Starbucks (with Howard Schultz)

0:00 All right. We rolling? We're rolling. We get to see how you guys do this. It's kinda interesting. Usually a pump up music, but I feel pumped up. We can do that. We got turntables. Ooh. I saw your turntable. That's beautiful. What do you want to hear?

0:15 No, we're starting. Ben's keeping us on track. Who got the truth? Is it you, is it you, is it you Who we got the truth now? Is it you, is it you, is it you? Down, say it straight.

0:30 Another story Welcome to season fourteen, episode five of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Seven years ago, David and I did an episode on the Starbucks IPO.

0:51 Just The IPO. That episode was a mere one hour and twenty four minutes, and Starbucks is a ninety billion dollar institution in our world that deserves the full acquired treatment. What were we thinking? Well, it actually was amateur hour back then, David. Gotta start somewhere. Well, today we have a very special third co-host to discuss this third place.

1:14 Howard Schultz. Howard started working at the small chain of three Starbucks stores in 1982, eventually buying it and becoming CEO. As you probably know, he is effectively the founder of the Starbucks we know today that exists on every corner of the earth. I come to you, David, and listeners, as an unabashed Starbucks fan. In this tumultuous time for the company, I am absolutely pulling for them in every way possible. And that is going to come through in our conversation.

1:42 You may have seen the news recently that they had a very rough last quarter with a key metric that you may remember from previous episodes as same store sales. These dropped and their stock price plummeted as a result. This is on top of a tumultuo era and some of their stores unionizing and a change in leadership. We thought that this would be the perfect time to sit down with Howard and unpack Why did Starbucks work in the first place? And how did it work at such grand scale? What can other founders and business leaders learn from what got them here? And although he is no longer CEO,

2:18 Where do they go now? It really is incredible. One of the very, very small number of food and beverage Establishments that has scaled to the entire world. Yeah, most of those types of concepts do not work in different countries and continents, but Starbucks is different. Today they're in over 80 countries with thirty-nine thousand stores across the world. They're even huge in China, a country that didn't consume very much coffee until Starbucks arrived. They are a bank scale financial institution as well.

2:48 At any given time, Starbucks holds$1.7 billion that customers have loaded onto gift cards, but not yet spent. So how did they go from one store selling beans, not even drinks and cups, just beans? to the default meeting place in communities everywhere. Today. We tell that story.

3:06 And listeners. This episode has video. We recorded it in person in Seattle at the Schultz Family Foundation, and you can watch it on YouTube. And if you want more from David and I, you should check out our second show, ACQ2, where we interview founders, investors, and experts, often as deeper dives into topics that we covered on the main show. Recent episodes have been awesome with the CEO and the founder of Synopsis of Starfish Space, further exploring the space industry. And we've got some great stuff in payments coming up next, too. We do.

3:36 All right, so with that, this show is not investment advice. David and I may have investments in the companies that we discuss, and this show is for informational and entertainment purposes only. On to our episode with Howard Schultz. Well, I do have to tell you, and I think I've told you this off camera. For the last year Almost ten years.

3:56 Every single day starts with a spinach and feta rep. I assume there are other people like me in the world. But it's always an iced almond milk latte with whipped cream and a spinach and feta wrap. And so thank you for uh Powering approximately a third of the cells in my body.

4:11 That's a great start. I also here's another stat that David You've done the math on. I have done the math. I exported all of my credit card transactions since twenty eleven. Of course you do. And I wish I had more history than that, but that was the oldest I could get. I've spent twenty three thousand dollars. at Starbucks since twenty eleven. Oh god. Okay. We wanna start with Starbucks one point oh

4:36 And listeners may know that there were three founders of Starbucks. Yes. None of which were named Howard Schultz. Correct. So

4:46 Take us back. You know, in the Starbucks prehistory before you arrived, how did the company start? Well, since I wasn't there, this is what I know. There were three founders. Jerry Baldwin. Zeb Segel.

4:59 And Gordon Balker. And the story that was told to me is that one or both of them were going to school in California. In the Bay Area. And they became enamored with Pete's coffee company.

5:13 Uh which Alfred Pete was. More than anyone else. In the history of coffee in America was the true pioneer. Specialty coffee, Arabica coffee. to Northern California.

5:29 And Jerry Baldwin and Zev became so interested and intrigued with what Peez was doing. And given the fact that they were from Seattle decided they would try and bring Starbucks coffee. in the form of Starbucks to Seattle, Washington.

5:46 Now what is not known is that when Starbucks opened in the Pike Place market in nineteen seventy one. They were using Pete's coffee. Really? No one knows that. That's no.

5:58 Because they they were not roasting coffee. So they were bringing coffee from San Francisco to Seattle. They were not calling it Pete, they were calling it Strawberry. So it's Pete's coffee in Starbucks bags. Yeah. Again, I wasn't there, but that's kind of the folklore.

6:12 After the three founders Built that store, opened that store. Uh I I get the sense that there was some kind of fallout between the three of them and Zev Siegel eventually left the company. That brings us to nineteen

6:30 Seventy nine, nineteen eighty, around that time. When I came to Seattle, Washington for the first time. So I was working for A Swedish housework company. Based in Sweden called Hammerplast.

6:45 That company had a beautiful non electric coffee maker. Kind of a thermal unit. And We had a big customer in Macy's in Northern California. And I was in California on a sales call.

7:00 And I had heard that there was a small company in Seattle, Washington that was buying a lot of this product. So given the fact I'd never been to Seattle I was already in the West Coast. I figured I'd come to Seattle. And see what was going on. With Starbucks buying it. For use in

7:14 They were selling it in their store. But here's the th'cause this was a consumer device. Yeah, yeah, but we have to remember Starbucks coffee company from nineteen seventy one until around eighty five, eighty six. Only sold Pounds of coffee.

7:29 There was no beverage. That's you know, we're gonna get into the epiphany of that. Of course. And so I walked into the Pipe Place store. For the first time. On a beautiful day just like this.

7:41 The sun was out. There was snow on the mountains. the clean fresh air and I walked into the Pike Place market and I walked into the Starbucks store. And I was Blown away by the experience, the the romance of coffee, the education.

7:59 And it just spoke to me. I had never met Jerry Baldwin, the founder who was the CEO at the time. And I became interested and intrigued with what Starbucks was doing and asked if I could meet Jerry. one thing led to another. I met Jerry Baldwin, we really hit it off and we established kind of a vendor customer relationship over a course of a year or so.

8:22 Starbucks had three stores at the time. Only three. And Over the course of the next year or so. I became more and more interested and intrigued with

8:34 The possibility of leaving New York City. Sherry and I were dating. We're not married. And I kind of maneuvered my way into a job.

8:45 Working for Starbucks. And so Cherry and I drove to Seattle, Washington on Labor Day weekend. In our old Audi car with a golden retriever. And we came here because I was offered the job as the head of marketing for Starbucks. When they were getting ready to open their fourth store.

9:03 In nineteen eighty two. Still just selling beans. Only beans. That's the whole st yeah, still the beans. The interest that the company had in me at the time, I think, was they were Really interested in expanding, but they're the dream or the plan at the time was

9:18 Could we expand to Portland, Oregon? Yeah and I never had any Idea of course that

9:29 What was about to happen and unfold of the subsequent years. But that was I arrived in nineteen eighty two as a head of marketing. So When you and Sherry arrive

9:39 Yeah. Like What was the coffee landscape? I mean there were these three soon to be four Starbucks bean store here in Seattle. Alfred Pete was down in The Bay Area. But w what was coffee culture? I mean it was it was like Folders in Maxwell House, right?

9:56 It was De Minimus. There was another coffee company which was Seattle's best coffee. Which was another retailer that was kind of at the same size and scale as Starbucks, both equal at the same time. But you couldn't even get a New York Times in Seattle. In nineteen eighty two, eighty three.

10:12 Was not no no good food to speak of, and Starbucks was a true pioneer. Where they were educating Customer after customer about what good coffee tastes like. And the pipe place market gave them an interesting vehicle because of of the tourists. And so Starbucks actually started establishing a mail order business.

10:32 As a result of all the people who are coming Into Seattle. And I think if I remember there was so many Points that I can remember where People were talking about Starbucks.

10:45 way outside of Seattle as if it was some kind of iconic big company. I think people came to Seattle. Is this it? This is You know, the eight hundred, nine hundred square foot store in Seattle, Washington and Pike Place Market. This is the Mecca. they would buy a bag and then they would fill out some kind of information so I'd like to I'd like to have this mailed to me. Yeah, because I don't have anything in my city. Yeah.

11:08 That's what happened. Because coffee has a shelf life of basically a week to ten days. And we didn't have a vacuum bag at that time. We were shipping small amounts because to Jerry Baldwin's credit He had such a

11:24 fastidious point of view about quality and freshness. And I think that had a Huge impact on me. But this Couldn't have been like a great business. You're shipping small amounts. No, it was the logistics costs, you know, the scale, like this was a small business. But

11:42 The equity of the brand even back then. Was much larger. than the size of the business. And the opportunity that I saw even when we had four or five stores was well beyond Portland, Oregon. And I was always kind of pushing

11:58 We could do so much more and then the whole thing blew up for me. when I went to Italy in eighty three. Okay, so before the Italy trip, I just want to Yeah. Really contextualize coffee in America. I think

12:11 Coffee had been declining. since like nineteen forty. It's still part of the American culture, but It's not that it's on the way out, but there's nothing new or interesting except for this little segment. of Specially Coffee.

12:25 And I think What you've just described. The reason for that is the coffee was terrible. It was instant coffee. stale coffee and primarily robust the beans. Which is the low grade coffee. That Starbucks was never involved in. Yeah, walk us through the two types of beans.

12:41 There's mainly two types of agricultural coffee grown for commercial use. Robusta beans, low end coffee, primarily in instant coffee. And high grade Arabica coffee. But even within the Arabica coffee There's significant segments of quality and integrity.

13:00 And Starbucks was has always played from nineteen seventy one to today. At the highest level. And my understanding from our research is that the robusta market really developed, as you say, with the instant coffee market. And that was kind of a product of World War Two, right? It was like, hey, we gotta get the troops This product to survive.

13:18 And so we just need a lot of beans and we need to ground them up and create this instant product. I believe Maxwell House was involved in inventing Yeah, you're exactly right. I mean, it was just fuel. And bitter, acidic. And yeah, and that's I think World War Two and the GIs were kind of the impetus. for that kind of quality coffee or not quality coffee too.

13:41 exist and have any kind of run after the war. So you show up at Starbucks, you know, you know a little bit about the market because you've been a a supplier of theirs. But you happen to be a pretty talented salesman from your your time at Xerox. And I wanna make a tie here. Our previous episode was the Microsoft episode, or at least Microsoft volume one. You were selling word processors. made by Xerox. Tell me what word processors were in the mid seventies.

