CHAPTER 8
If It Captures Your Imagination, It Will Captivate Others

Whatever you can do,
or dream you can, . . . begin it.
Boldness has genius,
power and magic in it.

—GOETHE

For five years, from 1987 to 1992, Starbucks remained a privately held company. I was able to learn my job and grow into it outside the glaring spotlight that is cast on publicly traded companies. With the support and approval of my investors, and ultimately the confidence of employees, we pushed ahead on many fronts at once: national expansion, employee benefits, investing in the future, and management development.

The following chapters describe what we accomplished on each of these fronts and recount the important lessons we learned during Starbucks’ formative years, when our culture was being shaped. It was a time of many debates, of honing our core values, of standing firm on some issues and learning to compromise on others.

SPECIALTY COFFEE IN A

MEAT-AND-POTATOES TOWN

Perhaps the gutsiest, and possibly the riskiest, move we made during this period was our entry into the Chicago market. In hindsight, it’s hard to believe we took on such a challenge so early in the development of Starbucks.

The idea had actually originated at Il Giornale, even before the marriage to Starbucks. Even though at that point we had only two coffee bars in Seattle and one in Vancouver, British Columbia, I was eager to prove the idea could work in cities across North America. A crucial test would be to see if people in other cities would be receptive to the taste of Starbucks coffee, which was stronger, richer, and more robust than they were used to. Would our retail stores become daily gathering places like those I had seen in Italy? If this combination was going to catch on nationwide, we were going to have to test the idea far from home, and the sooner the better.

It probably would have been more prudent to delay the expansion when the Starbucks acquisition opportunity came up. But even when I was absorbed in raising money for that deal, I refused to drop the Chicago plan. Once Starbucks and Il Giornale merged, it would be even more critical to establish that growth would be feasible outside Seattle. My objective was a national company, and I needed to know what the barriers were to attaining it.

A number of business experts made various arguments against opening stores in Chicago. Tiny Il Giornale didn’t have the infrastructure to support such a major move. As Chicago was 2,000 miles away, it was logistically hard to supply with a perishable product like fresh-roasted coffee. And how could we guarantee the appeal of top-quality coffee in the heartland of Folger’s and Maxwell House? Chicagoans, I was told, would never drink dark-roasted coffee. For take-out, they preferred the coffee they got at the White Hen Pantry, the local convenience store chain.

If I had listened to the prevailing wisdom, I would have waited till the acquisition was complete, built up a strong home base in Seattle, and then gradually expanded to nearby cities, specifically Portland and Vancouver, where there was a demonstrated appetite for specialty coffee.

But I wanted to go to Chicago. It’s a city with a cold climate, great for hot coffee. The downtown area is much bigger than Seattle’s. It’s a city of neighborhoods, which usually welcome local gathering places. Before 1971 Seattlites didn’t know anything about dark-roasted coffee, either. Why couldn’t Chicagoans learn to love it even more quickly?

As it happened, an enthusiastic real estate broker in Chicago had three or four locations to show us, and Jack Rodgers and I went to check them out. An early investor in Il Giornale, Jack was a veteran in the franchising and restaurant business, and also a native Chicagoan. With his fatherly affection and sentimental heart, he had become a friend and adviser, a consultant we could pay only in what seemed to be worthless stock. He was an early member of the Il Giornale board of directors and became an executive of the company when we purchased Starbucks. He remained a valued member of our executive management team for ten years.

Because Il Giornale had little money, Jack and I shared a hotel room. We had not yet completed the Starbucks acquisition. The next day, as we made our way through Chicago’s crowded streets on our way to look at sites, I said, “Jack, five years from now, every one of these people is going to be walking around holding a Starbucks cup.”

He looked at me and said, laughing, “You’re crazy.”

But I could just see it.

We eventually signed a lease for a prime downtown location, near the corner of West Jackson and Van Buren, one block from Sears Tower. I asked Christine Day to take care of the logistics. She opened the Yellow Pages and started looking up freight companies.

We didn’t know it couldn’t be done, so we just did it.

We opened that first store, as Starbucks, in October of 1987—the very day the stock market crashed. But it was a disaster for other reasons. I didn’t realize that to be successful in Chicago’s Loop we needed to open into a lobby. Because the winters are so cold and windy, no one wants to walk outside to get a cup of coffee. Our store faced the street. A few years later, we closed it down, one of the few times we’ve made an error in site selection. Yet in hindsight, I think shutting it down probably was the real mistake. If we had had the patience, today that site would have proven a winner.

We jumped feet first into Chicago, so in love with our product that we couldn’t imagine that everybody else wouldn’t love it, too. Over the next six months, we opened three more stores in the area. But by the time the long winter was over, we realized that Chicagoans were not exactly breaking down our doors to buy our coffee. And there were other problems. Costs of goods were higher there. Many of the early employees weren’t buying into either our coffee or our dream. And many customers just didn’t get it.

