CHAPTER 16
Seek To Renew Yourself Even When You’re Hitting Home Runs

To stay ahead, always have your
next idea waiting in the wings.

—ROSABETH MOSS KANTER

When you’re failing, it’s easy to understand the need for self-renewal. The status quo is not working, and only radical change can fix it.

But we’re seldom motivated to seek self-renewal when we’re successful. When things are going well, when the fans are cheering, why change a winning formula?

The simple answer is this: Because the world is changing. Every year, customers’ needs and tastes change. The competition heats up. Employees change. Managers change. Shareholders change. Nothing can stay the same forever, in business or in life, and counting on the status quo can only lead to grief.

At Starbucks, we had always aimed to build a company healthy enough to sustain itself for many years to come. We discovered along the way that sustainability is directly linked to self-renewal. Even when life seems perfect, you have to take risks and jump to the next level, or you’ll start spiraling downhill into complacency without even realizing it.

In 1994, Starbucks undertook the second paradigm shift in its history. The first was adding the beverage to the bean sales, beginning in 1984. After that we weren’t selling just coffee but also the coffee experience. The second shift came when we moved outside the four walls of our stores and invented new ways to enjoy the flavor of coffee, in bottled beverages, ice cream, and other innovative products.

This wasn’t a natural or obvious move, and it wasn’t one that was forced upon us. It was a deliberate attempt to spring ahead of the curve, to create a future no one would have imagined, while retaining our core values.

IT TAKES A FRESH OUTLOOK TO

REINVENT AN AGE-OLD PRODUCT

Coffee has been around for a thousand years. Could it possibly be reinvented? This wasn’t a question we at Starbucks spent much time thinking about in the early years. We figured we already had the best coffee around.

Yet any product-oriented company has to keep reinventing its core product if it expects to prosper, let alone survive. Ask Andy Grove of Intel, who obsoletes a whole generation of personal computers every eighteen months when he develops a new microprocessor chip.

We had devoted a lot of time to thinking about how to refresh and invigorate various elements of the Starbucks experience, whether store design, merchandise, espresso drinks, coffee blends, even new products like our jazz CDs. That’s a conventional retailing approach, however creative a twist we put on it.

We consciously reinvented the coffee experience in America, but it never occurred to us to reinvent coffee itself. It took an immunologist to convince us to try it.

In 1988, Don Valencia began experimenting with coffee. Why he picked coffee, I’ll never know. But we’re lucky he did.

Trained in cell biology at University of California at Davis, Don had founded and run a biomedical business in Sacramento called Immuno Concepts, to develop tests to diagnose autoimmune diseases, such as lupus and rheumatoid arthritis. In his biomedical research, Don had explored the delicate task of isolating molecules within human cells without destroying them.

One day, on a whim, literally at his kitchen table, he applied some of the same techniques to coffee. He discovered that he was able to capture its flavor and aroma in a concentrated extract.

Although Don himself wasn’t even a coffee drinker, his neighbors were. Every morning at 7:30, he would wake them up and put two wine glasses of coffee on their fence. One contained freshly brewed coffee; the other was made from his scientifically prepared coffee extract.

“Which is the control?” Don would ask them. He kept refining the technique until they couldn’t distinguish the two.

When Christmas came, Don’s wife suggested he bring along some of his coffee extract as a gift for her parents, who live in Seattle. During their visit, Don’s wife took him to the Starbucks store in Pike Place Market. It was his first exposure to Starbucks.

Half-embarrassed, Don pulled out a sample of the extract and asked the barista to mix it with hot water and have a taste. The baristas were pretty skeptical, but they agreed to try it. They made his coffee, smelled it, and took a careful sip.

“It’s okay,” they said. “But it’s nothing like Starbucks.”

Don remembers walking out to the street, feeling foolish and deflated. His wife wanted to know what had happened to her latte, which he had forgotten to order. When he returned to the store, several of the baristas were still examining his cup of coffee.

“You said it wasn’t very good,” Don said.

“Well,” they admitted, “it’s actually pretty good, considering what it is. What kind of coffee did you make it from?”

Don had been using beans from a different company. So they sold him a pound of one of our best-selling coffees, Sumatra. He promised to try to prepare an extract from it and send it back to them.

Excited, he returned to Sacramento and worked on the Starbucks Sumatra. When he got it right, he sent a sample to the Pike Place store by overnight express.

Two days later, Don got a call from one of our coffee specialists. “I tasted this,” he said, “and it’s revolutionary. I don’t know if you realize what you’ve got here.”