14:09 So My territory was forty second to forty eighth street. From Fifth Avenue to the river. And I had to make fifty cold calls.

14:20 Physical cold calls a day. That was a job. The Xerox job taught me. Incredible amount. About not only selling

14:31 But humility. Humility. Because the rejection every day. was so significant. And you put on your suit and tie and you go in an office building, there's no security.

14:42 at that time just go in and you go from the top floor to the bottom. And then there are other people. selling other products who are doing the exact same thing. And you had to get by the receptionist. I was making a thousand dollars a month. And living at home when I started.

14:58 Okay. The word processor was a big machine. in which you are editing on that machine. Create a letter.

15:08 And does it have a screen or is it like a typewriter? No, it it's a typewriter, no screen. It's like a typewriter with like a with a little bit of cache, right? So that you could like fix mistakes for one line, right? Yeah. The job at Xerox at the time was like working for Google. Xerox and IBM were the two pillars of technology. And high tech companies You told somebody you're working at Xerox, you had a whole different

15:30 Patina that you were wow, that's working for Zero. Wow. And so you quitting well, hammer plast, but you know, quitting what seemed like a I hate it. I mean that's that's nuts.

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

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

16:14 And when I got a three I said I you know, just saying to myself, I worked all year I just had a performance appeal from my manager and I'm a three. This is amazing. Howard Schultz got a three. I got a three. I got a three. This is an inspiration for all entrepreneurs. I got a three, and as soon as I got the three, I swear.

16:32 At that moment I knew I've got to get out of here. And that's when I started putting myself in a position of meet other opportunities And by and large, I was able to get the hammerplast job, which was the general manager of the company Which was based in Sweden in the US.

16:49 But I was a three. Do you think Having That Background at Xerox.

16:56 Did that give you a piece of perspective that helped Build Starbucks to what it is today. When I hear the question, I I have to go back to my childhood and think everything That have experience. Growing up in the projects.

17:12 And More or less a dysfunctional family. Because of the The pressure of money. Getting the Xerox opportunity

17:22 and having some level of success but realizing I wanted more. The humility which came with rejection. The shame I had as a poor kid living in the projects. All of that I think Crystallized.

17:38 In me. And I give Sherry so much credit in realizing that Build a different kind of life. And

17:47 gave me the courage, the conviction and um The drive to try and do something that I felt I was destined to do. I didn't know what it was. I certainly didn't know moving to Seattle was gonna Create the opportunity of a lifetime. But I always felt I had to get out of that station in life where I was

18:08 positioned not to get to the level that I thought I I deserve to be. I don't Think it is common. With someone

18:17 For your background. Poor kid in the projects coming from nothing. to get a great job, two great jobs, and be wildly dissatisfied. and not feel like I've made it. But rather, no, there's gotta be something more than this.

18:33 There's something. Deep inside you. That caused you to be willing to take a risk. I was

18:39 really insecure about not succeeding. And I didn't view what I was doing as The success that I was Not destined for that. That's that sounds wrong. Had the appetite for.

18:56 Alright, so we're getting to the big risk. So The year ticks over to nineteen eighty three. Yeah. you are sent, or maybe you asked to go to an international housewares conference in Milan. Yeah. What do you discover?

19:09 So I went to a trade show called Matcha. Uh, which big convention center and a it's a giant houseware show with equipment and All kinds of stuff. And I I was staying at a A relatively cheap hotel.

19:23 in walking distance to the convention center. I get out of the hotel. I'd never been to Italy before. And I am All of a sudden. being intercepted.

19:33 with the physical manifestation Of one coffee bar after another. in the business that I'm supposed to be in. But it wasn't the business that Starbucks was in. And I walk in like a normal person that's never seen us before and I am just like

19:49 I'm in a black and white movie and all of a sudden everything was color. And it was so rich. I couldn't get enough of it. And I just went from one to the other to the other to the other. And I

20:05 I was just blown away and more or less raced back to America. Sat down with Jerry and Gordon. And said, Holy shit. We got. What's happening in in Italy is the business that Starbucks has to be in. And they had seen it.

20:21 They've been in a way. And they said No. That's not what we want to do. And I just said

20:28 Seriously? And I banged on the door for two years. And in two years they finally let me open up a coffee bar. On the corner of Forth and Spring in Seattle and was the sixth Starbucks store. And out of about twelve hundred square feet, I got a hundred feet.

20:46 And I designed and opened the coffee bar, worked behind the counter. As a barista. And Starbucks probably had two to three hundred customers a day selling whole bean coffee. We were at five hundred in a week.

21:00 With Introducing lattes and cappuccino to the in espresso. And there's nowhere else. Well to get a case. Cafe Almegro had it, and that was Dave Olson. And after a few months or six months or so Jerry

21:13 Said. I don't want to repeat this. I don't wanna do it. I don't wanna be in the restaurant business. Yeah, what was the objection? Was it the stigma of the restaurant business? I mean I don't want to speak for Jerry. I have so much respect for him, but

21:27 He didn't think it was clean. He didn't like it. Now between eighty three and eighty five. Jerry Baldwin because of his love of Pete. And his relations with Alfred Pete. had an opportunity for Starbucks to acquire Pete's Coffee Company.

21:44 And they did. Unfortunately. Starbucks buys Pete. And they get into financial trouble. And so really at this point it was like their mentor was retiring, this person who was a steward of the industry

21:57 We're operating six points of retail distribution in Seattle for our beans. Why don't we just buy you're effectively the same business, but in Northern California. Keep them separate for now. Well it's important to know. That between The opening of the fourth and spring coffee bar inside of Starbucks. Starbucks number six. Yeah. And Jerry and Gordon saying, We don't want to repeat this.

22:20 I was so frustrated. I said, I'm gonna leave Starbucks. And what did I do? I had no money. To open up

22:28 A coffee store. So Jerry says Starbucks does not want to open up coffee bars. But we will invest in Il Jernali.

22:40 Which was the company you started, too. Yeah. So before they get into financial trouble Starbucks is an investor. I've always thought he did that, so I would sell. and market Starbucks coffee in the coffee bar. Which I would have done anyway.

22:55 So Starbucks makes an investment. A couple of people that we know make an investment. But I didn't have enough money, so I go to see two Italian Companies.

23:06 I've never told us. One is the espresso company Fima. And one is the large Italian coffee company, Lovazza. Oh yeah. And I asked them both. to invest in my idea.

23:20 And both of them turn me down. So at this point you're in Italy and you're trying to get ideas and investors for what would become Il Giornale. And only Starbucks and a couple other people have committed. I didn't have enough money. I still needed more money. And you're raising one point six million? About one point yeah, one point six, one point seven million. And they said, you know, no one is going to

23:43 buy Italian Espresso in Seattle. Or in America. Which is stupid'cause you watched it happen. Like I ran this store for six months and like it was fine, you know. Yeah, they don't want to do it. So they Lovassa

23:54 And Fahim, just get that on the record. Turn me down. Okay. Don't deny it. That's a fact. So then I you know, go back to the US. I'm trying to raise money and I I hit

24:07 The three Titans In Seattle. Jack Van Roya. Herman Sarkowski. And Sam Strong.

24:16 Three of the leading citizens of Seattle, Washington at the time. And the three of them have a little bit of an investment together. And they

24:26 Say We're gonna believe in you. And they take me over the the hump. Wow. Okay, and we opened three Il Granales, two in Seattle. One in Vancouver, BC.

24:37 And all three Are doing well. All three. But I didn't have enough money. to expand.

24:45 And needing the money to expand just to Pause on that for a minute, business wise. Obviously coffee bars. are a much better business long term than coffee beans, but Probably more capital intensive, right?

24:57 You need more staff? Yeah, more labor, yes. But the stores weren't that expensive to open'cause they were small. Less than a s a thousand square feet. And we we understood how to do it. And I was working

25:07 As a barista with Dave Olson and other people to keep the cost down. We were behind the counter and I had no salary. I had no salary for almost two years. Well, Sherry was working in pregnant with our first child.

25:19 So looking increasingly worse from a traditional perspective of Leaving a uh high quality job, moving across the country, then just a couple of years later here you are not making any money again while Raising millions of dollars to try to start your own business. It gets worse. Sherry is six, seven months pregnant. She's working.

25:40 Her parents visits you. They're from Ohio. Father Ask me to take a walk. Oh no.

25:46 It's God is my wins true story. Take a walk. And he says uh Whatever you're doing, I respect it. But it's not a job.

25:58 It's a hobby. You need to get a job. My daughter's pregnant. She's working, you're not. I start crying.

26:07 I bet. So embarrassed. And uh I come home at three, four o'clock in the afternoon, whatever it is, I don't say a word. Mm-hmm. completely shaken by the whole conversation.

26:18 My parents go to bed after dinner, I'm sitting with Sherry and I said, I gotta tell you something happened. She was so angry at her dad. And so upset. And she said. There's no way.

26:29 We're turning around. We're we are going. So she is the glue. To everything that's happened. And I don't know if she've ever had a conversation with her father. I'm sure she did. I don't

26:41 But The whole thing could have been over. And that would have been a Very understandable response if Sherry said I'm you know I I wasn't gonna say anything like you know, look at our situation objectively. Putting ourselves in your father in law's shoes.

26:54 How could you not feel that way for your daughter and her impending family? Yeah, and and her father was a great guy. And uh I understood. But I was embarrassed and uh y humiliated. How can I not be?

27:08 I mean I guess that's another dimension here too. This was not twenty twenty four. It's not like uh being an entrepreneur was a you know glorified profession here. In a business that he clearly did not understand. You know. Coffee store.

27:21 The other interesting thing to point out around this time is For the people who were Seeking high risk business investments. You know, this is the late eighties.

27:32 It's time to Look at tech. Like we're now twelve years into Microsoft. Apple's four years past the Macintosh. And I'm I'm trying to you're trying to raise money for a coffee house chain.

27:44 With names that people couldn't pronounce. And serving it in a paper cup. To go. That does not sound innovative to me. I don't know why I'm putting my risk capital into your Yeah.

27:56 You know, I would bring investors to the two or three stores And I would make sure There was a fair amount of people. In the space.

28:05 And that's when I started talking. About the language of community in the third place. And that's what I saw in Italy. The unlock and the epiphany, of course, it was the romance of espresso. But it was the sense of community.

28:20 And that is what was happening. Very early on in the two stores in Seattle and the one in Vancouver. You could see it. What would people do after they bought the coffee? 'Cause the the two stores didn't have seating right away.

