companyLs controller) had worked as a controller for se+eral organizations" !ther Starbucks employees had only the e%perience of managing or being a part of a si%&store organization" Ehen StarbucksL key roaster and coffee buyer resigned) Schultz put @a+e !lsen in charge of buying and roasting coffee" Dawrence <altz) who had 5- years of e%perience in business and eight years of e%perience as president of a profitable public be+erage company) was hired as e%ecuti+e +ice president and charged with heading operations) finance) and human resources" In the ne%t se+eral months) a number of changes were instituted" #o symbolize the merging of the two companies and the two cultures) a new logo was created that melded the Starbucks and Il ;iornale logos" #he Starbucks stores were e'uipped with espresso machines and remodeled to look more Italian than !ld Eorld nautical" #he traditional Starbucks brown was replaced by Il ;iornale green" #he result was a new type of store7a cross between a retail coffee&bean store and an espresso barMcafK7that became StarbucksL signature format in the 199-s" 9y @ecember 1980) employees at Starbucks had begun buying into the changes Schultz was making and trust had begun to build between management and employees" *ew stores were on the +erge of opening in Jancou+er and Chicago" !ne Starbucks store employee) @aryl <oore) who had +oted against unionization in 198,) began to 'uestion his fellow employees about the need for a union" !+er the ne%t few weeks) <oore began a mo+e to decertify the union" He carried a decertification letter around to Starbucks stores and secured the signatures of employees who no longer wished to be represented by the union" (fter getting a ma$ority of store employees to sign the letter) he presented it to the *ational Dabor /elations 9oard and the union representing store employees was decertified" Dater) in 1995) the union representing StarbucksL roasting plant and warehouse employees was also decertified"

E.pansion into /arkets 0utside the Paci1ic 2orthwest

StarbucksL entry into Chicago pro+ed far more troublesome than management anticipated" #he first Chicago store opened !ctober 50) 1980) the same day the stock market crashed" #hree more stores were opened in Chicago o+er the ne%t si% months) but customer counts were substantially below e%pectations7Chicagoans didnLt take to dark&roasted coffee as fast as Schultz had anticipated" (t the first downtown store) for e%ample) which opened onto the street rather than into the lobby of the building where it was located) customers were hesitant to go out in the wind and cold to get a cup of coffee in the winter months" Store margins were s'ueezed for a number of reasonsI It was e%pensi+e to supply fresh coffee to the Chicago stores out of the Seattle warehouse) and both rents and wage rates were higher in Chicago than in Seattle" ;radually) customer counts impro+ed) but Starbucks lost money on its Chicago stores until 199-) when prices were raised to reflect higher rents and labor costs) more e%perienced store

managers were hired) and a critical mass of customers caught on to the taste of Starbucks products" .ortland) !regon) was the ne%t market entered) and .ortland coffee drinkers took to Starbucks products 'uickly" 9y 1991) the Chicago stores had become profitable and the company was ready for its ne%t big market entry" <anagement decided on California because of its host of neighborhood centers and the recepti+eness of Californians to inno+ati+e) high&'uality food" Dos (ngeles was chosen as the first California market to enter) principally because of its status as a trendsetter and its cultural ties to the rest of the country" D"(" consumers embraced Starbucks 'uickly7the Los Angeles Times named Starbucks as the best coffee in (merica before the first D"(" store opened" #he entry into San =rancisco pro+ed more troublesome because of an ordinance there against con+erting stores to restaurant&related uses in certain prime urban neighborhoodsB Starbucks could sell be+erages and pastries to customers at stand&up counters but could not offer seating in stores that had formerly been used for general retailing" Howe+er) the city council was soon con+inced by cafK owners and real estate brokers to change the code" Still) Starbucks faced strong competition from .eetLs and local espresso bars in the San =rancisco market" Ehen StarbucksL store e%pansion targets pro+ed easier to meet than Schultz had originally anticipated) he upped the numbers to keep challenging the organization" Starting from a base of 11 stores) Starbucks opened 1, new stores in fiscal 1988) 5- in 1989) 4- in 199-) 45 in 1991) and ,4 in 19957producing a total of 121 stores" #he opening of 1,- new stores in fi+e years significantly e%ceeded the 1980 business planLs ob$ecti+e of 15," =rom the outset) the strategy was to open only company&owned storesB franchising was a+oided so as to keep the company in full control of the 'uality of its products and the character and location of its stores" 9ut company ownership of all stores re'uired Starbucks to raise new +enture capital) principally by selling shares to new or e%isting in+estors) to co+er the cost of e%pansion" In 1988 the company raised 14"9 millionB in 199-) +enture capitalists pro+ided an additional 114", millionB and in 1991 another round of +enture capital financing generated 11, million" Starbucks was able to raise the needed funds despite posting losses of 144-)--- in 1980) 1023)--- in 1988) and 11"5 million in 1989" Ehile the losses were troubling to StarbucksL board of directors and in+estors) SchultzLs business plan had forecast losses during the early years of e%pansion" (t a particularly tense board meeting where directors sharply 'uestioned him about the lack of profitability) Schultz saidI
Dook) weLre going to keep losing money until we can do three things" Ee ha+e to attract a management team well beyond our e%pansion needs" Ee ha+e to build a world&class roasting facility" (nd we need a computer information system sophisticated enough to keep track of sales in hundreds and hundreds of stores"1-

Schultz argued for patience as the company in+ested in the infrastructure to support continued growth well into the 199-s" He contended that hiring e%perienced e%ecuti+es ahead of the growth cur+e) building facilities far beyond current needs) and installing support systems laid a strong foundation for rapid) profitable growth on down the road" His arguments carried the day with the board and with in+estors) especially since re+enues were growing appro%imately 8- percent annually and customer traffic at the stores was meeting or e%ceeding e%pectations" Starbucks became profitable in 199- and profits had increased e+ery year thereafter"

&etting into the /ail30rder Business

#he original Starbucks had begun a small mail order operation in the 190-s to ser+e tra+elers who had +isited a Seattle store or former store customers who had mo+ed away from Seattle" Sales were solicited by mailing out a simple brochure" In 1988) Starbucks de+eloped its first catalog and began e%panding its mail&order base to targeted demographic groups" In 199- a toll& free telephone number was set up" Sales grew steadily as the companyLs name and reputation

began to build" #he companyLs market research indicated that its a+erage mail&order customer was a well&educated) relati+ely affluent) well&tra+eled connoisseur interested in the arts and cultural e+ents) and usually a loyal buyer of the companyLs products" (s time went on) the cities and neighborhoods in which the companyLs mail&order customers were located became one of the beacons used to decide where to open new stores"