The next day, he got a call from Dave Olsen. “This is surprisingly good,” Dave told him. “If you’re ever in Seattle, I’d love to sit down and talk to you.”

The next day he got a call from me. I told him I had to meet him as soon as possible.

The day before, Dave had come into my office with a cup of coffee that he told me was Sumatra. When he insisted I try it, I figured he had discovered some new estate.

“How do you like it?” Dave asked

“It’s great,” I said. “Is it a new arrival?”

“Nope,” he said. “It’s from the same lot we’re selling in the stores, but it’s made from an extract!”

He had fooled me. The coffee in my cup tasted 100 percent as good as fresh-brewed Sumatra. He led me into his tasting room and showed me how it was made.

A few days later, I flew to Sacramento to meet Don Valencia. He has intense brown eyes and an infectious boyish excitement. We fed off each other’s energy, like two kids getting ready to build the world’s biggest fort. This scientist had the key to Starbucks’ future, right there in his kitchen. I proposed that he form a joint venture with Starbucks.

Getting him to join forces with us wasn’t easy, for he had made a career in the medical field and didn’t want to leave it. Also, the timing was wrong for Starbucks. In 1990, we were just beginning to make money. We were in the midst of preparing for another round of private financing and still trying to fix problems in Chicago. The Starbucks board wanted me to concentrate on retail expansion, which was critical to the success of the company.

The board hasn’t often turned down my proposals, but they rejected the idea of a joint venture with Don Valencia. I was terribly disappointed, for I could envision a raft of future products this technology would make possible. But they thought his idea would drain a lot of time and money from Starbucks’ top priority, which was to expand rapidly before other companies started copying us.

Don was more philosophical when he heard the news; his company was growing and taking all of his time. But in the years that followed, we kept in touch with each other. We sent him lots of coffee and a commercial espresso machine from one of our stores, and Don came to visit us in Seattle every Christmas. Dave and I got to know him well.

Then in spring of 1993, we made a formal overture. By then, Starbucks had grown to nearly $150 million in sales, with 250 stores in 10 regions. The company had gone public and was on much sounder financial footing. We could finally afford to set up our own in-house research and development facility.

Even then, Don wasn’t a shoo-in. If you’re going to hire an R & D guy, people advised me, hire a world-class R & D expert. But an immunologist? It was hard to justify how someone from the field of immunology could add value in a coffee company’s pursuit of new products.

But I knew instinctively that Don’s lack of experience in coffee was one of the factors that made him such an ideal candidate. We didn’t need someone whose gaze was turned toward the past. Nontraditional results are more likely to arise from someone who can think out of the box. You’re not likely to find such a person by looking inside the box.

Don had recently turned forty and was, in fact, contemplating a change of career. But he did not want to join us to work on just one product. He said he would accept Starbucks’ offer only if he could develop a long-term strategic vision for technology and support it with a lab and researchers within a new department. After a lot of discussion, Don finally arrived in 1993 as vice president for research and development.

The extract that Don first developed in his Sacramento kitchen has opened new worlds for Starbucks. It enabled us to capture the unmistakable taste of fresh-brewed coffee as the key ingredient in a wide range of new products, including coffee-flavored beer, coffee ice cream, and ready-to-drink bottled beverages.

In 1996 we invested several million dollars to build a Technology Resource Application Center for Don. In a locked-off section on the seventh floor of our building, he’s equipped seven labs and hired thirty scientists and technicians who work with such sophisticated technologies as gas chromatography, high-pressure liquid chromatography, and capillary electrophoresis. Ask Don what all that means! Some of the equipment is found only rarely in the top labs in the world.

At the same time, we devoted more than $4 million to a state-ofthe-art pilot plant, set up in our parking garage, to produce the extract and test other new technology. At first we planned it only for small test batches, but as new products caught on quickly, we had to ramp up to commercial production levels.

It was wild: a coffee company, hiring scientists and investing millions in R & D.

It’s a long way from espresso.

It’s a long way from immunology.

What it wasn’t far from was the market.

WHAT IT TAKES TO SHIFT

TO A NEW PARADIGM

For all his scientific brilliance, Don Valencia did not have the background to develop a commercial product on his own. That step required another major move by the company—a partnership that few could fathom at first.

In 1992, I attended a top-secret meeting in Purchase, New York, in the imposing, mahogany-paneled boardroom of PepsiCo. Accompanying me was George Reynolds, then Starbucks’ senior vice president for marketing, who had worked for Frito Lay and Taco Bell for thirteen years and knew Pepsi well.