28:35 They would stand up at the coffee bar at the window. On Columbia Center. And it was at at eight, nine o'clock in the morning, they were hanging out there. And then they after late morning they were coming back and you could just feel the relationship that people were having with one another around human connection.

28:53 I know it sounds trite, but I I could see it back then. And as I was talking to people about the investment opportunity, I was pointing out Look what's happening here. There's something happening, there's some magic going on here. It's not just the coffee.

29:07 The coffee was the conduit. Alright, so we're at the pivotal moment. Starbucks and Pete gets into financial trouble. And the debt to equity was north of six to one for a company was tiny. Jerry comes to me.

29:21 And says Jane and I His wife? Are gonna move to California. And we're gonna

29:29 Keep Pete's and I'm gonna sell Starbucks. And I'm my heart is pounding. I say, Okay. And then he finished it and he says, I think you're the person to buy Starbucks. I said that's fantastic, but I don't have any money. You gonna give it to me no money. Uh how much is it?

29:48 Three point eight million dollars. Now we're in 86, 87. Now we get into A story I have told, but not a hundred percent. Mm.

30:00 Okay, but I'm gonna tell it. I go out to raise money. I'm having a hard time. So Jerry gave me about I think he gave me ninety days to raise three point eight million dollars. Around the second month

30:13 Where are you with all this? And I I think I had about half of it raised. I might have fibbed a bit and said I had a little bit more, but I I didn't I had about half. And he lays a bomb on me. And says Howard, listen.

30:27 We're in a tight situation here. And one of your investors. All cash offer on the table. With no due diligence.

30:38 And wants to close right away. For him to take it over, not you. Yeah, yeah, I'm out. I'll be out. And I said, Who is it? And he told me.

30:48 I'll save that. And I'm absolutely Annihilated. Crushed. Because I didn't have the wherewithal

30:57 And I could just envision as soon as I heard that name. I knew it was over. I was in a basketball league. At the Seattle Club. I'm playing basketball that night.

31:10 My good friend Scott Greenberg, who's an attorney At uh A prestige firm in Seattle, the Gates firm. I'm basically crying to him a after the game and telling him the story. And he says, You've got to come to the office tomorrow.

31:25 And me. our senior partner and tell him the story. Bill Gates Sr. I said we'll Titan. We foreshadowed this in the Microsoft episode. There were there were three Titans there. But here is the Titan.

31:43 And Bill was Six foot seven? Six foot seven is a mountain of a man and very imposing. So Nine o'clock in the morning. Put a suit on.

31:54 I must have been sweating through my shirt. I was just so anxious, so nervous. At the same time so scared about what's gonna happen. I go in there. And I I I must have been trembling. I I I I was just so nervous. I tell him exactly.

32:10 What I just told them. And he interrupts me and says, Howard, I'm just gonna ask you two questions. Is everything you told me true? I said Mr. Gates, yes.

32:21 Have you left anything out? No. And he says, come back in an hour. And I said, Okay, w uh to do what? He says. I'll see you in an hour.

32:34 And so we walk out. Um Walking around. I think we probably went to went to Columbia Center to get a coffee and come back. I go back with Scott and Mr. Gates says, Scott I'm gonna see Howard along. I'm Scott Lee.

32:47 Now I'm alone in his office. I hardly sit down. And he says, We're going for a walk. And I said

32:56 Where are we going? And he says, We're going to see The man. Who was Sam.

33:04 Strong. Mm. One of your investors. One of the investors. We walk the street to the Rainier Tower, the old Rainier Tower. I think Sam had

33:15 One of the Biggest Offices, we walk in there. And I swear. Even though so many years later.

33:23 I have a perfect Vivid. Account. For what took place. Sam is sitting behind his desk.

33:31 And this is what happened. Because it was five minutes. Bill Gase. Remember, he's a huge guy. Leans over

33:40 To the desk with his hands on Sam's desk. And says I don't know. What you are planning. But whatever it is, it's not gonna happen. Wow. And he says.

33:54 Howard Schultz. is going to acquire Starbucks Coffee Company. And he's never gonna hear from you again. That was it. And we walk out.

34:08 That's it. That's the whole thing. And so did you hear from Jerry that the bid had been dropped? We walk out. And I say to Mr K one little problem, you still need the money, right? I say to Mr. G what what what uh what just happened? And he said,

34:23 You're gonna buy Starbus Coffee Company. And my son and I are gonna help you. Wow. Hm. And we raise the money.

34:34 And that's the story. I never spoke to Sam Strom again. I've never mentioned his name publicly. I never mentioned his name in this book. And I say it respectfully. I'm not trying to But that's the story. And Sam, I mean, for for anyone who doesn't live in the Seattle area, his name is on buildings and community centers. I mean, this revered philanthropist, I actually don't know his business background. How did he become the Titan that he was?

34:57 He was involved. In real estate and also in those auto stores. How did you get him off the Il Jornale cap table? Like wasn't he an investor in the uh he he was in he and his family were investors to the end until they got out of the yeah. Oh wow. Wow.

35:14 What do you think happened? Did he have any legitimate criticisms of you as running the company? No, he had he had a henchman who was his money guy who figured out we we could just take this company and What do we need Howard Schultz for? Who is this young kid? And he had and Sam had experience with retail with those auto stores.

35:33 I see. So we could Install some professional management from some other venture. Yeah. Run the playbook. Yeah. It would have been over. But the thing about Bill Gates Is I saw him socially

35:45 A hundred plus times. He never ever said anything public about what he did. He never took credit for it. So for listeners, uh Howard's told us uh elsewhere, but you spoke at the Microsoft CEO summit, you recounted the story to, you know, the Fortune five hundred CEOs.

36:03 And um Bill Gates the third, you know, Microsoft founder comes up to you afterwards and says Um yeah, who was the guy? But Bill did not know the whole story. He didn't know any of it. He didn't know what his father had done for me.

36:17 He's hearing it for the first time. And this is, you know, twenty fifteen or something. So Starbucks, like You would think No, he didn't know. Someone would want to tell their family I played some significant role in this, but that's not the type of guy he was. Bill Gates Sunior never told a soul what he did for me. Again, humility.

36:35 Incredible lesson about humility. It's amazing. Yeah. And so were Bill Gates senior and Bill Gates the third investors in that three point eight million dollar round? Bill senior was, but I don't know if it was part of Bill or yeah, Microsoft. Influ interesting.

36:51 Um so I asked Sherry about this when I was preparing for the episode and her recollection was It was something like one to two weeks before the three month exclusivity for you. was gonna be up. And so you're basically like this event happens, but now you need to come up with the money and you have this unbelievably short period of time to do so.

37:10 And so She said that you were calling everybody you knew, she was calling her clients,'cause she's a designer. calling her clients trying to just you know, find pockets of fifty K here, hundred K there, anywhere you could to make it happen. But I had another Angel.

37:27 Who helped me? By the name of Jack Rogers. Who became a lifelong friend who passed away. Couple years ago.

37:34 Hm. He was part of an investor group. And he brought them along. So The acquisition goes through.

37:41 Yeah. August of eighty seven. Yeah. We bought the six Starbucks stores. We had the three old Illdrenales. And there were two stores under construction. So at the end of the calendar year.

37:54 We had eleven stores. And a hundred employees in nineteen eighty seven. All in the North West. Yeah. Meanwhile.

38:03 The original Starbucks folks, they've now gone. Down to California. When did Pete's open coffee bars? Uh many, many years later. Ah, so they you weren't competing. No. But this is one of the great observations, David. Il Jornale buys the Starbucks stores.

38:20 rebrands Il Jornale incorporated as the Starbucks corporation. Yeah. And The original Starbucks buys you know, had owned Pete's and now r needs a new name. So it rebrands the company Pete's. So Pete's was actually Starbucks. Starbucks was actually Il Il Jornale. Yes. It's amazing. Some stats just for listeners to

38:39 understand the gravity of the situation. Uh, for the initial one point six million that you raise for Il Jornal A, you talked to two hundred and forty two investors. Two hundred and seventeen of which said no. So anybody who's griping about their fundraising journey. And yeah, those are rookie numbers. But you asked me a question earlier about what did the years at Xerox teach me.

38:59 So you the rejection. I was going through. The Italians turn me down. People in the US turned me down. Nobody would believe in the idea. It was like I was cold calling again at Xerox.

39:12 The other thing that I is worth pointing out is The Starbucks. company with the six stores when they bought Pete's with that six to one debt to equity ratio. basically backed themselves into a corner. where now they have these big debt service payments to make.

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

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

39:52 When you first created this combined company. You were pretty religious about no debt. No debt. I don't I don't want any debt again because of my childhood. I was gonna ask you, w was that informed by the the what you had seen with the Starbucks situation or more your childhood. No, it was totally my childhood.

40:09 My parents were always in debt. Bill collectors were always calling. And uh no. There was we never had any debt. The entire time. Never.

40:18 This It's probably a good point in time to Talk about the business model a little. Okay. You've alluded to kind of A stigma at least among potential investors in the original Starbucks founders of like the restaurant business.

40:31 What did the economics of the business of the coffee bar business look like when you bought The Starbucks stores. So what did we buy? We had the stores. We had the brand name.

40:42 And we had a roasting facility on Airport Way. In Seattle. The ability to source and roast coffee. And Put that through

40:53 The supply chain of a beverage. gave us probably at the time an eighty percent gross margin. Wow. Yeah, that is not the Yeah. The quote unquote restaurant business that people are imagining. And I could begin to see even early on.

41:08 The accretive nature of frequency. Where I can see what was going on here is People were not coming for coffee in the morning anymore. They were starting. The morning rush was getting bigger. The need for more labor, and I could sense

41:24 That the business that Starbucks was in was going to be significantly in the back. and the beverage and the romance of the theater. And the third place was the hero. They didn't take us long to realize.

41:39 We had the beginning of lightning in the bottom. even the best, most successful restaurant you could possibly imagine. How many times are their most loyal customers gonna come there? In a week. Yeah.

41:50 There was a time In the northwest. When we were really at our peak. Where the average customer is coming eighteen times a month.

42:01 I should rephrase it. Maybe the most loyal was coming eighteen times a month. There's some magic to this. idea that it's not a terribly expensive item. I think I saw some research that said that it's you know, sub one percent of someone's house household income and often far less than that. But it is repeat and it is high gross margin.

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

42:40 We applied to Every single store we were opening. You know, by the way, I chose the first five hundred locations myself. So I was In it and so many. Ways.

42:50 The the economic model In Wall Street when we went public in ninety two, now I'm just w when they when they heard the model, I said, Well they we never seen a model like that. And the model basically was a sales to investment ratio of two to one. And a operating profit of twenty percent. So what does that mean, sales to investment ratio? So if the sales were a million dollars, the investment was five hundred thousand. No just the sales to invest had to be a two to one. Wow.