Schultz4s Strategy to /ake Starbucks a &reat Place to 5ork

Howard Schultz strongly belie+ed that StarbucksL success was hea+ily dependent on customers ha+ing a +ery positi+e e%perience in its stores" #his meant ha+ing store employees who were knowledgeable about the companyLs products) who paid attention to detail) who eagerly communicated the companyLs passion for coffee) and who had the skills and personality to deli+er consistently pleasing customer ser+ice" <any of the baristas were in their 5-s and worked part& time) going to college or pursuing other career acti+ities on the side" #he challenge to Starbucks) in SchultzLs +iew) was how to attract) moti+ate) and reward store employees in a manner that would make Starbucks a company that people would want to work for and that would result in higher le+els of performance" <oreo+er) Schultz wanted to cement the trust that had been building between management and the companyLs workforce" !ne of the re'uests that employees had made to the prior owners of Starbucks was to e%tend health care benefits to part&time workers" #heir re'uest had been turned down) but Schultz belie+ed that e%panding health care co+erage to include part&timers was the right thing to do" His father had recently died of cancer) and he knew from ha+ing grown up in a family that struggled to make ends meet how difficult it was to cope with rising medical costs" In 1988 Schultz went to the board of directors with his plan to e%pand the companyLs health care co+erage to include part& timers who worked at least 5- hours per week" He saw the proposal not as a generous gesture but as a core strategy to win employee loyalty and commitment to the companyLs mission" 9oard members resisted because the company was unprofitable and the added costs of the e%tended co+erage would only worsen the companyLs bottom line" 9ut Schultz argued passionately) pointing out that if the new benefit reduced turno+er) which he belie+ed was likely) then it would reduce the costs of hiring and training7which e'ualed about 14)--- per new hire" He further pointed out that it cost 11),-- a year to pro+ide an employee with full benefits" .art&timers) he argued) were +ital to Starbucks) constituting two&thirds of the companyLs workforce" <any were baristas who knew the fa+orite drinks of regular customersB if the barista left) that connection with the customer was broken" <oreo+er) many part&time employees were called upon to open the stores early) sometimes at ,I4- or 2 amB others had to work until closing79 pm or later" .ro+iding these employees with health care benefits) he argued) would signal that the company honored their +alue and contribution" #he board came round and appro+ed SchultzLs plan" Starting in late 1988) part&timers working 5or more hours were offered the same health co+erage as full&time employees" Starbucks paid 0, percent of an employeeLs health insurance premium and) o+er the years) e%tended its co+erage to include pre+enti+e care) crisis counseling) dental care) eye care) mental health care) and treatment for chemical dependency" Co+erage was also offered for unmarried partners in a committed relationship" Since most Starbucks employees are young and comparati+ely healthy) the company has been able to pro+ide broader co+erage while keeping monthly payments relati+ely low" #he +alue of StarbucksL health care program struck home when one of the companyLs store managers and a former barista walked into SchultzLs office and told him he had (I@S" Schultz said laterI
I had known N8imO was gay but had no idea he was sick" His disease had entered a new phase) he e%plained) and he wouldnLt be able to work any longer" Ee sat together and cried) for I could not find meaningful words to console him" I couldnLt compose myself" I hugged him"

(t that point) Starbucks had no pro+ision for employees with (I@S" Ee had a policy decision" 9ecause of 8im) we decided to offer health&care co+erage to all employees who ha+e terminal illnesses) paying medical costs in full from the time they are not able to work until they are co+ered by go+ernment programs) usually twenty&nine months" (fter his +isit to me) I spoke with 8im often and +isited him at the hospice" Eithin a year he was gone" I recei+ed a letter from his family afterward) telling me how much they appreciated our benefit plan"11

In 1993 Howard Schultz was in+ited to the Ehite House for a one&on&one meeting with .resident Clinton to brief him on the Starbucks health care program" 9y 1991 the companyLs profitability had impro+ed to the point where Schultz could pursue another employee program he belie+ed would ha+e a positi+e long&term effect on the success of Starbucks7a stock option plan for all employees"15 Schultz wanted to turn all Starbucks employees into partners) gi+e them a chance to share in the success of the company) and make clear the connection between their contributions and the companyLs market +alue" +en though Starbucks was still a pri+ate company) the plan that emerged called for granting e+ery employee companywide stock options in proportion to base pay" In <ay 1991) the plan) dubbed 9ean Stock) was presented to the board" #hough board members were concerned that increasing the number of shares might unduly dilute the +alue of the shares of in+estors who had put up hard cash) the plan recei+ed unanimous appro+al" #he first grant was made in !ctober 1991) $ust after the end of the companyLs fiscal year in SeptemberB each partner was granted stock options worth 15 percent of base payB the +alue of these first shares was pegged at 12 per share" ach !ctober since then) Starbucks has granted employees options e'ual to 13 percent of base pay) awarded at the stock price at the start of the fiscal year >!ctober 1?" mployees) if they wish) can cash in one&fifth of the shares granted each succeeding year) paying the initial yearLs price and recei+ing the current yearLs price" It took fi+e years for the shares to fully +est" ach of the shares granted in 1991 was worth 1145 in !ctober 1992B thus) an employee making 15-)--- in 1991 could ha+e cashed in the options granted in 1991 for more than 1,-)--- in !ctober 1992" In 1991 when the 9ean Stock program was presented to employees) Starbucks dropped the term employee and began referring to all its people as partners because e+eryone) including part&timers working at least 5- hours per week) was eligible for stock options after si% months" (t the end of fiscal year 1990) there were 8"0 million shares in outstanding options at an a+erage e%ercisable price of 119"05 >which compared +ery fa+orably to the current stock price of 134",-?" In 199,) Starbucks implemented an employee stock purchase plan" ligible employees could contribute up to 1- percent of their base earnings to 'uarterly purchases of the companyLs common stock at 8, percent of the going stock price" #he total number of shares that could be issued under the plan was 3 million" (fter the planLs creation) nearly 5--)--- shares were issuedB $ust o+er 5),-- of the 13)2-- eligible employees participated" %hibit 4 shows the performance of StarbucksL stock since 1995" Starbucks was able to attract moti+ated people with abo+e&a+erage skills and good work habits not only because of its fringe benefit program but also because of its pay scale" Store employees were paid 12 to 18 per hour) well abo+e the minimum wage" Starbucks belie+ed that its efforts to make the company an attracti+e) caring place to work were responsible for its relati+ely low turno+er rates" Ehereas most national retailers and fast&food chains had turno+er rates for store employees ranging from 1,- to 3-- percent a year) the turno+er rates for StarbucksL baristas ran about 2, percent" StarbucksL turno+er for store managers was about 5, percent compared to about ,- percent for other chain retailers" #here was e+idence that SchultzLs approaches) +alues) and principles were affecting company performance in the intended manner" !ne Starbucks store manager commented) C<orale is +ery high in my store among the staff" IL+e worked for a lot of companies) but IL+e ne+er seen this le+el of respect" ItLs a company thatLs +ery true to its workers) and it shows" !ur customers always comment that weLre happy and ha+ing fun" In fact) a lot of people ask if they can work here"C14