I approached Pepsi the same way I’ve approached every one of Starbucks’ partnerships: looking, first and foremost, for the right people. We had arranged to meet the then-president of Pepsi-Cola North America, Craig Weatherup. I had half-expected a top executive of a $33 billion company to be formal, detached, impersonal, and bureaucratic, so I was pleasantly surprised when Craig proved to be the very opposite: a hands-on, warm, personable man who genuinely valued the entrepreneurial spirit. Craig and I quickly developed a mutual trust and respect, which later proved vital in cementing the relationship between our companies.

Initially, neither of us had a clue how Pepsi and Starbucks might work together. But I figured there had to be a way to leverage Pepsi’s tremendous distribution power to help move Starbucks out of our retail stores and into a more visible position in the mainstream market. Craig suggested we have a discussion with Pepsi’s new beverage group, which had developed and marketed successful bottled beverages for Lipton and Ocean Spray.

I had discovered, during a trip to Tokyo in 1991, how popular cold, ready-to-drink, coffee-based beverages were in Japan, in both bottles and cans. The Japanese consume $8 billion worth of these drinks a year, about one-third of their coffee consumption. By contrast, this market is only $50 million a year in the United States—so far. Coke had found a ready market in Japan for its Georgia Coffee, and I was certain that if Starbucks could create a better product, it could be a huge success in North America and ultimately the world. I knew we would need a partner with strong national distribution to help us break into this category; who better than Pepsi?

In July 1993, on Don Valencia’s first day at Starbucks, we held our first meeting with Pepsi’s new-beverage group. Don didn’t even have a lab yet, let alone support staff. But when the possibility of a bottled coffee product was proposed, he and our coffee specialist Tim Kern began experimenting immediately.

A few months later, working with the Pepsi R & D group, they had developed a wonderful coffee drink, made from Don’s extract. Its taste was far superior to that of Georgia Coffee or any other cold coffee beverage on the market. We hoped it would be the first of many products with the potential to redefine the experience of coffee drinking in America.

Pepsi was excited, and so were we. We set up a task force, studied the market, and discussed the alternatives. Tiny Starbucks, with annual sales barely over $200 million, sat down with Pepsi and negotiated a fifty-fifty joint venture with a company more than a hundred times its size. Pepsi had huge marketing muscle and one million points of distribution, yet they agreed to cede us a high degree of ownership and control over our brand equity and product formulas.

In August 1994, Pepsi and Starbucks publicly announced the formation of the North American Coffee Partnership, with the goal of creating new coffee-related products for mass distribution, including cold coffee drinks in a bottle or can.

From the outside, the venture may have seemed an odd sideline, with little relevance to Starbucks’ core business, or to Pepsi’s, an unusual experiment unlikely to substantially affect the bottom line of either company. But I viewed it as an earth-jolting paradigm shift, a sign that our business might evolve in unimaginable directions. Our core business was now about to expand to a far wider concentric circle: coffee-based products. That meant leaving the comfortable confines of our stores, where we firmly controlled the quality and the environment, and entering intimidating new channels of distribution, where we were a bit player. It meant creating products that would carry the Starbucks brand name but would not be sold by Starbucks directly. It meant working with joint-venture partners who had a different agenda. It also meant reaching out to far more potential customers than those who came into our stores.

While we all perceived the risks involved, almost no one appreciated the ambiguities and complexities such a relationship would force us to grapple with.

For example, there was considerable debate about the appeal of cold coffee. In Japan, people are accustomed to it, and they even buy it from vending machines. But in America, cold coffee was always regarded as something brackish that deserved to be tossed down the drain.

Others viewed Pepsi and Starbucks as strange bedfellows. Starbucks appeals to sophisticated customers with discriminating tastes, while Pepsi aims to appeal to the broadest consumer base possible. Purists in the coffee business accused us of selling our soul.

In fact, it was straight uphill in the early stages of our relationship, with a clash of cultures that shook people in both companies. The tensions between Pepsi and Starbucks were predictable, if only because we came to the venture for such different reasons. Starbucks was looking to leverage Pepsi’s distribution, while Pepsi wanted to leverage the quality and integrity of Starbucks’ trademark. Because of their company’s huge size, Pepsi people tend to be process-driven and focused on one project at a time, where Starbucks people tend to work on multiple projects simultaneously. Pepsi is so big that one division can be involved in a project that another knows nothing about, as we discovered when Pepsi International announced a joint venture in China with Maxwell House.