43:17 In year one of operation. Yeah, yes. And the and the and the the operating profit was was north of twenty percent. Well. But cash on cash return was So yeah, you get that two years or less payment. The retail world had never seen a model like this before. There was no physical storefront that could had this business model before this.

43:34 Early on it became clear to us that customers were also starting to customize the beverage on their own. Mm. We were just Breister was behind the counter and somebody would say

43:46 Can I can you Put something else in there. Yeah, what do you want? And then so that just started the you know, the average ticket started growing. as a result of the customers personalizing and customizing their beverage.

43:58 And to be clear, like the era of Starbucks we are in right now You produce drip coffee and you produce espresso espresso. And you can put that espresso in frothed milk. And those that's basically your options. Yeah. Like none of this, you know. Yeah, exactly. But can I tell you a mistake I made? Please. Please.

44:15 When Ilnalee was getting ready to open. It's a standard cup. In the world was that terrible styrofoam cup. That is used in diners in New York City. Remember that cup? Yeah.

44:28 I I put boiling water into that cup. Five minutes later, the cup is starting to tur turn like a golden color. Because of the chemical. That can't be good for your insights. Or the taste of the cup. And so we had to find, we had to ch change the cup.

44:45 This is such a smart move. In retrospect, but we were just trying to figure out Now No one in America That is in the paper business.

44:56 had any kind of cup or lid that was compatible with what I was trying to do. In fact, they didn't understand it. Why not just use the cup that exists? No, because it doesn't taste good.

45:08 And it doesn't feel right. Right. Why go to the trouble of you know, this m perfect roast of these beautifully sourced Arabica beans from all these farmers if you're gonna pour it into styrofoam. Yeah. Okay. Like when you would tell these th the like are you on L S D or you dismiss me? So We went to Chicago to the international paper company.

45:29 And they had a cup. But the cup didn't have a lid. Yeah. A compatible lid. And so we found they found a lid.

45:41 That beautiful sip lid, which is now ubiquitous in the world. Howard Schill should have said to them, I want an exclusive on that list. Because that lid became the standard for the world. If I would have just understood that. The other thing I didn't do is we introduced Cafe Latte to the to America.

46:00 We didn't trademark it. You know, we trademarked Frappuccino later on, but we didn't trademark Cafe Latte. Mm. Just you know, wasn't thinking. Yeah. You got enough right. You don't need to get enough right. No, I I just I missed it.

46:11 When uh The sizing. Grande, Ventidrenta. Yeah. When did that start? There was a

46:20 Brilliant, brilliant guy. Who Was the architect of the name Starbucks. Name Terry Heckler. In Seattle.

46:29 And he's a fantastic design guy. And we're just sitting one day and I just talking about the importance of language. We gotta get the language right. We got the cup. Gotta get the language.

46:41 And we just started talking. About changing it from the pedestrian words. Of small, medium, large. To what it became. Which was short.

46:51 Tall and grande. People made fun of it, but they loved it. Was Venti not an original Venti, we didn't have that size when we started. That was later on. Wow. Who would have thought somebody wanted to This is America. Yeah.

47:05 So my one more question on this. Writing the customer's name on the cup. That didn't come from me. As the stores got busier and busier, the Breeses were having a hard time. With whose cup is it?

47:18 What are we gonna do? And Someone in Starbucks, I don't know who it was. Started writing names on the cop. Right named.

47:25 And it just became Standard. So much of Starbucks success Came from customers asking for things we weren't doing. And Starbucks.

47:37 Employees who became partners in Nighty one. understanding the business better than me. And this is all like, you know, to my mind just starting to create this incredible flywheel, right? If you've got this eighty percent gross margin business. Where the key lever is repeat loyal customer visits.

47:55 You've got Customization. That is making customers more loyal. And increasing your margin at the same time, because you can charge more for it. You've got the interpersonal relationship with

48:07 The baristas, sure. But Also Even as you scale, I mean the name on the cup That's something that scales even as thousands and thousands of people come into the store.

48:17 The intimacy with the customer and the breach. became a very powerful component. of the equity of the experience. And I've always thought In so many ways, Starbucks became the first experiential бран.

48:33 At scale. We didn't spend any money on marketing. Zero. There was no money for marketing in the cup. The iconic cup. Became A badge of honor.

48:44 Because People were doing something that was new. And novel. And walking in the street with it and people you know, what is that? It's a lot of that kind of stuff. It's your free billboard. Yeah, so people are proud of. Uh.

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51:23 I mean, you must just be getting more and more excited every day. Oh, I was out of my mind. So David Howard sent me there's a nineteen eighty eight I can't believe this was filmed, but a nineteen eighty eight Shareholder and employee meeting. Where it's great. The whole thing's like an hour and a half It's it it's it's all there and you are using all the same language that you use today back in nineteen eighty eight.

51:45 We focus on our people. Those people delight the customer. The customer, you know, d delights the shareholder or then satisfies the shareholder. And The conviction that you have, it's like watching a preacher. You're up there, you've got I think eleven stores or something.

52:02 You're like You have no idea. What we have here. We are on top of something that is gonna change and you don't say the world.

52:10 America. And this thing can become America's coffee house. And it was interesting because I think the whole room was already scared of your ambition. Of you know, going nationwide with this thing that there did not exist another example of a national coffee house chain.

52:28 Everything was just these little cities, these these small markets. And there's this great quote. that you have at the end of the meeting that says The company since nineteen seventy one has been growing at a very, very slow pace. As a result of that, you combine Ilgiornale and Starbucks together, we're gonna take your six stores that you've built in 17 years, and we're gonna go to twenty six in one year. We're gonna go to over a hundred.

52:51 In five years. And that must have just sounded bonkers, but that is literally what happened. That's what happened. Like the pace of growth. Approximately you just doubled stores year over year over year. Was there some moment in eighty eight eighty nine, ninety, or you're just like looking around, realizing

53:10 We must expand. As fast as we possibly can because this concept is the concept the world needs now. And if we don't Pull out all the stops. Someone else is gonna do it.

53:21 There were regional Competitors. who were making noise about doing what we were aspiring to do. Mm-hmm.

53:30 And I was Very mindful. Because one of them was franchising. That was Gloria Jeans. out of Chicago. Hm.

53:37 And at one point I think they had more stores than we did. Because of the franchising opportunity. And that's one of the reasons why I went to Chicago as well. In eighty seven, eighty eight. 'Cause Chicago was the first market outside of Seattle and Vancouver, right? Yeah. Even before LA. And it didn't work right away.

53:53 Huh. Howard Bihar should be credited with so much Of the Cultural

54:00 Texture and the tapestry. Said, I will go to Chicago. And fix it. He went to Chicago

54:10 And stayed in Chicago. Through the winter. And recalibrated the mistakes we were making. And of course he and Oren were so instrumental and to

54:23 the loneliness that exists as a entrepreneur and their ability to Help me Build the company that you know today. Yeah, so I have in my script here this is literally labeled the uh H two O era and

54:36 For anyone who was a partner at Starbucks sort of knows what I'm talking about, and anybody else outside has no idea, but there's two Howards, there's Howard Schultz and Howard Bihar. And Howard B. Hart joined in nineteen eighty nine, Orin Smith joined in nineteen ninety. And the way that it looks to me from the outside, and you can tell me if this is right. You were sort of the vision and ambition. That would almost like

54:55 take any ambition that anybody else had and force them to think bigger and faster. Okay. And then Howard Bihar was in many ways the soul. Like he brought the idea of servant leadership. He brought the idea of nothing else matters if we aren't people first. And obviously that became a huge tenet of Starbucks as we knew it through the nineties and two thousands, but that seems like it really arrived with him. And then Oren is like A numbers god.

55:20 No, he was the adult in the room. Hm more than the numbers. He had the style. He was quiet. He was a gentleman. He was the only MBA in the company.

55:31 But he was the wise man. Who behind the doors could say to me and Howard, You're both full of shit. We're not doing that. Mm. And we listened. More or less.

55:42 And Is it true that the three of you had uh dinner every Monday night for a decade? More or less that is true. May sometimes more than once if we had a crisis or two, which generally we did.

55:55 Oh, we had a disagreement. Mm. There's a lot of creative conflict. Especially between Howard and I. Mm. Because he had a operate what we were trying to do and

56:05 At times he thought we were Growing too fast or Head of the resources. Hm. 'Cause he was basically training all these

56:14 operators, the the the sort of management fleet of the company. Yeah, he was building the operating system for us to be able to open the store, design the stores, which More or less I had done. Build them. operate them, train them and create the system to handle the flow of customers. So he his job was much harder than mine.

56:34 Speaking of system. What did your technology look like at this point? Uh. Don't embarrass him. No, we had there was no there was no technology. No.

56:43 Were you running like a Oracle system? Not at that time. No. Wow. No. We're talking paper? Yeah, it was mostly manual. Wow. Yeah.

56:51 I mean the eventually when they did get Point of sale terminals, they were DOS based all the way through like two thousand and eight, right? Yes, yes. Like the iPhone was out and you guys had DOS based point of sale systems. Sounds right.

57:04 But obviously tech technology was not the secret source of the foreshadowing here of the future of the company. Yeah. Yeah. So Let's take it forward from this eighty eight, eighty nine, ninety. The first market after Chicago, after you sort of writed that ship. That you decide to enter on the West Coast is LA.

57:20 That's the big fight between Howard and I. I don't think I realized this big fight. I just felt in my bones we had to go to to LA. And and he said, We're not ready for that. We're going to San Diego.

57:33 I said San Diego. Who's in San Diego? No, we're not going to San Diego in LA. And I've got the location. You wanted to play in the majors. Yeah. So we had a meeting. And it's a

57:43 It it erupted. Erupted. Into uh Bad a bad scene. And uh

57:53 One thing led to another. We we did go to LA. I'm shocked. We did go to way. It was fine. And your conviction of we have to go with that for I the equity of the brand I could see, I could envision the warm weather.

58:08 And everyone walking around with our cuffs and the media and the celebrities in just the iconic way. And there was nothing in the market, nothing at all. that even appeared to be in the business that we were in. And anyone who was doing it was not doing it well. We had to go.

58:25 And even though we maybe we're not ready. We just had to do it. And we did. And I think Howard would agree today that that ended up being a The right decision.

58:35 And LA The halo. On Starbucks. From Seattle to Vancouver and Chicago. Was nothing.

58:44 When we went to LA, it just exploded. Because Celebrities embrace Starbucks. Was there an intentional strategy to uh create sort of a luxury brand out of Starbucks that like the cool people were carrying the Starbucks cup. It might be a little bit expensive, but you can afford it.