%hibit 3 contains a summary of StarbucksL fringe benefit program" In 1992) the pro$ected cost of benefits was 15)5-- for each of the companyLs 19)9-- employees"

Starbucks4 /ission Statement

In early 199-) the senior e%ecuti+e team at Starbucks went to an off&site retreat to debate the companyLs +alues and beliefs and draft a mission statement" Schultz wanted the mission statement to con+ey a strong sense of organizational purpose and to articulate the companyLs fundamental beliefs and guiding principles" #he draft was submitted to all employees for re+iew" Changes were made based on employeesL comments" #he resulting mission statement appears in %hibit ," #o make sure the company li+ed up to the elements of the mission statement) a C<ission /e+iewC system was formed" mployees were urged to report their concerns to the companyLs <ission /e+iew team if they thought particular management decisions were not supporti+e of the companyLs mission statement" Comment cards were gi+en to each newly hired employee and were kept a+ailable in common areas with other employee forms" mployees had the option of signing the comment cards or not" Hundreds of cards were submitted to the <ission /e+iew team each year" #he company promised that a rele+ant manager would respond to all signed cards within two weeks" Howard Schultz re+iewed all the comments) signed and unsigned) e+ery month" (s the company continued to grow) resulting in a large and geographically scattered workforce) Starbucks assembled a team of people from different regions to go o+er employee concerns) seek solutions) and pro+ide a report at the companyLs !pen =orums" (t these !pen =orums) held 'uarterly in e+ery geographic region where the company did business) senior managers met with all interested employees to present updates on StarbucksL performance) answer 'uestions) and gi+e employees an opportunity to air grie+ances"

)alues and Principles

@uring these early building years) Howard Schultz and other Starbucks senior e%ecuti+es worked to instill some key +alues and guiding principles into the Starbucks culture" #he keystone +alue in the effort Cto build a company with soulC was that the company would ne+er stop pursuing the perfect cup of coffee" Schultz remained steadfastly opposed to franchising) so that the company could control the 'uality of its products and build a culture common to all stores" He was adamant about not selling artificially fla+ored coffee beans7CEe will not pollute our high&'uality beans with chemicalsCB if a customer wanted hazelnut&fla+ored coffee) Starbucks would pro+ide it by adding hazelnut syrup to the drink rather than by adding hazelnut fla+oring to the beans during roasting" /unning fla+ored beans through the grinders would lea+e chemical residues that would alter the fla+or of beans ground afterwardB plus) the chemical smell gi+en off by artificially fla+ored beans would be absorbed by other beans in the store" =urthermore) Schultz didnLt want the company to pursue supermarket sales because pouring StarbucksL beans into clear plastic bins) where they could get stale) would compromise the companyLs distincti+e productI fresh) dark&roasted) full& fla+ored coffee" StarbucksL management was also emphatic about the importance of pleasing customers" mployees were trained to go out of their way) taking heroic measures if necessary) to make sure customers were fully satisfied7the theme was C$ust say yesC to customer re'uests" mployees were also encouraged to speak their minds without fear of retribution from upper management7 senior e%ecuti+es wanted employees to be +ocal about what Starbucks was doing right) what it was doing wrong) and what changes were needed" <anagement wanted employees to contribute to the process of making Starbucks a better company"

( +alues and principles crisis arose at Starbucks in 1989 when customers started re'uesting nonfat milk in cappuccinos and lattPs" Howard Schultz) who read all customer comment cards) and @a+e !lsen) head of coffee 'uality) conducted taste tests of lattPs and cappuccinos made with nonfat and skim milk and concluded they were not as good as those made with whole milk" Howard 9ehar) recently hired as head of retail store operations) indicated that managementLs opinions didnLt matterB what mattered was gi+ing customers what they wanted" Schultz responded) CEe will ne+er offer nonfat milk" ItLs not who we are"C 9ehar stuck to his guns) maintaining that use of nonfat milk should at least be tested7otherwise) all the statements management had made about the importance of really and truly pleasing customers were a sham" ( fierce internal debate ensued" !ne dogmatic defender of the 'uality and taste of StarbucksL coffee products buttonholed 9ehar outside his office and told him that using nonfat milk amounted to CbastardizingC the companyLs products" *umerous store managers maintained that offering two kinds of milk was operationally impractical" Schultz found himself torn between the companyLs commitment to 'uality and its goal of pleasing customers" !ne day after +isiting one of the stores in a residential neighborhood and watching a customer lea+e and go to a competitorLs store because Starbucks did not make lattPs with nonfat milk) Schultz authorized 9ehar to begin testing"13 Eithin si% months all 4- stores were offering drinks made with nonfat milk" In 1990) about half the lattPs and cappuccinos Starbucks sold were made with nonfat milk" SchultzLs approach to offering employees good compensation and a comprehensi+e benefits package was dri+en by his belief that sharing the companyLs success with the people who made it happen helped e+eryone think and act like an owner) build positi+e long&term relationships with customers) and do things efficiently" He had a +i+id recollection of his fatherLs employment e%perience7bouncing from one low&paying $ob to another) working for employers who offered few or no benefits and who conducted their business with no respect for the contributions of the workforce7and he +owed that he would ne+er let Starbucks employees suffer a similar fate) sayingI
<y father worked hard all his life and he had little to show for it" He was a beaten man" #his is not the (merican dream" #he worker on our plant floor is contributing great +alue to the companyB if he or she has low self&worth) that will ha+e an effect on the company"1,