But differences can be complementary, as long as each side values what the other can bring to the table. Rather than slug it out until one party or the other won, we resolved our disagreements the hard way, assuming positive intent and aiming for winwin solutions. We learned to celebrate our differences rather than getting frustrated by them, and with time began to get along surprisingly well. I give great credit to Craig Weatherup, now chairman of Pepsi-Cola Company worldwide, Brenda Barnes, president of Pepsi-Cola, Mark Mangelsdorf, general manager of the joint venture, and Brian Sweete, head of marketing, for making the partnership work, because they recognized the long-term value of the joint venture and the Starbucks brand.

As it happens, the joint venture’s first attempt was a failure. Mazagran was a cold, lightly carbonated coffee drink with a name borrowed from the French Foreign Legion posted in Algeria in the nineteenth century. When we test-marketed it in southern California in 1994, it polarized people. Some loved it; others hated it. A lot of customers were willing to try it because of the Starbucks brand name, but Mazagran didn’t get the repeat business we had hoped for. We finally realized, with disappointment, that we had created a niche product, one that would catch on, if at all, only after a slow build.

Pepsi was remarkably patient. If Craig Weatherup and I had not established so forthright a relationship from the start, that episode might have ended it. But we both believed in each other and, obviously, in the capabilities of the partnership.

So we kept pushing until, in 1995, we found a better approach. Frappuccino had been a surprise hit that summer, drawing in tens of thousands of customers who were not normally coffee drinkers, filling our stores in afternoons and in hot months when the coffee business is usually slow. One day, in the midst of an agonizing discussion about the future of Mazagran, I said: “Why not develop a bottled version of Frappuccino?” The Pepsi executives were immediately enthusiastic.

But coming up with the idea was the easy part. Actually getting Frappuccino into a bottle in the supermarket was a challenge. In our stores, Frappuccinos are made in a blender, with crushed ice. They also contain milk, which has a limited shelf life. The first few efforts at a bottled version tasted wrong. It took months of experimentation before our joint venture R & D teams came up with a shelf-stable Frappuccino that tasted as delicious as the blended ones in our stores. When they did, I knew it would be a winner.

We were so confident of our product that we didn’t even test-market it. Pepsi ramped up production as quickly as possible, but even then we could supply only West Coast supermarkets for the summer of 1996.

The response overwhelmed us. Within the first few weeks of introducing bottled Frappuccino, we were selling ten times the quantities we had projected. We couldn’t make it fast enough. Supermarkets kept running out of it, and customers grew frustrated. We had to cancel all marketing support.

Pepsi, too, was blown away. Frappuccino was getting twice the level of trial they had predicted—and more than 70 percent repeat business, well above that of other New Age beverages. Sales of bottled Frappuccino were matching or exceeding early returns on Lipton and Ocean Spray. Finally, we had to withdraw it from the shelves until we could increase our manufacturing capacity.

Bottled Frappuccino was the runaway hit we had been hoping for. It ushered our way into the supermarket and into the ready-to-drink beverage business.

Throughout the summer, we met frequently with the Pepsi people to assess the unexpected surge of demand and the shortage of supply. In September, we jointly decided to invest millions of dollars to simultaneously build three bottling facilities for Frappuccino. It was the largest single investment Starbucks has ever made. With supermarkets continuing to clamor for the product, we planned a summer 1997 date for a nationwide launch. Once again, we set our sights on what seemed like a stretch goal. But we were confident we could make it.

HOW CAN YOU BE AUTHENTIC

YET ALSO INNOVATIVE?

The equity of the Starbucks brand is a priceless asset. Every decision we make has to contribute to its sustainability and differentiation. Yet each time we create a new Starbucks product, we’re weighing a risk against a potentially great reward. If we capture the public imagination with innovative products, Starbucks could become larger than life. But we have to make sure that nothing we do dilutes the integrity of the Starbucks brand.

Creating new products through joint ventures has now become a central part of how we do business. In 1995, we worked with Seattle’s Redhook Ale Brewery to create Double Black Stout, a stout beer with a shot of Starbucks coffee extract in it. It amazed and delighted many of Redhook’s customers. We then moved into another line Starbucks’ founders could never have imagined: coffee ice cream.

In October of 1995, Starbucks ice cream wasn’t even in our business plan. By July of 1996, it was in supermarkets around the country, number one in its category.