59:02 No, there was no I can never remember a discussion About segmentation of the brand. Because we we wanted Starbucks to be accessible to all. You'd have a CEO of a company

59:16 And the person behind them. was a blue collar truck driver. Because everyone could afford the affordable luxury of Starbucks at the time. When you say affordable luxury, what about it was luxury?

59:29 The quality of the coffee. Mm-hmm. The experience. Mm-hmm. And what it felt like to walk around with that cop at the time. It was a badge.

59:39 It was like you were in the no. Yeah. Well it's not a badge of luxury. Was just like Something No.

59:47 So it became a trope for decades now that, you know, it's oh it's a Six dollar latte or an eight dollar latte or ten. Where does that come from? In your mind is Starbucks. Premium priced.

59:59 Is there actually a Starbucks gets to charge a little bit more because the brand has more cachet. Where is that? Just completely a farce. Myth.

1:00:09 I think the pricing of Starbucks Was Directly linked. To the economic model that I Alluded to earlier.

1:00:20 And the rising costs of labor Rent. And the Fiducial responsibility that we all felt. to achieving

1:00:30 The promise we had to our shareholders. Um now we're talking about as a public company. There certainly was a fair amount of discussion all the time about the sensitivity. of the price points. And I think

1:00:44 In later years, maybe in the last couple years. given the consumer inflationary time. I think it's become A bit of uh Of a prep.

1:00:56 And certainly I've always said As Starbucks was growing. That the ubiquity of Starbucks was an enemy to the company.

1:01:06 And the challenge was we have to figure out a way to ensure the fact that we are getting smaller as we're getting bigger. And specifically, how do we maintain intimacy and the currency of trust with our customers and our people.

1:01:22 That unto itself is kind of the capsule. Uh. Making sure that the growth doesn't become so intoxicating and so seductive.

1:01:32 That we lose sight of the really secret of the company, which was the internal culture and values. Which built the brand. and built a relationship with the customer. Yeah, can you tell us about

1:01:44 The people. This is such a huge pillar. Star mines of building Starbucks. Again. We started this conversation talking about childhood.

1:01:53 I really want to build a different kind of company. And and how do I do that? In a way that Provides Respect and dignity.

1:02:03 Because I was so imprinted. with how my st my father felt disrespected divalued And kind of vilified. As a Uneducated.

1:02:15 Blue collar veterin. working in a series of jobs that he just never made it. And living through the dysfunction. of of a poor family always under pressure with money. And so

1:02:31 I I wanted to kind of craft the code. on how do we create benefits that would In a way. Uh.

1:02:41 take the company a direction no one's ever been in before. And so early on we started Talking about exceeding the expectations of our people so they can exceed the expectations Of the customer. And the first time we actually were able to manifest that.

1:02:55 was a year before the IPO. And that was a Incredible struggle because I had on my board. to venture capitalists. And I was proposing something that had never been done before.

1:03:07 And that was I wanted to give equity in a form of stock options to every single employee in the company. And they just said, What? What are you talking about? We're not doing that. And so the fight became Ultimately we gave fourteen percent of everyone's base pay in the form of stock options at the end of the year based on the strike price. And I had to do it the year before the IPO. Had to.

1:03:28 So everyone wouldn't miss it. And I think the The The turning point. Of the culture of the company.

1:03:36 was the day we announced that and we became partners. And to the credit of Craig Foley, who was the VC And Jamie Shannon. They believed that performance would be enhanced, attrition would be lowered. And that

1:03:50 the brand would just elevate as a result of that. And it was true, completely true. That was that that changed Starbucks For decades. And Along with some other

1:04:02 Events. Based on doing the right thing. I mean the the healthcare for part time workers. So then you know, healthcare I think twenty five years before the Affordable Care Act, what we did with company for health insurance and that also I grew up in a family with no health insurance.

1:04:19 And Well I saw what happened. So all of that is that origin story of mine. Of Uh and the tragedy is my father passed away and

1:04:28 Never saw what we're able to do. Do you want the stats on that initial employee stock grant. I'd love to hear it. So The program was called Beanstalk listeners that uh the great name Howard was alluding to amazing name.

1:04:43 So in nineteen eighty eight, the uh health benefits roll out even to part-time employees, including gay couples in domestic partnerships, I believe the first of its kind. That was a thirty three store company at that point. A few years later. You had grown to fifty five stores, you did the LA expansion, and then in nineteen ninety one, which is the year before the IPO Beanstalk happens.

1:05:05 Equity in the form of stock options. goes out to everyone working twenty plus hours a week. There were thirteen hundred employees at the time. And uh I believe it was the first time in history that part time employees were offered a program like this. So those initial grants

1:05:21 The strike price was six dollars per share. Today, as we speak, the share price is seventy seven dollars. But there have been six splits since then. Which comes out to a sixty four X. So that initial grant

1:05:35 has eight hundred X. Since even the part time employees and baristas were offered the opportunity to buy Starbucks stock. Yeah. A lawyer, I think Scott Greenberg at the time came to me and said We can't do this. Unless we get approval.

1:05:50 From the SEC because we were over five hundred shareholders. So You know, we've studied um Lots of amazing companies. On the show.

1:05:59 who have lots and lots of different business models. But one thing that just kept striking us as we were preparing for Starbucks. Or the similarities too. Your neighbor here in the northwest in Costco. Costco, right. And how you treat your people specifically.

1:06:14 That's not by accident. Both from a uh it's the right thing to do perspective and the amazing business model benefit of the retaining employees. I mean it's so expensive to train a new employee. It's not expensive to keep an existing employee. And so you can just pay people more if you keep them for longer. Yeah. You know, you just Basically have extra money around is what what uh Costco discovered. There's so much about Starbucks to David's point that's

1:06:38 Similar to Costco. Did you ever speak with Jeff Protman or Jim Senegal or any of those guys about this concept? Do you know the answer to that? No, we don't know. I assume the answer to this, but I don't know it. First, Jeff Bron. Invested. In Starbucks in the round to buy Starbucks. No way. Yeah.

1:06:57 Yeah, in that eighty seven round. That's when I met Jeff for the first time. Jeff. Became a board member. of the early in printing of Starbucks.

1:07:08 And Clearly a mentor. Mentor of mine. And then he introduced me to Jim Sinegal. And so

1:07:16 There were many moments of me sitting With Jeff and Jim. Including The huge decision. to put Starbucks coffee in Costco.

1:07:27 Which there was a revolt. inside the halls of Starbucks saying no F and Way. Wow. And we did it. And Jeff and Jim took me to a parking lot.

1:07:41 In Kirkland. When I said I don't know if we can do this, I don't if I can sell it inside. I don't know, I don't know. Yeah. Okay. Meet us on a Sunday morning, whatever it was. Look at the cars.

1:07:51 These are your customers. In fact. Putting Starbucks in Costco. We were able to measure Directly.

1:08:00 The increase In volume in the stores on the east side. As a result of the proximity. to the Costco. Store.

1:08:10 You sold Beans. We sold beans. In Costco. Yes. And that brand awareness of I buy Starbucks beans at home meant that that group of people went to the stores. We introduced thousands of Beverage customers.

1:08:24 Two Costco through the beans. Wow. So Jeff and Jim were instrumental in so many things. And and were so kind to me. As a young kid. Then we went nationwide with Costco.

1:08:38 So this is a thing that I think many people don't realize now that Starbucks is ubiquitous. We sort of forget about this time. When it wasn't. And where

1:08:50 People had to find some way to experience Starbucks. You know, you only get a few stores in each of these cities. You're only in a few cities But there are ways to scale brand awareness. And so you can do things like become the official coffee of United Airlines. Or you know, be in

1:09:08 Uh Costco's all over the US. You did this a number of times and I feel like the rest of the world did not catch on to what you were doing was just finding little billboards everywhere where you could put the Starbucks logo and and sort of create that ubiquity. Yeah, if you thought the Costco revolt was high. You can imagine. When I said

1:09:28 We have an opportunity for United Airlines. People thought that was Absolutely. Blasphemy. Don't do that. And again. the exposure

1:09:38 And the opportunity to surprise and delight customers in places that they've never had anything close to good Coffee. All these things when you consider we didn't spend a Dollar. A dollar of marketing dollars ever.

1:09:52 And so the the the reputation of the company was built Basically word of mouth. Both inside our stores And exactly right in places that we could surprise the customer. And then we also started

1:10:05 putting Starbucks coffee in grocery stores. Which was the other. Thank you Because remember. We were building a beverage business.

1:10:12 Right. And we were then going back to our core business. In new channels of distribution. It's like the ultimate goal is to capture those margin dollars from selling cups of coffees in the stores that you operate, but there's all these other things that you can do that actually might spit off some profit dollars, but at the very least, it's a breakeven way to do customer acquisition and brand building in the rest of the world. I don't know what our cost of customer acquisition was back then.

1:10:35 But it was low. Well, you I weren't spending any money on marketing, so But United Airlines was paying you for coffee. I assume. I don't know exactly how they were went down, but yeah. They're they're um I have to assume the Barnes and Noble is basically the same thing. Barcelona's a different deal. I met

1:10:52 Len Riggio, the founder of Barnes and Noble Very interesting guy, very smart guy. great merchant and we just started talking. He was from Brooklyn. I was from Brooklyn. We had a natural kind of relationship and I said What do you think about us opening Starbucks inside Barnes and Noble given

1:11:10 You are the ultimate third place is what we are. And it just again became a natural extension. of our stores. We have a fun uh piece of trivia that you may know. Uh related to Costco.

1:11:22 Do you know where Jeff Bezos. And Jim Sinegal met for the first time. Sounds like in a Costco. Not in Costco, in the Starbucks, in the Barnes and Noble, in Bellevue. Did not know that. And that

1:11:36 you know, led to so many things, Amazon Prime among them. Yeah. And I still am friendly with Jim Sinegal. Today. I mean the y your company's rhyme in so many ways. It it's it's uh that's not surprising at all.

1:11:51 I wanna talk a little bit Um before we get to the IPO here about what the strategy was when you expanded market by market. Did you try to sprinkle a few stores in and see? Did you try to move into a market with force and be the dominant? coffee house chain in that city.

1:12:08 Uh, and in particular it it could be worth talking about Boston. Well, Boston's an anomaly because of the acquisition, but um Bihar was so Strident. in not expanding to multiple markets at once. Mm.

1:12:21 Hundred percent right. And so we didn't We went to Chicago. Went to LA. Mm-hmm. And we stayed there for quite a while, went to Portland. Uh, we weren't ready for New York City in terms of the issues there and

1:12:35 But we were very diligent. You went to D C first, D. We were not expanding to multiple markets until we had enough evidence in the existing market that we had success And we weren't gonna compound the growth in another market with problems that we're having in the existing one.