#he companyLs employee benefits program was predicated on the belief that better benefits attract good people and keep them longer" SchultzLs rationale was that if you treat your employees well) they will treat your customers well"

Starbucks Becomes a Public Company

Part 6 Starbucks' initial public offering >I.!? of common stock in 8une 1995 turned into one of the most successful I.!s of the year >see %hibit 4 for the performance of the company's stock price since the I.!?" Eith the capital afforded it by being a public company) Starbucks accelerated the e%pansion of its store network >see %hibit 1?" Starbucks' success helped specialty coffee products begin to catch on across the Anited States" Competitors) some imitating the Starbucks model) began to spring up in many locations" #he Specialty Coffee (ssociation of (merica predicted that the number of coffee cafKs in the Anited States would rise from ,-- in 1995 to 1-)--- by 1999"

The Store E.pansion Strategy

In 1995 and 1994 Starbucks de+eloped a three&year geographic e%pansion strategy that targeted areas which not only had fa+orable demographic profiles but which also could be ser+iced and supported by the company's operations infrastructure" =or each targeted region) Starbucks

selected a large city to ser+e as a ChubCB teams of professionals were located in hub cities to support the goal of opening 5- or more stores in the hub in the first two years" !nce stores blanketed the hub) then additional stores were opened in smaller) surrounding CspokeC areas in the region" #o o+ersee the e%pansion process) Starbucks created zone +ice presidents to direct the de+elopment of each region and to implant the Starbucks culture in the newly opened stores" (ll of the new zone +ice presidents Starbucks recruited came with e%tensi+e operating and marketing e%perience in chain&store retailing" Starbucks' store launches grew steadily more successful" In 199,) new stores generated an a+erage of 10--)--- in re+enue in their first year) far more than the a+erage of 1350)--- in 199-" #his was partly due to the growing reputation of the Starbucks brand" In more and more instances) Starbucks' reputation reached new markets e+en before stores opened" <oreo+er) e%isting stores continued to post year&to&year gains in sales >see %hibit 1?" Starbucks had notable success in identifying top retailing sites for its stores" #he company had the best real estate team in the coffee&bar industry and a sophisticated system that enabled it to identify not only the most attracti+e indi+idual city blocks but also the e%act store location that was best" #he company's site location track record was so good that as of 1990 it had closed only 5 of the 1),-- sites it had opened"

7eal Estate8 Store 9esign8 Store Planning8 and Construction

Schultz formed a head'uarters group to create a store de+elopment process based on a si%& month opening schedule" Starting in 1991) the company began to create its own in&house team of architects and designers to ensure that each store would con+ey the right image and character" Stores had to be custom&designed because the company didn't buy real estate and build its own freestanding structures like <c@onald's or Eal&<art didB rather) each space was leased in an e%isting structure and thus each store differed in size and shape" <ost stores ranged in size from 1)--- to 1),-- s'uare feet and were located in office buildings) downtown and suburban retail centers) airport terminals) uni+ersity campus areas) or busy neighborhood shopping areas con+enient to pedestrian foot traffic" !nly a select few were in suburban malls" Ehile similar materials and furnishings were used to keep the look consistent and e%penses reasonable) no two stores ended up being e%actly alike" In 1993) Starbucks began to e%periment with a broader range of store formats" Special seating areas were added to help make Starbucks a place where customers could meet and chat or simply en$oy a peaceful interlude in their day" ;rand CafKs with fireplaces) leather chairs) newspapers) couches) and lots of ambience were created to ser+e as flagship stores in high& traffic) high&+isibility locations" #he company also e%perimented with dri+e&through windows in locations where speed and con+enience were important to customers and with kiosks in supermarkets) building lobbies) and other public places" #o better reduce a+erage store&opening costs) which had reached an undesirably high 14,-)--in 199,) the company centralized buying) de+eloped standard contracts and fi%ed fees for certain items) and consolidated work under those contractors who displayed good cost&control practices" #he retail operations group outlined e%actly the minimum amount of e'uipment each core store needed) so that standard items could be ordered in +olume from +endors at 5- to 4- percent discounts) then deli+ered $ust in time to the store site either from company warehouses or the +endor" <odular designs for display cases were de+eloped" (nd the whole store layout was de+eloped on a computer) with software that allowed the costs to be estimated as the design e+ol+ed" (ll this cut store&opening costs significantly and reduced store de+elopment time from 53 to 18 weeks"

( Cstores of the futureC pro$ect team was formed in 199, to raise Starbucks' store design to a still higher le+el and come up with the ne%t generation of Starbucks stores" Schultz and !lsen met with the team early on to present their +ision for what a Starbucks store should be like7Can authentic coffee e%perience that con+eyed the artistry of espresso making) a place to think and imagine) a spot where people could gather and talk o+er a great cup of coffee) a comforting refuge that pro+ided a sense of community) a third place for people to congregate beyond work or the home) a place that welcomed people and rewarded them for coming) and a layout that could accommodate both fast ser+ice and 'uiet moments"C #he team researched the art and literature of coffee throughout the ages) studied coffee&growing and coffee&making techni'ues) and looked at how Starbucks stores had already e+ol+ed in terms of design) logos) colors) and mood" #he team came up with four store designs7one for each of the four stages of coffee makingI growing) roasting) brewing) and aroma7each with its own color combinations) lighting scheme) and component materials" Eithin each of the four basic store templates) Starbucks could +ary the materials and details to adapt to different store sizes and settings >downtown buildings) college campuses) neighborhood shopping areas?" In late 1992) Starbucks began opening new stores based on one of the four templates" #he company also introduced two ministore formats using the same styles and finishesI the bre ebar) a store&within&a&store for supermarkets or office& building lobbies) and the !oppio) a self&contained 8&s'uare&foot space that could be mo+ed from spot to spot" <anagement belie+ed the pro$ect accomplished three ob$ecti+esI better store designs) lower store&opening costs >about 141,)--- per store on a+erage?) and formats that allowed sales in locations Starbucks could otherwise not consider" =or a number of years) Starbucks a+oided debt and financed new stores entirely with e'uity capital" 9ut as the company's profitability impro+ed and its balance sheet strengthened) Schultz's opposition to debt as a legitimate financing +ehicle softened" In 1992 the company completed its second debt offering) netting 1121 million from the sale of con+ertible debentures for use in its capital construction program" %hibit 2) %hibit 0) and %hibit 8 present Starbucks' income statement and balance sheet data for recent years"

