CHAPTER 4
“Luck Is the Residue of Design”

Whenever you see a
successful business,
someone once made a
courageous decision.

—PETER DRUCKER

Branch Rickey, the Brooklyn Dodgers general manager who broke the color barrier by signing on Jackie Robinson, often remarked: “Luck is the residue of design.”

People sometimes say the sun always shines on Starbucks, that our success was built on luck. It’s true that we hit the front wave of what became a North American social phenomenon, the widespread popularity of cafés and espresso bars. I can’t say that I predicted this wave, but I did perceive the romantic appeal of coffee by the cup, in Italy, and then spent three years brainstorming and laying the plans to translate it into an American context.

Whenever a company, or a person, emerges from the crowd and shines, others are quick to attribute that prominence to good fortune.

The achiever, of course, counters that it’s the product of talent and hard work.

I agree with Branch Rickey. While bad luck, it’s true, may come out of the blue, good luck, it seems, comes to those who plan for it.

GREAT IDEA, LET’S DO SOMETHING ELSE

Have you ever had a brilliant idea—one that blows you away—only to have the people who can make it a reality tell you it’s not worth pursuing?

That’s what happened to me on my return to Seattle from Italy. I thought I’d come upon a truly extraordinary insight, one that could serve as the foundation for a whole new industry and change the way Americans drank coffee. To my bosses, however, I was an overexcited marketing director.

Starbucks was a retailer—not a restaurant or a bar, they argued. Serving espresso drinks would put them in the beverage business, a move they feared would dilute the integrity of what they envisioned the mission of a coffee store to be. They also pointed to Starbucks’ success. The company was small, closely held, private, and profitable every year. Why rock the boat?

But, as I was to learn, there was a more immediate reason my idea didn’t appeal: Jerry was considering an opportunity that excited him far more.

The story of Starbucks has some unexpected twists and turns, but none so strange as the one that happened next. In 1984, Starbucks bought Peet’s Coffee and Tea.

Just how that occurred is a part of Starbucks’ history that isn’t often told, since Peet’s and Starbucks are now competitors in the San Francisco Bay area. Most customers don’t know they were once intertwined.

It was like the son buying out the father. Starbucks’ founders had, after all, drawn inspiration from Peet’s and learned their roasting skills at the elbow of Alfred Peet. But Alfred Peet had sold the business in 1979, and by 1983 the new owner was ready to sell.

To Jerry Baldwin, it was the chance of a lifetime and a much more promising way of expanding than opening espresso bars. As a purist, he still regarded Peet’s as the ultimate in coffee purveyors. It was the same size as Starbucks, with about 5 stores. But in Jerry’s mind, Peet’s would always be the real thing, the originator of dark-roasted coffee in America. The Seattle market, he thought, was already well-served, while San Francisco and northern California, a much larger area, offered plenty of room to grow.

To fund the acquisition, Starbucks went deeply into debt. The day we acquired Peet’s, I recall, we had a debt-to-equity ratio of 6:1. Only in the go-go 1980s would the banks have made such a deal.

My heart sank when we took on that burden. It tied our hands and deprived us of the flexibility to try out new ideas. The company was now so heavily leveraged that there would be no money available for growth or innovation.

The task of consolidating Starbucks and Peet’s proved more difficult than we had imagined. Despite a shared preference for dark-roasted coffee, our company cultures clashed. While Starbucks’ people felt gratitude and respect for Peet’s legacy, Peet’s people feared an unknown Seattle upstart coming to swallow them up. What’s more, the acquisition distracted management’s attention. For most of 1984, the managers of Starbucks were flying back and forth between San Francisco and Seattle. I myself went there every other week to oversee Peet’s marketing and retail operations.

Some Starbucks employees began to feel neglected. In one quarter, they didn’t receive their usual bonus. They went to Jerry with a request for more equitable pay, for benefits, specifically for part-timers, and for a reinstatement of their bonuses. But his focus was elsewhere and he didn’t respond. Angry employees from the plant eventually circulated a petition to invite the union in. Nobody in management realized how widespread and deep the discontent was. Retail employees seemed satisfied, and since they outnumbered plant workers, Jerry figured they would vote to keep the union out. But when the day came for the official tally, the union won by three votes.