1:12:54 Mm. And I think that's all be her. Managing all the operations. Boston was very different.

1:13:01 We had A very strong High quality. competitor called the Coffee Connection in Boston. with a

1:13:12 owner operator in George Howell who was not unlike Alfred Pete kind of a gospel. of coffee culture on the east coast. And We knew Boston was gonna be tough for Starbucks to enter. We also had Dunkin' Donuts there. Like a lot of the good real estate was taken by the coffee production, right? Yeah. And so

1:13:31 George and I never Saw eye to eye and but it was clear. That if we came to Boston in a significant way we're gonna impact his business. And uh

1:13:43 I think to his credit. And he was willing to sell. So coffee connection was the first Acquisition. And we we had to tread very lightly after the acquisition because of the loyalty.

1:13:54 And be careful with the name and and uh You know, solicit George's help and advice and also w we needed him to kinda validate for us. What we're trying to do. And ultimately it ended up being a very good strategy.

1:14:09 Well it seemed like I think the numbers are it was uh It's a little bit after IPO in in 94,$23 million. They had 23 locations, and they were doing 16 million a year in revenue. So if you just look at like The purchase. I think we Oh. Maybe a little over one time sales. And the original Starbucks, ironically enough, was ex exactly at one time sales, right? That's what you bought it from the founders for.

1:14:31 If they had the lock on all the best real estate and they had burned all the capital figuring out you know, what stores we should be in, what stores we shouldn't be in. And then you just get to like move into that market for one time sales. You know, one point five, whatever it is. Uh with all that already figured out. That's pretty amazing. It probably seemed high at the time, though.

1:14:49 I'm sure it did. Well, isn't that the thing about valuations and uh they they always it always seemed like in the good old days, you know, everything was undervalued and Okay, let's talk about the IPO. So It seems like You knew the moment that you bought Starbucks from the founders.

1:15:07 uh this can be a public company. I thought so. There was no I I think it there was It was so much about being a public company that meant something to me personally. that it validated the company, it validated me. My own shame, insecurity as a kid.

1:15:25 So that was a I was tr I was a d driving force all along. Certainly the the year before with beanstock is an indication what I was planning. if bean stock was turned down. I I would I I I would have waited. Hm.

1:15:39 I just I had to that had to be done. I think we only had a couple of quarters of profitability. And I think we had about one hundred and thirty stores. And what was the revenue at the time? Oh. Well I don't I remember exactly.

1:15:52 I know what the market cap was the day it went public. I think it you did you ended up doing ninety three million that year, but the the year before, you know, it was fifty million or something like that. Like you know, companies went public when they were smaller back then, but Well you are a small cap IBO. Yeah, we were, and you know, we got turned down by Goldman Sachs, you know that? I did not know that.

1:16:13 I couldn't believe it. I mean I just I I wanted Goldman Sachs as as the I just you know, they were the The patina on the prospectus to have Goldman Sachs. It would be a very Starbucks thing for Goldman Sachs to be the the elite left. Well Uh blank fine.

1:16:29 I had a good friend who's who was a senior partner there who's since passed away. I thought I had it locked. I mean it was just so many Mm-hmm. Things about it. New York, everything. And they said no.

1:16:41 You're too small. Well the thing that Dan Levitan told us years ago when we did a an episode on the Starbucks IPO was that Uh you were really only considering smaller banks because it was going to be a smaller IPA. Well, I was considering it because Golf is extra told you you had no choice. I had no choice. And Bromman at the time Uh was not a big fan of Worthham Schroeder, which was D Dan Levitant's.

1:17:03 Thing. And so Alex Brown became the lead. But I also you know, I had my own ego attached to this. I had so much fun on the uh you know, on the road show. I I was just in my element, you know. I was looking up I was trying to figure out y you know, your public comps at the time. I think there were

1:17:18 Zero publicly traded coffee companies, not bean companies, not retailers, not coffee house chains. I mean truly unheard of. So when you're going on this road show. I I think people of course are mystified. There's like there's literally no public companies like yours. You know, investor education problem, right? Yeah, I think we had to take them through everything. We had the product there, you know, we we served coffee. I you know, gave him the whole show. We had a short video that was probably in black and white.

1:17:43 The comp always was a restaurant and I was always fighting we're not a restaurant. We're a hybrid retailer. I never referred to us as a cafe. It was always a store. Hm. We are a store.

1:17:55 We are merchants. Fascinating. I mean I go there and eat m many, many meals sitting in your store. Yeah, what But as we've been talking about I mean the economics, you were a store. We were a store. We were a retail store. So Howard, I'm gonna take us through the IPO. Uh, you know, you're the first publicly traded coffee company.

1:18:13 uh you do end up doing ninety three million in in revenue that year. Do you remember the the exact price that I feel at? We were we went out at seventeen dollars and the price was twenty one. The market cap, I think, was two hundred and fifty million dollars. Can you imagine today a two hundred and fifty million dollar market cap company going public and people considering that a success. I mean, this is a great At the time. For your employees, how how crazy is that? What, twelve, eighteen months before They I guess twelve months before six bucks a share. They triple their money.

1:18:43 Yeah. Fantastic for what and and that was when you started calling them partners, right? When they became ninety one. As soon as Beanstock was instituted, it was everyone was a partner. And is that when we did the lowercase when titles all became lowercase? Everyone was lowercase from the beginning. Oh. Out of respect. Everyone's all case. Listeners, when you um when you look up a Starbucks employee on LinkedIn, it always looks like is that is that a typo? And then you realize there's a pattern. All employees always put lowercase. Titles.

1:19:12 So Another interesting thing about the uh I was reading the S one last night. the management team inclusive of you owned eighteen percent. But only nine to ten percent of that was you personally. So the rest of the management team owned just as much as you did as the founder. Yeah. That does feel unusually high.

1:19:32 Do you think that that played a role in sort of Getting people's buy in and getting them to bleed Starbucks as much as you can. Okay, not a strategy. No, that was not a not a strategy. Interesting.

1:19:47 So then from there you open in Washington, DC on the east coast. I think that the reason you picked DC was because Your mail order business was strong there. So you sort of had proprietary data to know that that was gonna be a good coffee city. I don't know how you found that out, but that's accurate. In nineteen ninety five, you cross five hundred stores. Uh you had just bought the coffee connection as we talked about in Boston.

1:20:09 And uh they had one asset that was perhaps much more valuable than Any of the real estate or any of the uh sales that you would generate from there. They owned the trademark on the word Frappuccino. And I'm so smart.

1:20:23 That I looked at that for Appicino with disdain. Really? I didn't like the name. I didn't like the beverage. I I didn't think it was appropriate for Starbucks. And because

1:20:34 I just You know, I just saw Starbucks as such a purity with with regard to coffee. And uh I was wrong, dead wrong. Obviously. Putting myself in your shoes back then.

1:20:45 Now Starbucks and Fraffettino are like a it's like a synonym. It's like you can't disentangle them, but Yeah, it's very different than completely different from blended Cold drink. That was the first cold drink we've ever introduced. It was not a coffee forward beverage.

1:21:02 When we introduced it in southern California was just It went crazy. So what changed your mind to green light it? I didn't have a choice. I mean it it was Coffee gunction had it, then we had it in Boston. People wanted it.

1:21:14 Uh and I just went along. And you ended up like reformulating it, right? It wasn't exactly it. Store manager in Santa Monica reformatted it. And she was on it. I think Howard Bihar loved it. People in California loved it.

1:21:27 There's a fantastic story about Frappuccino. Because of what we did with it. Not in its existing form and retail, but what we ended up doing with it. In terms of the leveraging the brand and distribution. That's a another great story.

1:21:43 Was that your first bottled drink in retail? Yeah. So I went to Atlanta. And Pepsi in the same day. Uh I went to be in Coke. I went to Coke. I went to Pepsi the same day. A coke meeting.

1:21:58 Uh was a meeting lasted less than thirty minutes. I can't I can't remember who I met with. They dismissed me. Uh didn't view Starbucks or uh didn't understand what I was trying to do and didn't give me much time to even explain it.

1:22:13 Uh and then I went to Pepsi. And this is ninety five ish? Mid ninety. But an East Coast. Starbucks wasn't really well known. So I w I went to Pepsi in Purgas, New York.

1:22:27 Met Roger Enrico, the iconic CEO. And Craig Wetherup, the president of of Pepsi. They love the idea. And we started talking about this. Subsequently.

1:22:38 Craig Weather up by and I. On a napkin, I swear. Shook hands. And created a multi billion dollar business. for Pepsi and Starbucks and a fifty fifty J V and bottle prep genome.

1:22:52 And Craig Wetherup deserves all the credit for that. And then Craig became a board member of Starbucks. Oh. And Roger and I were friends until his death. And served on the DreamWorks board together. How did you find yourself at Coc and Pepsi pitching a bottled beverage? And was there an internal revolt?'Cause I could imagine people saying, This is a bridge too far. I don't think people knew what I was even doing.

1:23:13 I mean I think maybe a few people I know I I I just had the thought we gotta put this in a bottle. We have to put this in a bottle. And this product. If I'm remembering right, was so successful the instant that it hit shore s store shelves, we were you had to

1:23:29 pull it all off because you needed to like create new manufacturing processes and spin up new factories in order to make enough to actually satisfy demand. Correct. And we also early on had a recall where with they found glass in the bottle. And Pepsi to its credit took All the blame for that and fixed it. But yeah, it was from minute one.

1:23:52 The the power of Starbucks and bottle frappuccino and doing something we had never no one it was no Bottle of coffee. Let alone. And uh again, just like the Costco story.

1:24:05 In the United Airlines story? The flywheel Of the awareness. And people drinking something they can enjoy at home or at work. Again it just

1:24:16 Created another Uh level of velocity. On the brand. I mean th I just thinking about between the cups But then United Airlines and Costco and

1:24:27 The CPG products. Fifty billion. Starbucks logos printed. I'm sure that was

1:24:35 Maybe more. Yeah. the size of the equity of the brand. Was much bigger. Then the size of the company.

1:24:49 Much bigger. Right,'cause at this point you're like eight hundred stores. Then something else happened. And that is we wake up one day Starbucks is in a movie.

1:25:01 We said, What movie? You've got mail. That wasn't coordinated? First of all Starbucks never paid for placement. Someone must have approved it.

1:25:11 I I knew nothing about it. And then someone said, You gotta see this movie, Starbucks all over it. What movie? Tom Hanks, you've got mail. Meg Ryan. I knew nothing about it.

1:25:23 It was just another thing where it was just like a little fairy dust on the brand. Did you know that it was like the good old days where you're like, This is just like We were so in the mud. I was so in it. That we didn't have a t we didn't have time to look up.