Product :ine
Starbucks stores offered a choice of regular or decaffeinated coffee be+erages) a special Ccoffee of the day)C and a broad selection of Italian&style espresso drinks" In addition) customers could choose from a wide selection of fresh&roasted whole&bean coffees >which could be ground on the premises and carried home in distincti+e packages?) a selection of fresh pastries and other food items) sodas) $uices) teas) and coffee&related hardware and e'uipment" In 1990) the company introduced its Starbucks 9arista home espresso machine featuring a new portafilter system that accommodated both ground coffee and Starbucks' new ready&to&use espresso pods" .ower =rappuccino7a +ersion of the company's popular =rappuccino blended be+erage) packed with protein) carbohydrates) and +itamins7was tested in se+eral markets during 1990B another promising new product being tested for possible rollout in 1998 was Chai #ea DattP) a combination of black tea) e%otic spices) honey) and milk" #he company's retail sales mi% was roughly 21 percent coffee be+erages) 1, percent whole&bean coffees) 12 percent food items) and 8 percent coffee&related products and e'uipment" #he product mi% in each store +aried) depending on the size and location of each outlet" Darger stores carried a greater +ariety of whole coffee beans) gourmet food items) teas) coffee mugs) coffee grinders) coffee&making e'uipment) filters) storage containers) and other accessories" Smaller stores and kiosks typically sold a full line of coffee be+erages) a limited selection of whole&bean coffees) and a few hardware items" In recent years) the company began selling special $azz and blues C@s) which in some cases were special compilations that had been put together for Starbucks to use as store background music" #he idea for selling the C@s originated with a Starbucks store manager who had worked in the music industry and selected the new Ctape of the monthC Starbucks played as background in

its stores" He had gotten compliments from customers wanting to buy the music they heard and suggested to senior e%ecuti+es that there was a market for the company's music tapes" /esearch that in+ol+ed looking through two years of comment cards turned up hundreds asking Starbucks to sell the music it played in its stores" #he Starbucks C@s) created from the Capitol /ecords library) pro+ed a significant addition to the company's product line" Some of the C@s were specifically collections designed to tie in with new blends of coffee that the company was promoting" Starbucks also sold !prah's 9ook Club selections) the profits of which were donated to a literacy fund supported by the Starbucks =oundation" #he company was constantly engaged in efforts to de+elop new ideas) new products) and new e%periences for customers that belonged e%clusi+ely to Starbucks" Schultz and other senior e%ecuti+es drummed in the importance of always being open to re&in+enting the Starbucks e%perience"

Store *mbience
Starbucks management looked upon each store as a billboard for the company and as a contributor to building the company's brand and image" ach detail was scrutinized to enhance the mood and ambience of the store) to make sure e+erything signaled Cbest of classC and that it reflected the personality of the community and the neighborhood" #he thesis was C +erything matters"C #he company went to great lengths to make sure the store fi%tures) the merchandise displays) the colors) the artwork) the banners) the music) and the aromas all blended to create a consistent) in+iting) stimulating en+ironment that e+oked the romance of coffee) that signaled the company's passion for coffee) and that rewarded customers with ceremony) stories) and surprise" Starbucks was recognized for its sensiti+ity to neighborhood conser+ation with the Scenic (merica's award for e%cellent design and Csensiti+e reuse of spaces within cities"C #o try to keep the coffee aromas in the stores pure) Starbucks banned smoking and asked employees to refrain from wearing perfumes or colognes" .repared foods were kept co+ered so customers would smell coffee only" Colorful banners and posters were used to keep the look of Starbucks stores fresh and in keeping with seasons and holidays" Company designers came up with artwork for commuter mugs and #&shirts in different cities that was in keeping with each city's personality >peach&shaped coffee mugs for (tlanta) pictures of .aul /e+ere for 9oston and the Statue of Diberty for *ew Fork?" #o make sure that Starbucks' stores measured up to standards) the company used Cmystery shoppersC who posed as customers and rated each location on a number of criteria"

Building a Top /anagement Team

Schultz continued to strengthen Starbucks' top management team) hiring people with e%tensi+e e%perience in managing and e%panding retail chains" !rin Smith) who had an <9( from Har+ard and 14 years' e%perience at @eloitte and #ouche) was brought in as chief financial officer in 199and then was promoted to president and chief operating officer in 1993" #he four key e%ecuti+es during the company's formati+e years7Howard Schultz) @a+e !lsen) Howard 9ehar) and !rin Smith7contributed the most to defining and shaping the company's +alues) principles) and culture" (s the company grew) additional e%ecuti+es were added in marketing) store super+ision) specialty sales) human resources) finance) and information systems" Schultz also took care to add people to Starbucks' board of directors who had e%perience growing a retail chain and who could add +aluable perspecti+es"

Employee Training
(ccommodating fast growth also meant putting in systems to recruit) hire) and train baristas and store managers" Starbucks' +ice president for human resources used some simple guidelines in screening candidates for new positionsI CEe want passionate people who lo+e coffee " " " Ee're looking for a di+erse workforce) which reflects our community" Ee want people who en$oy what they're doing and for whom work is an e%tension of themsel+es"C12 Some 8- percent of Starbucks employees were white) 8, percent had some education beyond high school) and the a+erage age was 52" +ery partnerMbarista hired for a retail $ob in a Starbucks store recei+ed at least 53 hours training in the first two to four weeks" #he training included classes on coffee history) drink preparation) coffee knowledge >four hours?) customer ser+ice >four hours?) and retail skills) plus a four&hour workshop called C9rewing the .erfect Cup"C 9aristas were trained in using the cash register) weighing beans) opening the bag properly) capturing the beans without spilling them on the floor) holding the bag in a way that keeps air from being trapped inside) and affi%ing labels on the package e%actly one&half inch o+er the Starbucks logo" 9e+erage preparation occupied e+en more training time) in+ol+ing such acti+ities as grinding the beans) steaming milk) learning to pull perfect >18& to 54&second? shots of espresso) memorizing the recipes of all the different drinks) practicing making the different drinks) and learning how to make drinks to customer specifications" #here were sessions on how to clean the milk wand on the espresso machine) e%plain the Italian drink names to customers) sell an 180, home espresso machine) make eye contact with customers) and take personal responsibility for the cleanliness of the coffee bins" +eryone was drilled in the Star Skills) three guidelines for on&the&$ob interpersonal relationsI >1? maintain and enhance self&esteem) >5? listen and acknowledge) and >4? ask for help" (nd there were rules to be memorizedI milk must be steamed to at least 1,- degrees =ahrenheit but ne+er more than 10- degreesB e+ery espresso shot not pulled within 54 seconds must be tossedB customers who order one pound of beans must be gi+en e%actly that7not "99, pounds or 1"1 poundsB ne+er let coffee sit in the pot more than 5- minutesB always compensate dissatisfied customers with a Starbucks coupon that entitles them to a free drink" <anagement trainees attended classes for 8 to 15 weeks" #heir training went much deeper) co+ering not only the information imparted to baristas but also the details of store operations) practices and procedures as set forth in the company's operating manual) information systems) and the basics of managing people" Starbucks' trainers were all store managers and district managers with on&site e%perience" !ne of their ma$or ob$ecti+es was to ingrain the company's +alues) principles) and culture and to impart their knowledge about coffee and their passion about Starbucks" ach time Starbucks opened stores in a new market) it undertook a ma$or recruiting effort" ight to 1- weeks before opening) the company placed ads to hire baristas and begin their training" It sent a Star team of e%perienced managers and baristas from e%isting stores to the area to lead the store&opening effort and to conduct one&on&one training following the company's formal classes and basic orientation sessions at the Starbucks Coffee School in San =rancisco"