Jerry was shocked. The company he had founded, the company he loved, no longer trusted him. In the months that followed, his heart seemed to go out of it. His hair grew grayer. The company lost its esprit de corps.

The incident taught me an important lesson: There is no more precious commodity than the relationship of trust and confidence a company has with its employees. If people believe management is not fairly sharing the rewards, they will feel alienated. Once they start distrusting management, the company’s future is compromised.

Another important thing I learned during that difficult time was that taking on debt is not the best way to fund a company. Many entrepreneurs prefer borrowing money from banks because doing so allows them to keep control in their own hands. They fear that raising equity by selling shares will mean a loss of personal control over the operation. I believe that the best way for an entrepreneur to maintain control is by performing well and pleasing shareholders, even if his or her stake is below 50 percent. That risk is far preferable to the danger of heavy debt, which can limit the possibilities for future growth and innovation.

In hindsight I can say it was fortunate that I learned those lessons when I did. In those days, I had no idea I would ever head any company, let alone Starbucks. But because I saw what happens when trust breaks down between management and employees, I understood how vitally important it is to maintain it. And because I saw the harmful effects of debt, I later made the right choice to raise equity instead. These two approaches became critical factors in the future success of Starbucks.

YOU’VE PROVED IT WORKS, NOW LET’S DROP IT

In many companies, mid-level managers and even entry-level employees become impassioned evangelists for risky, bold ideas. It’s important that managers listen to those ideas and be willing to test them and implement them—even if the CEO is skeptical. I learned this truth first as an employee of Starbucks in 1984 and later as CEO. As boss, if you close your ears to new ideas, you may end up closing off great opportunities for your company.

It took me nearly a year to convince Jerry to test the idea of serving espresso. Preoccupied with the Peet’s acquisition and concerned about changing the core nature of Starbucks, he didn’t consider it a high priority. My frustration got more intense with each passing month.

Finally, Jerry agreed to test an espresso bar when Starbucks opened its sixth store, at the corner of Fourth and Spring in downtown Seattle, in April of 1984. This was the first Starbucks location designed to sell coffee as a beverage as well as coffee beans by the pound. It was also the company’s first downtown location, in the heart of Seattle’s business district. I was certain Seattle’s office workers would fall in love with espresso bars the same way I had in Milan in 1983.

I asked for half the 1,500-square-foot space to set up a full Italian-style espresso bar, but I got only 300 square feet. My great experiment had to be crammed into a small corner, behind a stand-up bar, with no room for tables or chairs or lines, and only a tiny counter space to hold milk and sugar. Although I was forced to realize my dream on a far smaller scale than I had planned, I was sure that the results would bear out the soundness of my instincts.

We didn’t plan any pre-opening marketing blitz, and didn’t even put up a sign announcing Now Serving Espresso. We decided to just open our doors and see what happened.

On that April morning in 1984, unseasonably cool, there was drizzle in the air, but it wasn’t raining hard. The plan was to open the store at 7 A.M., two hours earlier than usual. I arrived at around 6:30 and looked anxiously out the floor-to-ceiling windows at the streets. Only the most devoted office workers were striding up the steep slopes of downtown Seattle streets at this hour.

I began pacing around inside the store, and to keep myself occupied, helped with last-minute preparations and rearranging. On the left stood our usual whole-bean counter, stocked with bins of coffee. Behind it, a coffee expert in a brown Starbucks grocer’s apron checked his metal scoop, his scale, and his grinding machine. He verified that each of the bin drawer labels correctly indicated its contents and readied a row of rubber stamps that would be used to mark each bag of coffee sold with its varietal name. He straightened the mugs and coffeemakers and tea canisters on their shelves along the wall, products already familiar to Seattle’s Starbucks fans.

In the right rear corner of the store, my experiment was about to begin. Just like baristas in Milan, two enthusiastic employees were working a gleaming chrome machine pulling shots of espresso and practicing their newly acquired skill of steaming milk to a foam for cappuccinos.