1:25:36 And we were just running. So fast, so hard. When you're growing at this pace. It's almost virtually impossible. To catch the growth.

1:25:47 In terms of the infrastructure. And so You're constantly Back and forth trying to create That fragile balance between

1:25:57 The seductive nature and the intoxication. Of growth and success. And the foundation. Necessary. to support it.

1:26:08 And not falling too far behind where you lose it. But you never are in a position, at least we were never in a position, we were we were ahead of it. Never. And so There was a constant push, and I think this is where Orin

1:26:23 was the wise man in the room to say Howard that's we just can't do that now. It's just we don't have the infrastructure. We don't have the people, the systems. Mm. And you know, I'd be screaming, we we we gotta do it. If if we don't do it, someone else can do it. We gotta do it.

1:26:37 And that takes us to international. We weren't ready for that. Yeah, so I wanna uh uh putting a bow on Frappuccino. Yeah, the year after it launched in nineteen ninety six, Frappuccinos were seven percent of revenue, which I can attest to. maybe freshman year in high school. I had my first tall mocha frappuccino with whipped cream and a little chocolate drizzle on top. And and I now here I am drinking what are we drinking here? You're drinking coffee from India. Yeah, and no cream, only black. Yeah. And so uh you know the the Frappuccino began my journey to the good stuff.

1:27:12 Uh So that's the Frappuccino story. Uh Ninety six, ninety seven, ninety eight. I mean this is this is the international story. So I love the Japan story. You've told this to me before, but um I'd love to Okay. I mean there's a couple of things about this.

1:27:29 I started taking a couple of trips Uh to Europe. And Asia. Just to get a sense.

1:27:37 Oh what the opportunity would be and how would we do it. Mm. I quickly Wrough Europe.

1:27:45 Because coffee was there. I didn't think we could possibly enter as an American company. And so we just took your voice. American luxury leather goods company coming in and competing with their Mez. Yeah, not gonna happen.

1:27:59 And so we said we just took it off the map. And then Uh We we narrowed our focus very quickly on Japan. Japan had

1:28:09 A couple of thousand Coffee stores named Dotour. You walk in there and it was smoke filled, mostly men. Dark. But they were successful.

1:28:20 And so I said to the board We want to go to Japan. The board was Incredibly resistant. to the idea. Why? You've got all this white space in America. There's no need to do this at the time.

1:28:33 And I just said, Okay, well and so w one thing led to another and a board member said if you're gonna if if you're considering this Higher an outside resource to do a study. Oh. Livid about that.

1:28:48 You know. Aren't there some consultants you could possibly pay to help, you know, this uh And so we we hired a consultant. Who came back with a you know big book Presented it to the board.

1:29:01 I had a preview and it basically was this is a non starter, you can't possibly succeed there. And in the meeting I was just I could feel my blood just Boiling because With every statement was getting worse. Like.

1:29:14 The economics won't work. No one in Japan will ever walk in the street with a cup of coffee, they would lose face. Your no smoking policy, which we had from the beginning, is a non starter. And you can't afford the economics, the rent. Don't go.

1:29:32 Well. That only made me more furious. It's like they've never met you. And more more intentional. And so We were we kept thinking about this and then one day We get a handwritten letter.

1:29:49 From a Japanese company. And the Founder of the company, UG Sun. had a LA restaurant. And he was enamored with Starbucks.

1:30:01 Mm. We sit down with him, we fall in love with him. And uh We weren't ready. But we decided

1:30:10 We're gonna give it a shot. We go to Tokyo, we meet him. We ended up forming a J V and you know the folklore at Starbucks Which is not that Unrealistic.

1:30:22 Is the reason we went to Japan as an international market. is because it had direct flight to Seattle. Yeah. That was the extent.

1:30:32 Of our understanding. Now We open up In August. If you've been to Tokyo in August, it's hot.

1:30:41 It's like ninety five degree temperature. and a hundred percent humidity. It's like getting out of a New York City subway. In the middle of August. As soon as you walk out, you need a shower.

1:30:53 It's gonna be a tough opening. Because of the hot weather. I'm very concerned about it. I get back to my hotel room and I have a message. That's C and N.

1:31:04 Is covering the opening Life. Oh. They got cameras. High risk, high rewards.

1:31:12 It's six AM. We get in the car. So hot. The tie around my neck is feels like a A noose.

1:31:22 We're driving up to the store in the Ginza. And it's like two hundred people online. And I turned to the translator and I said Did he hire extras? I cut the ribbon.

1:31:35 And a young man who slept over the night before to be the first person is a college student. Speaks no English. He rushes to the front of the line and I follow him. No English and he says. Double tall latte.

1:31:50 As God is my witness, just like that. And I said Shit. How did they know?

1:31:59 And Japan was a Extraordinary. Success. From minute one. We got two thousand stores there. I was there a lot two months ago. Incredible. We have a roastary there.

1:32:09 Why were there people lined up around the block? Why did it work so well instantly? Was it a strong coffee culture or the coffee c no, it was the iconic reputation and anticipation. Of something That they had convinced themselves

1:32:27 Was Unique Proprietary Not in Tokyo, not in Japan. That they wanted to have. And that cup. But by the way, the research

1:32:37 That cup. Was all over Tokyo. In months. Everyone was walking around with that cop. And this is nine years after

1:32:48 You bought the six stores. It has turned into This icon. In all the events we just covered. Starbucks has already become Starbucks. It is already this like globally desirable

1:33:01 brand there by nineteen ninety six. I honestly I haven't thought about it in that way, but That's so fast. I mean to build something that seemed fast to us. I bet. The parallels to the Microsoft story are just like

1:33:13 So after Japan was Microsoft's first international market. Did not know that. It was half their business and it started in the same way. Bill and Paul got a cold call from Kenishi. There's a guy in Japan. Who had somehow gotten a hold of the basic interpreter. Loved it.

1:33:29 And Said, I'm so passionate about this, I wanna bring it to Japan. fifty percent of Microsoft's revenue for the first At least five years. And they stayed fifty percent international. Permanently. And that's what took them right, you know, from this Albuquerque to like, hey, we're international.

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1:35:33 Japan's ninety six, in ninety seven, you cross a thousand stores globally, you're getting your feet under you, you're saying, Okay, international is gonna be a thing. Uh in nineteen ninety nine you two thousand stores. Two thousand stores.'Cause we had a goal of two thousand by two thousand, we beat it by year. Ninety nine you also open in Beijing. What's the calculus on entering China? And did you realize it could become

1:35:58 Such a pillar of the company like it is today. I I honestly Don't think we had Any real understanding of what we're getting into.

1:36:10 And we went there with a partner that didn't work out. We we I should tell you that we we had a theory of the case. That any international market that we opened That didn't speak English. We needed a partner.

1:36:23 And so Japan was a partner successful. We entered in a partnership. In China early on. That was not successful. Did not share our values and we got out.

1:36:34 And ended up So we closed all the stores? No, no, we got we got out of the partnership, bought'em out and became company owned. And so you the that was that was legal to do that to be an American owned But we struggled in China. Yeah, but we struggled in China for almost a decade. Lost money.

1:36:52 It was tremendous pressure inside the company of Close China. Until Belinda Wong. Maybe the most valuable person in the company. From my view.

1:37:04 Really? Yeah. When did Belinda get involved with Linda was working, she started with Starbucks in Singapore. But she was working in Hong Kong?

1:37:13 We were open in Hong Kong? And uh I I saw something in her was just Extraordinary operator. And had a touch with people.

1:37:24 And I said and we were dying in China, we're really In trouble. Would you come to China and run it? And she said. I would do I would consider doing that.

1:37:35 Uh But you've got to decentralize it. And we couldn't do that right away. It's just too much. But she changed the course of history for Starbucks in China.

1:37:46 What year was that? That she can't that she took over the role. Okay. Well I I'm still there today. I asked because I want to come back to it. There's a whole Inner um you know, between two thousand and and two thousand and eight.

1:38:01 where you are not the CEO of the company. Right. So in two thousand, I mean if if If you're if you've been listening to this episode, the theme that should be occurring to you is Oh my God, basically everything worked. And I know it didn't feel like that on the inside. No. But like you read all those investment banking reports and it's like, hey, Starbucks uh here's all these price targets for Starbucks and here's what we think they're gonna do in earnings and up they beat it again. And like

1:38:23 I don't know, thirty, forty quarters in a row. It's just like this. Uh I would say perfectly predictable except you actually kept exceeding the expectation, so it wasn't predictable. I did a hundred quarterly conference calls.

1:38:36 I'll see you. A hundred. Yeah. That's a lot. I I bet. That's a lot of earnings prep because each one of those has what, two weeks before it of the truth is the majority of those were no script. Which became the league the lawyers took over after that many years, but no script.

1:38:54 Which is your preferred communication style. I mean, it seems like whenever I see you up speaking, there's there's no teleprompters. From the heart. So At this point I don't want to say it it would be Incorrect to say Starbucks is running itself.

1:39:09 But like It's in a great place. And you step into the role of is it executive chairman? Chairman. Executive chairman, with Oren as the CEO. In two thousand. Yeah. What was your

1:39:21 I was I was I think I was physically And emotionally exhausted. Um Kids were getting older, I had missed a lot.

1:39:32 Just think about all the things we're doing. And I had so much confidence in Orange, so it was no problem. And so that's what I did. But I was still engaged, but I was, you know, not running it day to day. And at this point it's thirty five hundred stores. The company's doing two point two billion in revenue. It kind of feels like

1:39:49 Okay, I can I can get some distance. I can do other things in life. It's it's You know, it's gonna work out. At some point, Orin transitions the CEO role to Jim Donald, which I assume you're also very involved in in working with him. Um, what was that transition about? Oren never wanted to be the CEO.

1:40:08 He's not a front guy. Hm. Uh In fact, he's shy. And uh d never wanted to be on the stage as a CEO. So he said, I'll do it for a couple of years.

1:40:19 But he's always kinda knocking on my door saying We we need to see ya. Hm. And we didn't have anyone internally. Bihar didn't want it.

1:40:27 Um and so we did a search. We met Jim Donald. Great, great guy. had all this operational experience. Um

1:40:37 And then certain things started appearing and we would just weren't hitting our stride the way we usually do. The economic environment was getting tougher. And uh Things just kind of

1:40:51 unveiled itself that we it wasn't gonna work out. By the way, but Jim is a great guy, like a really good person, but it just Wasn't the right fit. And so how long had he been in that role of CEO? I say less than three years. Two years maybe.

1:41:06 But basically the um 2008 happens. And so the cataclysmic financial crisis is Unfolding. And uh that plus the cracks that we were experiencing. Uh board meeting.