Product Supply
@a+e !lsen) Starbucks' senior +ice president for coffee) personally spearheaded Starbucks' efforts to secure top&notch coffee beans to supply the company's growing needs" He tra+eled regularly to coffee&producing countries7Colombia) Sumatra) Femen) (ntigua) Indonesia) ;uatemala) *ew ;uinea) Costa /ica) Sulawesi) .apua *ew ;uinea) Genya) thiopia) 8a+a7 building relationships with growers and e%porters) checking on agricultural conditions and crop yields) and searching out +arieties and sources that would meet Starbucks' e%acting standards of

'uality and fla+or" /eporting to !lsen was a group that created and tested new blends of beans from different sources" (lthough most coffee was purchased in the commodity market7coffee was the world's second largest traded commodity7coffee of the 'uality sought by Starbucks was usually purchased on a negotiated basis at a substantial premium abo+e commodity coffees) depending on supply and demand at the time of purchase" Coffee prices were sub$ect to considerable +olatility due to weather) economic) and political conditions in the growing countries) as well as agreements establishing e%port 'uotas or efforts on the part of the International Coffee !rganization and the (ssociation of Coffee .roducing Countries to restrict coffee supplies" Starbucks entered into fi%ed&price purchase commitments in order to secure an ade'uate supply of 'uality green coffee beans and to limit its e%posure to fluctuating coffee prices in upcoming periods" Ehen satisfactory fi%ed&price commitments were not a+ailable) the company purchased coffee futures contracts to pro+ide price protection" *onetheless) there had been occasions in years past when une%pected $umps in coffee prices had put a s'ueeze on the company's margins and necessitated an increase in the prices of its be+erages and beans sold at retail"

7oasting Co11ee Beans

Starbucks considered the roasting of its coffee beans to be an art form" ach batch was roasted in a powerful gas o+en for 15 to 1, minutes" Highly trained and e%perienced roasting personnel monitored the process) using both smell and hearing) to $udge when the beans were perfectly done7coffee beans make a popping sound when ready" Starbucks' standards were so e%acting that roasters tested the color of the beans in a blood&cell analyzer and discarded the entire batch if the reading wasn't on target" !n a daily basis) when he wasn't tra+eling in search of coffee supplies) @a+e !lsen checked coffee samples from the roasting process) sniffing the aromas) tasting sample cups) and recording his obser+ations in a logbook" In 1998) Starbucks had three roasting plants" #he company's smallest plant) built in 1989 and originally thought to be big enough to supply the company's needs for the ne%t 1- years) was dedicated to supplying the company's mail&order business" In 1994) a 4-,)---&s'uare&foot plant was opened in Gent) Eashington) $ust south of SeattleB its output mainly was being used to supply stores west of the <ississippi" In 1993) the company began construction of an 111 million roasting facility in Fork) .ennsyl+ania) that could be e%panded to 1 million s'uare feet to supply stores east of the <ississippi"

Bonding with Customers

(bout , million customers per week were patronizing Starbucks stores in early 1998" Stores did about half of their business by 11 am" Doyal customers patronized a Starbucks store 1, to 5times a month) spending perhaps 1,- monthly" Some customers were Starbucks fanatics) coming in daily" 9aristas became familiar with regular customers) learning their names and their fa+orite drinks" Christine *agy) a field director for !racle Corporation in .alo (lto) California) told a "all Street #ournal reporter) C=or me) it's a daily necessity or I start getting withdrawals"C10 Her standard order was a custom drinkI a decaf grande nonfat no&whip no&foam e%tra&cocoa mochaB when the baristas saw her come through the door) she told the reporter) C#hey $ust Nsaid)O 'Ee need a Christine here"'C

/ail 0rder Sales

Starbucks published a mail&order catalog that was distributed si% times a year and that offered coffee) candies and pastries) and select coffee&making e'uipment and accessories" ( special business gift&gi+ing catalog was mailed to business accounts during the 1990 Christmas holiday season" #he company also had an electronic store on the Internet" In 1990) sales of this di+ision were about 151"5 million) roughly 5 percent of total re+enuesB almost ,-)--- mail&order customers were signed up to recei+e monthly deli+eries of Starbucks coffee as of late 1990" Starbucks management belie+ed that its direct&response marketing effort helped pa+e the way for retail e%pansion into new markets and reinforced brand recognition in e%isting markets"