At 7 A.M. sharp, we unlocked the door. One by one, curious people began walking in on their way to their offices. Many ordered a regular cup of coffee. Others asked about the unfamiliar espresso drinks listed on the Italian menu. The baristas were jazzed about the new drinks and enjoyed explaining what each contained. They recommended the drink I had discovered in Verona, one that many customers had never heard of: caffè latte, espresso with steamed milk. As far as I know, America was first introduced to caffè latte that morning.

I watched several people take their first sip. As I had, most opened their eyes wide, responding first to the unaccustomed burst of intense flavor. They hesitated, then sipped again, savoring the sweet warmth of the milk. I saw smiles as the full richness of the drink filled their mouths.

The pace quickened during the early morning rush, and then tapered off. It was awkward serving people in the cramped back corner of a store. Customers jammed into that small space on the right while the retail counter stood empty. If that store had been a ship, it would have capsized.

From the minute we opened, this much was clear to me: Starbucks had entered a different business. There could be no turning back.

By closing time, about 400 customers had passed through the door—a much higher tally than the average customer count of 250 at Starbucks’ best-performing bean stores. More important, I could feel the first ripples of that same warm social interaction and engaging artistry that had captivated me in Italy. I went home that day as high as I’ve ever been.

As weeks went on, business grew, almost all on the beverage side. Within two months, the store was serving 800 customers a day. The baristas couldn’t make espressos fast enough, and lines began snaking out the door onto the sidewalk. Whenever I stopped by to check on the progress of my experiment, customers came up to me, eager to share their enthusiasm. The response was overwhelming.

The Fourth and Spring store became a gathering place, and its atmosphere was electric. I thrived on it. So did the small cohort of Starbucks people who had supported the idea, people like Gay Niven, a merchandise buyer at Starbucks since 1979, and Deborah Tipp Hauck, whom I had hired in 1982 to manage a store.

Here were the test results I was looking for. With the success of the first espresso bar, I began to imagine many further possibilities. We could open coffee stores around the city, all dedicated to serving espresso drinks. These would become not only a catalyst but also a vehicle for introducing a new, broader base of customers to Starbucks coffee.

Surely, I thought, the popularity of Fourth and Spring would overcome any doubts Jerry Baldwin still had. He would see as vividly as I did the great opportunity that had arisen to take Starbucks to a whole new level.

Once again, my bubble burst.

To Jerry, the very success of that store felt wrong. Although I continue to have enormous respect for him, Jerry and I viewed the coffee business, and the world, differently. To him, espresso drinks were a distraction from the core business of selling exquisite arabica coffee beans at retail. He didn’t want customers to think of Starbucks as a place to get a quick cup of coffee to go.

To me, espresso was the heart and soul of the coffee experience. The point of a coffee store was not just to teach customers about fine coffee but to show them how to enjoy it.

I must have seemed a real nuisance to Jerry during the months following the Fourth and Spring opening. Each day I would rush into his office, showing him the sales figures and the customer counts. He couldn’t deny that the venture was succeeding, but he still didn’t want to go forward with it.

Jerry and I never had an argument, throughout the entire course of our professional relationship. But we both recognized that we had reached an impasse, that our disagreement was not over merely a new twist on business, but over what could potentially represent a sea change for the company. Shrewd as he was, he knew there was a fire burning inside me, a fire there was no way to put out.

After weeks of trying to convince him, I strode into Jerry’s office one day, resolved to have a conclusive discussion about the issue.

“The customers are telling us something,” I said. “This is a big idea. We’ve got to keep moving on it.”

“We’re coffee roasters. I don’t want to be in the restaurant business,” he said, wearily, realizing we were going to have yet another run-through of this topic.

“It’s not the restaurant business!” I insisted. “We’re giving people a chance to enjoy our coffee the way it’s supposed to be prepared.”

“Howard, listen to me. It’s just not the right thing to do. If we focus too much on serving coffee, we’ll become just another restaurant or cafeteria. It may seem reasonable, each step of the way, but in the end, we’ll lose our coffee roots.”

“But we’re reconnecting with our coffee roots!” I argued. “This will bring more people into our stores.”

Seeing my determination, Jerry sat silently at his desk for a few minutes, his arms folded in front of him, until he finally offered:

“Maybe we can put espresso machines in the back of one or two other stores.”