Although Howard Behar had been pushing for ice cream for years, it had never seemed to me to be a serious business proposition. But Don Valencia’s extract opened my eyes to the possibility that we could bring authentic Starbucks flavor to a variety of products we had long dismissed as unlikely. So when Harry Roberts, our vice president for merchandising, came to me with an ice cream proposal in August 1995, I agreed to let him invite a few manufacturers to discuss it with us. After a few intriguing meetings, we picked Dreyer’s Grand Ice Cream as a partner because they had nationwide distribution and experience making super-premium ice cream. Dreyer’s was also willing to produce and distribute Starbucks ice cream without co-branding, or putting their name on the ice cream along with ours.

Don Valencia took his coffee extract to Dreyer’s, and their ice cream experts began working with our coffee experts to come up with some flavor profiles.

In September, Dreyer’s president Rick Cronk brought a high-level team to Seattle to meet with us and taste several samples. Like us, the Dreyer’s people were dressed in plaid or striped shirts, and were genial and informal, open and excited. I asked them, “How do you guys stay so thin?”

They laughed and responded, “How do you guys stay calm?”

In a slide presentation they outlined the size of the market opportunity (potentially a $100 million market) and proposed five to six coffee-related flavors of premium ice cream in quarts, as well as two or three novelty items, on a stick. Then they broke out the ice cream: three prototypes they had prepared. It was wonderful, rich and creamy, with the distinct taste of Starbucks dark-roasted coffee.

I flashed a look across the table at Behar and said, “You’re going to get your wish after all.”

It seemed like a big opportunity, good timing, and the right partners. I knew that this product would enhance our brand equity and burnish our image. So I set a goal.

“July Fourth, 1996, nationwide, that’s the target,” I announced. “Super-premium ice cream, better than Ben and Jerry’s, better than Häagen-Dazs. Best of class. Go for it.”

Developing a new product at such high speed with a new partner is fraught with potential difficulties, but our legal department helped us work them out. The final products were of a quality that made both sides proud.

When it hit the supermarkets in April, Starbucks ice cream sales blew off the charts. We introduced five gourmet flavors: Italian Roast Coffee, Dark Roast Espresso Swirl, Javachip, Caffè Almond Fudge, and Vanilla Mocha Swirl, adding Low Fat Latte the following year. During the month of July, before we even completed our national rollout to 10,000 grocery stores, we passed Häagen Dazs as the number-one premium coffee ice cream brand in the United States—with very little promotional expense.

The customers voted yes on both ice cream and bottled Frappuccino. People who had never entered a Starbucks store were trying our products.

We were leveraging the equity of the brand, but in a way that was very risky, one that could either reward us handsomely or do great harm. The compressed timetable added to the potential dangers. Other companies might have declined that gamble.

Did we make the right decisions?

Conventional marketing wisdom says that every brand has its limitations. If you slap it on just anything, it will be cheapened beyond recognition. We put the Starbucks brand only on best-of-class products that take advantage of our recognized expertise in coffee.

Ice cream and Frappuccino are almost certain to become profitable and fast-growing businesses for Starbucks, but that’s only part of the point. We want to attract new customers to Starbucks, and we want it to be known that this company is not sitting on its haunches. New products show that Starbucks the company is dedicated to innovation and self-renewal.

These opportunities were open to us only because we had already validated the brand at retail, through word-of-mouth reputation with consistently high-quality coffee. Once people came to trust the Starbucks brand, we were free to experiment, within a carefully drawn set of parameters. In fact, we’ve recently begun testing whole-bean coffee in supermarkets, an outlet we avoided in the early years because grocery-store coffee was generally, and correctly, regarded as inferior. If we had done this before the Starbucks brand was firmly established, it could have hurt us. But now, we are bringing premium whole-bean coffee to markets too scattered or small to merit a dedicated store. Although no barista is present to explain the different blends, many grocery shoppers already know that Starbucks stands for the highest quality of coffee.

All the goodwill and trust we’ve built up over twenty-five years could evaporate if customers thought these supermarket products were shoddy or mediocre. It’s a delicate balance. We have to bring our consciences to the table every day. If we succeed, new products will refresh the brand, not dilute it. The market will always let us know how we’re doing.

Living in the same city as Microsoft, I’m only too aware that, even in low-technology businesses like coffee, the Next Big Thing could knock the dominant player into second place tomorrow. I keep pushing to make sure that Starbucks thinks of the Next Big Thing before it has even crossed anybody else’s mind. In fact, Don Valencia is working on it even as I’m writing this book.