;oint )entures
In 1993) after months of meetings and e%perimentation) .epsiCo and Starbucks entered into a $oint +enture arrangement to create new coffee&related products for mass distribution through .epsi channels) including cold coffee drinks in a bottle or can" Howard Schultz saw this as a ma$or paradigm shift with the potential to cause Starbucks business to e+ol+e in heretofore unimaginable directionsB he thought it was time to look for ways to mo+e Starbucks out into more mainstream markets" Cold coffee products had generally met with +ery poor market reception) e%cept in 8apan) where there was an 18 billion market for ready&to&drink coffee&based be+erages" *onetheless) Schultz was hoping the partners would hit on a new product to e%ploit a good& tasting coffee e%tract that had been de+eloped by Starbucks' recently appointed director of research and de+elopment" #he $oint +enture's first new product) <azagran) a lightly fla+ored carbonated coffee drink) was a failureB when test& marketed in southern California) some consumers liked it and some hated it" Ehile people were willing to try it the first time) partly because the Starbucks name was on the label) repeat sales pro+ed disappointing" @espite the clash of cultures and the different moti+ations of the two partners) the partnership held together because of the good working relationship that e+ol+ed between Howard Schultz and .epsi's senior e%ecuti+es" #hen Schultz) at a meeting to discuss the future of <azagran) suggested) CEhy not de+elop a bottled +ersion of =rappuccinoQC18 Starbucks had come up with the new cold coffee drink it called =rappuccino in the summer of 199,) and it had pro+ed to be a big hot& weather sellerB .epsi e%ecuti+es were enthusiastic" (fter months of e%perimentation) the $oint +enture product research team came up with a shelf&stable +ersion of =rappuccino that tasted 'uite good" It was tested in Eest Coast supermarkets in the summer of 1992B the response was o+erwhelming) with sales running 1- times o+er pro$ections and 0- percent repeat business" In September 1992) the partnership in+ested in three bottling facilities to make =rappuccino) with plans to begin wider distribution" Sales of =rappuccino reached 115, million in 1990 and achie+ed national supermarket penetration of 8- percent" Sales were pro$ected to reach 1,-million in 1998B Starbucks management belie+ed that the market for =rappuccino would ultimately e%ceed 11 billion" In !ctober 199, Starbucks partnered with @reyer's ;rand Ice Cream to supply coffee e%tract for a new line of coffee ice cream made and distributed by @reyer's under the Starbucks brand" #he new line) featuring such fla+ors as @ark /oast spresso Swirl) 8a+aChip) Janilla <ochaChip) 9iscotti 9liss) and Caffe (lmond =udge) hit supermarket shel+es in (pril 1992B by 8uly) Starbucks coffee&fla+ored ice cream was the top&selling superpremium brand in the coffee segment" In 1990) two new low&fat fla+ors were added to complement the original si% fla+ors) along with two fla+ors of ice cream barsB all were well recei+ed in the marketplace" (dditional new ice cream products were planned for 1998" (lso in 199,) Starbucks worked with Seattle's /edhook (le 9rewery to create @ouble 9lack Stout) a stout beer with a shot of Starbucks coffee e%tract in it"

:icensed Stores and Specialty Sales

In recent years Starbucks had begun entering into a limited number of licensing agreements for store locations in areas where it did not ha+e ability to locate its own outlets" #he company had an agreement with <arriott Host International that allowed Host to operate Starbucks retail stores in airport locations) and it had an agreement with (ramark =ood and Ser+ices to put Starbucks stores on uni+ersity campuses and other locations operated by (ramark" Starbucks recei+ed a license fee and a royalty on sales at these locations and supplied the coffee for resale in the licensed locations" (ll licensed stores had to follow Starbucks' detailed operating procedures) and all managers and employees who worked in these stores recei+ed the same training gi+en to Starbucks managers and store employees" Starbucks also had a specialty sales group that pro+ided its coffee products to restaurants) airlines) hotels) uni+ersities) hospitals) business offices) country clubs) and select retailers" !ne of the early users of Starbucks coffee was Horizon (irlines) a regional carrier based in Seattle" In 199,) Starbucks entered into negotiations with Anited (irlines to ha+e Starbucks coffee ser+ed on all Anited flights" #here was much internal debate at Starbucks about whether such a mo+e made sense for Starbucks and the possible damage to the integrity of the Starbucks brand if the 'uality of the coffee ser+ed did not measure up" (fter se+en months of negotiation and discussion o+er coffee&making procedures) Anited (irlines and Starbucks came up with a way to handle 'uality control on some ,--&plus planes with +arying e'uipment) and Starbucks became the coffee supplier to the 5- million passengers flying Anited each year" In addition) Starbucks made arrangements to supply an e%clusi+e coffee blend to *ordstrom's for sale only in *ordstrom stores) to operate coffee bars in 9arnes R *oble bookstores) and to offer coffee ser+ice at some Eells =argo 9ank locations in California" <ost recently) Starbucks began selling its coffees in Chapters) a #oronto book retailer with sites throughout Canada) and in Costco warehouse club stores" ( 1990 agreement with A"S" !ffice .roducts ga+e Starbucks the opportunity to pro+ide its coffee to workers in 1", million business offices" In fiscal 1990) the specialty sales di+ision generated sales of 1110"2 million) e'ual to 15"5 percent of total re+enues"

(nternational E.pansion
In markets outside the continental Anited States >including Hawaii?) Starbucks' strategy was to license a reputable and capable local company with retailing know&how in the target host country to de+elop and operate new Starbucks stores" In some cases) Starbucks was a $oint +enture partner in the stores outside the continental Antied States" Starbucks created a new subsidiary) Starbucks Coffee International >SCI?) to orchestrate o+erseas e%pansion and begin to build the Starbucks brand name globally +ia licenseesB Howard 9ehar was president of SCI" ;oing into 1998) SCI had 15 retail stores in #okyo) 0 in Hawaii) 2 in Singapore) and 1 in the .hilippines" (greements had been signed with licensees to begin opening stores in #aiwan and Gorea in 1998" #he company and its licensees had plans to open as many as 3- stores in the .acific /im by the end of September 1998" #he licensee in #aiwan foresaw a potential of 5-stores in that country alone" #he potential of locating stores in urope and Datin (merica was being e%plored"