“It could be so much bigger than that,” I repeated, knowing that if I accepted that concession, it would be the farthest I would ever be able to take the company.

“Starbucks doesn’t need to be any bigger than it is. If you get too many customers in and out, you can’t get to know them the way we always have.”

“In Italy, the baristas know their customers,” I answered.

“Besides, we’re too deeply in debt to consider pursuing this idea. Even if we wanted to, we couldn’t afford to.” He stood up and prepared to leave for home, but seeing my reluctance to end the conversation, added firmly: “I’m sorry, Howard. We aren’t going to do it. You’ll have to live with that.”

I was depressed for months, paralyzed by uncertainty. I felt torn in two by conflicting feelings: loyalty to Starbucks and confidence in my vision for Italian-style espresso bars.

I was busy enough with my everyday work, flying back and forth to San Francisco and finding ways to consolidate the operations of the two companies, that I could have distracted myself and just dropped the idea. But I refused to let it die. The espresso business felt too right, and my instincts about it ran too deep to let it go.

One weekend, around that time, when I went to a downtown athletic club for my usual game of Sunday basketball, I was paired up with a wiry, muscular blond guy, about my age. He was two inches taller than my own six feet two, and a good player.

When the game was over, we started talking, and he introduced himself as Scott Greenburg. He told me he was a lawyer with a big firm in town. After he learned what I did, he said he loved Starbucks coffee. So I began to bring a pound of coffee to the games for him every now and then. We met occasionally for beers, and over time, I found myself sharing some of my frustrations with him.

Scott, as it happened, was a corporate lawyer, whose job it was to advise companies on many matters, including private placements and public stock offerings. When I told him I was thinking of going independent and opening espresso bars, he said he thought investors might be interested.

Gradually, in talking over my ideas with Scott and Sheri, I realized what I had to do. This is my moment, I thought. If I don’t seize the opportunity, if I don’t step out of my comfort zone and risk it all, if I let too much time tick on, my moment will pass. I knew that if I didn’t take advantage of this opportunity, I would replay it in my mind for my whole life, wondering: What if? Why didn’t I? This was my shot. Even if it didn’t work out, I still had to try it.

I made up my mind to leave Starbucks and start my own company. My idea was to open stores that would serve coffee by the cup and espresso drinks, concentrating on high-traffic downtown locations. I wanted to re-create the romance and artistry and community I had seen in Italy.

It took several months of planning, but I finally made the move. Knowing how frustrated I had become, Jerry and Gordon supported the idea. They let me stay on in my job and at my office until I was ready to move, in late 1985.

In some respects, leaving to start my own company took a lot of courage. Just as I made up my mind, we found out that Sheri was pregnant. Without my salary, we would have to live on her income until I could get the new company up and running. She was willing to go back to work soon after the baby was born in January, but I hated the fact that, because of my decision, she had no choice.

But at some level, I felt I’d been preparing for this step my entire life. Ironically, it ran counter to the values my parents had taught me. From my dad, I learned that quitting a job causes instability and disruption in the family. My mother’s constant refrain was: “You have a good job. Why quit?”

But I saw the move as consistent with my life’s dream, my earliest desires to do something for myself and for my family, to achieve something unique, to be in control of my own destiny. The insecurity, the desire for respect, the burning need to rise far above the circumstances of my parents’ struggles all came together in that defining moment.

My close friend Kenny G later told me about a similar experience in his life. In the 1980s he was in an established band, with a secure position and income. (This was long before he became famous as a jazz saxophonist.) But he realized that he would have to leave the band if he was ever to find his own sound. Musically speaking, he went out and did exactly that. If he hadn’t, today he’d just be a saxophone player in some little-known band.

What distinguishes the talented person who makes it from the person who has even more talent but doesn’t get ahead? Look at the aspiring actors waiting tables in New York, as an example: Many of them are probably no less gifted than stars like Robert DeNiro and Susan Sarandon.

Part of what constitutes success is timing and chance. But most of us have to create our own opportunities and be prepared to jump when we see a big one others can’t see.

It’s one thing to dream, but when the moment is right, you’ve got to be willing to leave what’s familiar and go out to find your own sound. That’s what I did in 1985. If I hadn’t, Starbucks wouldn’t be what it is today.