Over the next two years, we lost tens of thousands of dollars in Chicago. Starbucks’ directors began asking some tough questions, and at first I didn’t really have good answers. I knew the stores would eventually work, but how could I convince them?

When we tried to attract venture capitalists in late 1989, some potential investors saw us floundering in Chicago and challenged the whole premise of my growth plan. They wondered if Starbucks was at the front of a long-term trend or if it was a fad; until we succeeded in Chicago, we couldn’t prove that our idea was transportable throughout North America. We did manage to raise the money we needed, but at a far lower price per share than we had hoped for.

It wasn’t until 1990, after we hired Howard Behar to run our retail operations, that Chicago began to turn the corner. The solution included hiring experienced managers and raising the prices we charged to reflect higher rents and labor costs. What really solved the problem, though, was simply time. In Chicago, loyal customers were saying the same thing as in Seattle; there just weren’t enough of them. By 1990, though, a critical mass of customers had caught on to our taste profile. Many switched from our drip coffee, which was stronger than they were used to, to cappuccinos and caffè lattes, which tend to appeal more often on first taste. As they got to know us, many Chicagoans gradually learned to love dark-roasted coffee.

Today, Starbucks has become so much a part of the landscape and culture of Chicago that a lot of residents think it’s a local company.

DISPROVING THE DOUBTERS

As time went on and we reached each goal, our self-confidence grew. We accelerated the pace of store openings, aiming to outdo ourselves each year. On a base of 11 stores, we opened 15 new stores in fiscal 1988. For the following year, we figured we could open 20 more. When we realized our targets weren’t as hard to hit as they looked, we challenged ourselves to harder ones. We started opening more stores annually than in the original plan: 30 in fiscal 1990, 32 in 1991, 53 in 1992—all company-owned. Each time we achieved a big dream, we were already planning for a bigger one.

Yet this self-assurance was always counterbalanced by a measure of fear. With our greater visibility, I became increasingly afraid of waking up the sleeping giants, the big packaged food companies. If they had begun to sell specialty coffee early on, they could have wiped us out. But with every passing month, quarter, and year, with every new market we entered, I gained confidence that it was going to get harder and harder for them to displace us. With a business based on the next price discount and no retail store experience, they weren’t equipped to establish the same sort of close relationship with the customer that we had.

I also worried about competition from other specialty coffee companies. While many were poor operators or franchisers, others roasted good coffee, owned their own stores, and enjoyed a strong reputation in their local regions. If one of them had developed a hunger to go national and obtained the capital to do so, it could have presented a serious challenge to us. But by the time any of them decided to grow, it was too late.

Our competitive strategy was to win customers by offering the best coffee and customer service and an inviting atmosphere. We tried to be first in each market if we could, but then to succeed by playing fair, with integrity and high principles.

Until 1991, we confined our expansion to Chicago and the Pacific Northwest, from Portland through Seattle to Vancouver. Our strategy was to gain a foothold in each market and create a strong presence there before we moved to another city.

But even with this regional concentration, we found ourselves beginning to gain a national following through the medium of mail order. Starbucks had started serving customers by mail in the mid-1970s, mostly travelers who had visited one of the stores or people who had recently moved away from Seattle. At first, we just mailed out a simple brochure listing our products. In 1988, we developed our first catalogue and began expanding our mail-order base to targeted demographic groups. In 1990, we invested in a small phone and computer system to set up our 800 number. That allowed us to extend our one-on-one discussions to some of our most knowledgeable customers. Before we had national retail distribution, mail order was a wonderful vehicle to nurture loyal customers and to build awareness of Starbucks across America. Since they had to make a special effort to obtain our coffee, mail-order buyers were often the most loyal customers, and it made sense to open stores in cities and neighborhoods where they were clustered.

By 1991, we were ready for the next big market entry, which, we agreed, had to be California. With its host of neighborhood centers and openness to high-quality, innovative food, it was an attractive opportunity. Although it’s a huge state with diverse regions, we viewed it as one market. Given the size of its population, we could achieve economies of scale if we opened many stores at once. In addition, it was close to Seattle and therefore relatively easy for us to reach and supply.

Still, we debated the best way to make our entry into California. Some wanted to start with San Diego; I voted for Los Angeles. But L.A. is too sprawling and complex, I was warned. People don’t walk, they drive. That will hurt us. Others questioned whether Starbucks could even succeed in a warm climate. Would people there really choose to drink hot coffee?

Despite the reasonable arguments made against the move, I finally put a stake in the ground and said: “We’re going to L.A.”