Corporate 7esponsibility
Howard Schultz's effort to Cbuild a company with soulC included a broad&based program of corporate responsibility) orchestrated mainly through the Starbucks =oundation) set up in 1990" Starbucks was the largest corporate contributor in *orth (merica to C(/ ) a worldwide relief and de+elopment organization that sponsored health) education) and humanitarian aid programs in most of the #hird Eorld countries where Starbucks purchased its coffee suppliesB Starbucks

began making annual corporate contributions to C(/ when it became profitable in 1991" In addition) C(/ samplers of coffee and C(/ &related mugs) backpacks) and #&shirts were offered in the company's mail&order catalogB a portion of the price on all sales was donated to C(/ " In 199, Starbucks began a program to impro+e the conditions of workers in coffee& growing countries) establishing a code of conduct for its growers and pro+iding financial assistance for agricultural impro+ement pro$ects" In 1990) Starbucks formed an alliance with (ppropriate #echnology International to help poor) small&scale coffee growers in ;uatemala increase their income by impro+ing the 'uality of their crops and their market accessB the company's first&year grant of 10,)--- went to fund a new processing facility and set up a loan program for a producer cooperati+e" Starbucks stores also featured C(/ in promotions and had organized concerts with Genny ; and <ary Chapin Carpenter to benefit C(/ " Starbucks had an n+ironmental Committee that looked for ways to reduce) reuse) and recycle waste) as well as contribute to local community en+ironmental efforts" #here was also a ;reen #eam) consisting of store managers from all regions" #he company had donated almost 15--)--to literacy impro+ement efforts) using the profits from store sales of !prah's 9ook Club selections" Starbucks stores participated regularly in local charitable pro$ects of one kind or another) donating drinks) books) and proceeds from store&opening benefits" #he company's annual report listed nearly 1-- community organizations which Starbucks and its employees had supported in 1990 alone" mployees were encouraged to recommend and apply for grants from the Starbucks =oundation to benefit local community literacy organizations" !n the =ourth of 8uly weekend in 1990) three Starbucks employees were murdered in the company's store in the ;eorgetown area of Eashington) @"C" Starbucks offered a 11--)--reward for information leading to the arrest of the murderer>s? and announced it would reopen the store in early 1998 and donate all future net proceeds of that store to a Starbucks <emorial =und that would make annual grants to local groups working to reduce +iolence and aid the +ictims of +iolent crimes"

Competitors
;oing into 1990) there were an estimated 8)--- specialty coffee outlets in the Anited States" Starbucks' success was prompting a number of ambitious ri+als to scale up their e%pansion plans" !bser+ers belie+ed there was room in the category for two or three national players) maybe more" Starbucks' closest competitor) Second Cup) a Canadian franchisor with stores primarily in Canada) was less than one&third its sizeB Second Cup owned ;loria 8eans) a franchisor of specialty coffees) with stores located primarily in malls throughout the Anited States" *o other ri+al had as many as 5,- stores) but there were at least 5- small local and regional chains that aspired to grow into ri+als of Starbucks) most notably *ew Eorld Coffee) Coffee .eople) Coffee Station) 8a+a Centrale) and Caribou Coffee" !bser+ers e%pected many of the local and regional chains to merge in efforts to get bigger and better position themsel+es as an alternati+e to Starbucks" In addition) numerous restaurants were picking up on the growing popularity of specialty coffees and had installed machines to ser+e espresso) cappuccino) lattP) and other coffee drinks to their customers" #he company also faced competition from nationwide coffee manufacturers such as Graft ;eneral =oods >the parent of <a%well House?) .rocter R ;amble >the owner of the =olger's brand?) and *estlK) which distributed their coffees through supermarkets" #here were also a number of specialty coffee companies that sold whole&bean coffees in supermarkets" 9ecause many consumers were accustomed to purchasing their coffee supplies at supermarkets) it was easy for them to substitute these products for Starbucks"

Building the Starbucks Brand

So far) Starbucks had spent +ery little money on ad+ertising) preferring instead to build the brand cup by cup with customers and depend on word&of&mouth and the appeal of its storefronts" #he company was) howe+er) engaged in a growing effort to e%tend the Starbucks brand and penetrate new markets" In addition to e%panding internationally) +enturing into ice cream with @reyer's and into =rappuccino with .epsi) partnering with licensees) and de+eloping specialty and mail&order sales) Starbucks had recently begun selling its coffees in supermarkets" Supermarket sales were test&marketed in o+er ,-- stores in Chicago in the summer of 1990" <anagement belie+ed that the tests confirmed the appeal of offering Starbucks coffee to e%isting customers in con+enient supermarket locations while at the same time introducing new customers to its products" #wo&thirds of all coffee was sold in supermarkets" In *o+ember 1990) Starbucks hired *estlK +eteran) 8im (iling) as senior +ice president of grocery operations to direct Starbucks' supermarket sales effort" #he company started rolling out supermarket sales of its coffees in 1- ma$or metropolitan areas in the spring of 1998" Starbucks coffee sold in supermarkets featured distincti+e) elegant packagingB prominent positions in grocery aislesB and the same premium 'uality as that sold in its own stores" .roduct freshness was guaranteed by Starbucks' =la+orDock packaging) and the price per pound paralleled the prices in Starbucks' retail stores" #he company was also said to be testing Clight roastC coffee blends for those customers who found its current offerings too strong" (nd) in the summer of 1990) Starbucks 'uietly test& marketed four 5- percent fruit&$uice be+erages in one market"19 #he single&ser+e bottled drinks were priced around 15) and at least one contained caffeine" (lso on the new&product front was an apple cider made e%clusi+ely for Starbucks by *antucket *ectars" .lus) the company was selling chocolate bars and other candy) and had plans to bring candy production in&house if sales went well enough"

The 'uture
Industry analysts in 1998 saw Starbucks as being well on its way to becoming the *ike or Coca& Cola of the specialty coffee segment" It was the only company with anything close to national market co+erage" #he company's most immediate ob$ecti+e was to ha+e 5)--- stores in operation by the year 5---" Its longer range ob$ecti+e was to become the most recognized and respected brand of coffee in the world" #he company's efforts to greatly increase its sphere of strategic interest +ia its $oint +entures with .epsi and @reyer's) its mo+e to sell coffee in supermarkets) and the possibility of marketing fruit&$uice drinks and candy under the Starbucks label represented an ongoing dri+e on Schultz's part to continually rein+ent the way Starbucks did business" In order to sustain the company's growth and make Starbucks a strong global brand) Schultz belie+ed that the company had to challenge the status 'uo) be inno+ati+e) take risks) and alter its +ision of who it was) what it did) and where it was headed" Ander his guidance) management was posing a number of fundamental strategic 'uestionsI Ehat could Starbucks do to make its stores an e+en more elegant Cthird placeC that welcomed) rewarded) and surprised customersQ Ehat new products and new e%periences could the company pro+ide that would uni'uely belong to or be associated with StarbucksQ Ehat could coffee be7besides being hot or li'uidQ How could Starbucks reach people who were not coffee drinkersQ Ehat strategic paths should Starbucks pursue to achie+e its ob$ecti+e of becoming the most recognized and respected brand of coffee in the worldQ (rthur (" #hompson) #he Ani+ersity of (labama 8ohn ";amble) Ani+ersity of South (labama