In the building of a retail brand, you have to create awareness and attract people’s favorable attention. You have to become in vogue. You need opinion leaders who naturally endorse your product. With its status as a trendsetter and its cultural ties to the rest of the country, Los Angeles was the perfect place for Starbucks. If we could become the coffee brand of choice in Hollywood, it would not only help our expansion into the rest of California but also serve as a jumping-off point to other markets around the country.

Thanks to careful planning and a bit of luck, that is exactly what happened. L.A. embraced us immediately. Before we opened our first store, the Los Angeles Times named us the best coffee in America. Unlike our experience in Chicago, we never had to struggle with a learning curve. Almost overnight, Starbucks became chic. Word of mouth, we discovered, is far more powerful than advertising.

San Francisco was a harder market to enter. Under the terms of our acquisition of Starbucks in August 1987, we had agreed not to open stores in northern California for four years, to avoid competing with Peet’s. I wrote an impassioned letter to Jerry Baldwin, who still owned Peet’s, asking if we couldn’t explore a way to join forces and cooperate rather than compete. But he said no.

By early 1992, we were ready to enter San Francisco but faced another problem: That city had a moratorium on converting stores to restaurant-related uses in certain prime urban neighborhoods.We could sell coffee beverages and pastries for our customers to consume at stand-up counters but could not offer seating in locations that had formerly been used by general retailers. We took a risk, opting to open stores in visible locations on prime shopping streets. Arthur Rubinfeld, then an outside real estate broker, along with other café owners, convinced the City Council to add a new classification to the zoning code to allow “beverage houses” with tables and chairs. Once the code was changed, many cafés opened, reenergizing the neighborhood street life in several communities in the city of San Francisco.

As our growth became more visible, our biggest doubters were others in the specialty coffee business. Many of them assured us that our plans were unworkable. Even Alfred Peet, a longtime admirer of Starbucks, predicted that the excellence of our coffee would suffer if we attempted to sell it nationwide.

One reason they doubted us was the conventional wisdom that the whole-bean coffee business would always have to remain local, with stores close to the roasting plant. If you shipped fresh-roasted coffee beans to stores half a continent away, most people believed, they would lose their freshness and flavor.

In 1989, we figured out an answer to what seemed an impossible conundrum. We began using FlavorLock bags, a kind of vacuum packaging with a one-way valve to allow carbon dioxide gases to escape without allowing harmful air and moisture in. This device, used by Starbucks in the early 1980s for wholesale customers only, enabled us to preserve freshness by putting coffee in five-pound silver bags right after roasting and sealing in the flavor before shipping. Once the bag is opened, the fresh flavor begins to decline, so the coffee must be sold within seven days or we donate it to charity.

In retrospect, the reintroduction of FlavorLock bags was a key decision that made our expansion strategy feasible. It allowed us to sell and serve coffee with the highest freshness standards even in stores thousands of miles from our roasting plant. It meant we did not need to build a roasting plant in every city we entered. Even our Seattle stores, which are only minutes from the roasting plant, receive fresher-tasting coffee because of these bags.

Every time we open in a new city, someone predicts we’ll fail. So far, they’ve been mistaken.

For me, the thrill of business is in the climb. Everything we try to achieve is like climbing a steep slope, one that very few people have managed to scale. The more difficult the climb, the more gratifying the effort put into the ascent and the greater the satisfaction upon reaching the summit. But, like all dedicated mountain climbers, we’re always seeking a higher peak.

THE THIRD PLACE

I like to think of myself as a visionary, but I have to admit that the whole specialty coffee phenomenon grew a lot bigger and a lot faster than I had ever imagined.

Nobody believed that espresso would jump out of its narrow niche and become so popular and widely accepted a drink.

Nobody foresaw that coffee bars and espresso carts would appear on street corners and in office lobbies all across America, with more opening every month.

Nobody imagined that even fast-food places and gas-station convenience stores would hang big “espresso” signs in their windows to lure in customers.

When an innovative idea for a retail store makes history by creating a whole new paradigm, it’s rewarding for anyone who’s had the foresight to recognize its merits early on. When it creates a new social phenomenon, when it gives rise to a new vocabulary that finds its way onto TV talk shows and sitcoms, and ultimately becomes part of the American lexicon, when it becomes a defining element of the culture and a decade, it’s gone far beyond being simply the timely brainstorm of a single entrepreneur or a small team.

Starbucks’ success in so many different types of cities eventually forced me to ponder: What is it that people are responding to? Why did Starbucks, and similar cafés, strike a chord in so many disparate places? What need are we really fulfilling? Why do so many customers willingly wait in long lines at Starbucks stores? Why do so many linger afterward, even with a to-go cup in their hands?

At first, we figured it was simply because of the coffee.

But as time went on, we realized that our stores had a deeper resonance and were offering benefits as seductive as the coffee itself:

A taste of romance. At Starbucks stores, people get a five-or ten-minute break that takes them far from the routine of their daily lives. Where else can you go to get a whiff of Sumatra or Kenya or Costa Rica? Where else can you get a taste of Verona or Milan? Just having the chance to order a drink as exotic as an espresso macchiato adds a spark of romance to an otherwise unremarkable day.

An affordable luxury. In our stores you may see a policeman or a utility worker standing in line in front of a wealthy surgeon. The blue-collar man may not be able to afford the Mercedes the surgeon just drove up in, but he can order the same $2.00 cappuccino. They’re both giving themselves a reward and enjoying something world class.

An oasis. In an increasingly fractured society, our stores offer a quiet moment to gather your thoughts and center yourself. Starbucks people smile at you, serve you quickly, don’t harass you. A visit to Starbucks can be a small escape during a day when so many other things are beating you down. We’ve become a breath of fresh air.

Casual social interaction. One of the advertising agencies that pitched for our business interviewed Los Angeles–area customers in focus groups. The common thread among their comments was this: “Starbucks is so social. We go to Starbucks stores because of a social feeling.”

Yet, strangely, the agency discovered that fewer than 10 percent of the people they observed in our stores at any given time actually ever talked to anybody. Most customers waited silently in line and spoke only to the cashier to order a drink. But somehow, just being in a Starbucks store, they felt they were out in the world, in a safe place yet away from the familiar faces they saw every day.

In America, we are in danger of losing the kind of casual social interaction that is part of the daily routine for many Europeans. In the 1990s, coffee bars became a central component of the American social scene in part because they fulfilled the need for a nonthreatening gathering spot, a “third place” outside of work and home. Ray Oldenburg, a Florida sociology professor, wrote most eloquently of this need in his book, The Great Good Place (1989).

Oldenburg’s thesis is that people need informal public places where they can gather, put aside the concerns of work and home, relax, and talk. Germany’s beer gardens, England’s pubs, and French and Viennese cafés created this outlet in people’s lives, providing a neutral ground where all are equal and conversation is the main activity. America once had such spots, in its taverns, barber shops, and beauty parlors. But with suburbanization, they are vanishing, replaced by the self-containment of suburban homes. As Oldenburg observes:

Without such places, the urban area fails to nourish the kinds of relationships and the diversity of human contact that are the essence of the city. Deprived of these settings, people remain lonely within their crowds.

However well they seem to have stepped into the role, though, Starbucks stores are not yet the ideal Third Place. We don’t have a lot of seating, and customers don’t often get to know people they meet there. Most just grab their coffee and depart. Still, Americans are so hungry for a community that some of our customers began gathering in our stores, making appointments with friends, holding meetings, striking up conversations with other regulars. Once we understood the powerful need for a Third Place, we were able to respond by building larger stores, with more seating. In some stores, we hire a jazz band to play on weekend nights.

While my original idea was to provide a quick, stand-up, to-go service in downtown office locations, Starbucks’ fastest growing stores today are in urban or suburban residential neighborhoods. People don’t just drop by to pick up a half-pound of decaf on their way to the supermarket, as we first anticipated. They come for the atmosphere and the camaraderie.

The generation of people in their twenties figured this out before the sociologists. As teenagers, they had no safe place to hang out except shopping malls. Now that they are older, some find that bars are too noisy and raucous and threatening for companionship. So they hang out in cafés and coffee bars. The music is quiet enough to allow conversation. The places are well-lit. No one is carded, and no one is drunk. Sometimes a group will gather at a Starbucks before heading off to a movie or other entertainment; sometimes they just meet to talk.

The atmosphere obviously works for romance, as well. We’ve received dozens of letters from couples who met at Starbucks, whether during the morning rush or in the lazy evening hours. One couple even wanted to get married at a Starbucks store.

Other trends of the 1990s also nourish the growth of such gathering places. More and more people are working from home offices, telecommuting by phone and fax and modem with distant offices. They go to coffee stores for the human interaction they need on a regular basis. As the Internet becomes increasingly widely used, people spend more time sitting in front of their computers. There’s no interactive relationship with anything but that box. Is it mere coincidence that coffee bars became popular at the same time as the Internet was growing? Many cities, like Seattle, have cybercafés, gathering places for people who love coffee, computers, and socializing.

Back in 1987, none of us could foresee these social trends, and how our stores would accommodate them. What we did, though, was to appeal to the sophistication and wisdom and better nature of our potential customers, providing them the kind of music and atmosphere that we liked for ourselves.

People didn’t know they needed a safe, comfortable, neighborhood gathering place. They didn’t know they would like Italian espresso drinks. But when we gave it to them, the fervor of their response overwhelmed us.

That’s why our expansion—gutsy as it was—succeeded even better than we imagined.

Big opportunities lie in the creation of something new. But that innovation has to be relevant and inspiring, or it will burst into color and fade away as quickly as fireworks.