1:41:20 And I don't think the board meeting was set up for me to return, but it it just kind of happened in the meeting about okay, we got all these problems, what are we gonna do? Do you want to come back? Mm. Yeah, I'm gonna come back.

1:41:34 And that wasn't that was never your intent. When you stepped away, you thought you were going to be able to do that. It was certainly not my intent that we're going to run into problems. And so in the Christmas Vacation of two thousand and seven. I knew I was gonna return in January. So I was on holiday.

1:41:51 And I was starting to think through what I was gonna do. On that holiday, a friend of mine N not I didn't know he was there, but it was Michael Dell was there. And I must have talked to him almost every day.

1:42:06 About the transformation of Starbucks. And he was going through a similar thing at Dell almost at the same time. So we had so many things to talk about. Mm. And we were comparing notes and everything.

1:42:17 And so In early two thousand and eight, I s spoke to Jim and I Came back in two thousand eight. And When you came back in two thousand eight, I mean this is the whole

1:42:28 Crux of your book onward. There's an entire book's worth of material here, so we're not gonna do it all. Okay But uh suffice to say, just to put some numbers on it. Um, the market cap had dropped from thirty billion dollars to less than seven billion dollars. Same store sales, the the comparables number when you compare the the store this quarter last year to this quarter, you know, or this year to last year. um had dropped.

1:42:51 growth began to slow, uh and so you come in and you have to make these really horrible decisions. Th you're faced with two terrible options and you gotta make the right decisions for the business. I uh First off, every rock I turned over was worse than I thought. There were

1:43:08 A lot of unperforming stores that should have never been opened. That we need to close. I think we closed a thousand stores. And I had a company wide meeting I remember it vividly'cause I started crying.

1:43:22 And apologize to everybody. Yeah, we gotta close doors, we gotta lay people off. And I mean just think about You know, we were on our a trajectory for all this time and all of a sudden we not only hit a speed bump, but

1:43:36 The world the music was just stopping. The stock price, I think broke six dollars. I was so afraid that we were gonna get acquired, but The the only cover we had is that the world was coming undone, so no one had any resources. But I was terrified. I just stood up and apologized and said, We we we've let you down, I promise, I'm do my best, but

1:43:56 We're trying to save the company. And literally we were trying to save Starbucks. Things were that bad. you say that we were trying to save Starbucks and in my head I always thought Well, it couldn't have been that bad. This is big, successful company. It's fast growing. It's profitable. And then I read, You were seven months

1:44:12 from being insolvent. So we had uh we didn't have enough cash Comps had we never had negative comps in the history of Starbucks. So negative I didn't every single quarter was better than twelve month. Never had a never had a negative comp month. In my history.

1:44:27 Of of the company. I need to understand. How would I I understand it. Such an anomaly. So

1:44:35 Um We we close all those stores And um Then you gotta decide, okay, how do we How do we turn it? What what do we do? And I think

1:44:46 Going back to your Line of questions in the past about The people Is Of all the things that I could point to.

1:44:55 That demonstrates What Starbucks Is has been and needs to be. It's the humanity and the people of the company.

1:45:05 The company was built. On being a performance driven company through the lens of humanity. That's how it was built. And whenever we've lost our way.

1:45:17 We've lost our way because People In power. Didn't understand. That equation.

1:45:27 And so I I just said We need I I I need to be in front of every store manager. I need a meeting with 10,000 people. The big conference room. And so

1:45:38 In two thousand eight. No American company was traveling. And so the municipalities were hungry. For Starbucks two. Potentially have a meeting.

1:45:49 At a discount. And so we got we had Detroit come in. We had Houston come in and then New Orleans came in. What they presented to us. was the need for Starbucks to come as a result of Katrina.

1:46:03 And when we heard that, we realized we've got to go to To New Orleans. And in fact What we're gonna do in New Orleans is we're gonna have One full day of fifty thousand hours.

1:46:14 Of community service in the ninth ward. Next day we we walk through and we built Basically A tutorial. on how to restore the business.

1:46:26 And have people walk through it. And we had classes and we had all these things going on. And the third day. Was my Speech. in the basketball coliseum to ten thousand people.

1:46:38 About an hour before. I was really Feeling the burden. What I was gonna say is

1:46:47 And the CFO at the time. Who subsequently resigned. A week later. Wasn't my guy. Ask me what I'm gonna

1:46:56 Second. And I said, I'm gonna tell him the truth. And he says, you can't possibly do that. You're going to scare the shit out of them. I went up there. And I laid it out.

1:47:09 Chapter and verse. I think we have seven months left. We are going to be insolvent. I can see why he was freaked out about this. Like if we got out to Wall Street that year Yeah, well social media didn't exist at that time.

1:47:23 I just laid it out. What if that store? Was the difference between The food on your table and its success. And then I had this economic formula.

1:47:34 It would take per store. to turn comps around. And the number was low. It's like less than 10 per day.

1:47:44 Or eleven per day. Mm. And so I said. Let's just talk about New Orleans.

1:47:50 You know how many New incremental customers it'll take In your store? And it's man it was manageable and tangible. Mm-hmm.

1:47:59 Anyway. Right,'cause you could actually imagine Okay, if ten more people walk in the door today. And I delight them in a particular way that brings them back tomorrow, like We're we're turning this thing around, or we're turning this one store around. And if everybody does that. And and the problem when you get this big.

1:48:16 is you start thinking about large numbers. But if you reduce it to the locus lowest common denominator, one store, one cup of coffee, one customer, one partner And what if all of that works? Well. We rushed out of New Orleans.

1:48:30 Like an effin tidal wave. And we never What Back. And less than a year was turned.

1:48:38 And you you did crazy I mean the the tactics involved in the turnaround The closed stores. For what, noon onward, right? For an entire afternoon and evening. Because The previous administration.

1:48:53 That diluted the integrity of coffee. To maximizing the yield. W like what? What does that mean? Yeah. Let's say you're making a batch of brewed coffee.

1:49:04 Yep. Well what if that brewed coffee was based on a number of ounces of coffee? What if you just reduced it just a little bit? No one's gonna know. Hm.

1:49:13 Just little things. Scratches of efficiency that dilute the experience. Yeah. Hm. But that does seem like a

1:49:24 reflects a misunderstanding of the fundamental Business. That this is a business about Mm. Store.

1:49:32 With high gross margins. Based on customer loyalty. But we were beginning Headwinds.

1:49:40 Mm-hmm. And what are the headwinds? Headwinds were delu the level of attrition. Of customers. Mm.

1:49:48 As the financial climate deteriorated. Yeah. Yeah. Spending that six dollars on the latte daily habit. Yeah. Gets harder to justify. And we weren't as good as we we were when we were small. Yeah. Then it makes it easier to give up. Yeah, and this goes back to what I said earlier. Growth covers up mistakes. Mm-hmm.

1:50:03 And success breeds hubris. And it did. I mean how how could you Starbucks today is so freaking ubiquitous, which again is one of the things I love about it. It's consistent anywhere I travel in the world. I can count on it, I can mobile order and pay. There's all these wonderful things. But when you become like government level scale in the world, people

1:50:24 assume it's a piece of public infrastructure. I assume employees even must feel that way during some periods of time of like, we're so big and we're just But the the worst thing that Starbucks Could have become And the worst thing that Starbucks could become is a utility.

1:50:42 Scale. creates complexity. Complexity demands efficiency. But we are in a business.

1:50:52 Where That touch point between the customer and the barista has to be Protected. And has to be elevated. Now.

1:51:01 Then you get stores that are so busy. With the breast, I can't even look up Can't look up. And then you get mobile order and pay, which we haven't even talked about. Which is, you know, is is phen I a thing I love and do every day and depersonalizes the experience by definition. Yes. Starbucks demands nurturance.

1:51:18 It's it's a a company that has to be nurtured like a young child. That is An anomaly inconsistent with scale. And you get people coming into the company. With different experience, different language.

1:51:33 The immersion doesn't quite hit them in the heart or the soul. Well the conscience of the company. They they feel like they're doing a good job, but it's not the job That's consistent with the integrity and heritage.

1:51:46 of what the company has been. Metaphorically, let's let's say that's a giant reservoir. Mm-hmm. If you're taking a deposit On a consistent basis out of the reservoir.

1:51:57 And it's getting dry. You better stop. You better make sure you're making a deposit. So they're equal and it's balanced. When you get this.

1:52:08 That's when the company loses the block. And if you get this And you're making a lot of money? And the stock price is high. People say

1:52:17 It's okay. We're fine. And that's fool's gold. It's it's a camouflage because eventually it's gonna bite you in the ass. Have you ever figured out a way to measure these things?

1:52:28 in a way that like as long as these numbers that that the numbers are a direct tie to our values are good, we can actually put a KPI against them. We know that the core is solid. I I haven't been smart enough to figure that out, but I mean I think The interesting thing to me today

1:52:48 Is that The Asian business. is operating at a much higher. Of the soft side of Starbucks. Than we are in the US. Mm-hmm.

1:53:02 Yeah. And Now I understand your Belinda Wong comment. It doesn't answer your question about quantifying it. But when I am in Asia.

1:53:11 I see things. That are Very elevated. To the brand. that speak to the financial performance of those markets which are very high.

1:53:22 Okay. Before we get to today, I want to talk about some other things that happened in two thousand and eight. Two thousand eight was a big year. So two thousand eight, two thousand nine, two thousand ten, there's no way to put it other than a wildly successful turnaround. Your low point in two thousand and eight profits were three hundred and fifteen million and by twenty ten, they were nine hundred and forty five million. I mean I don't know how we did that. We just went through a lot of the ways of how you did that.

1:53:45 There's a couple other things here, one of which is technology, but I'm told there's a a story you have about Steve Jobs around this point in time, too. Yeah, funny story. Another story. And so In Hawaii

1:54:00 When it's on vacation. I'm talking to Michael Dell. And Benny Off. And you're uh cycling with Dell. Cy cycling with Dell almost every day. And I'm talking to Benny m Michael introduced me to Benny I didn't know him.

1:54:12 And so It's a pretty good Hawaii crude, eh? So I get back. And um Adam Brandtman.

1:54:22 There's a key n person in all this in terms of mobile order and pay. Yeah. He ran digital for Starbucks. Yeah, he ran digital. I'm trying to make sure I got the sequencing of this right. I think There was a

1:54:36 Future meetings scheduled for Starbucks and Apple. Uh around mobile order and pay and other things. And I met Steve on a phone call. I never met him. I was talking to him on the phone

1:54:52 And I'm I'm telling him what's going on. He said you should come down with sh and he had a whole thing about walking. He would Go out and walk around the building. Have you heard this before? This is infinite loop at the early campus. Yeah, yeah. Yeah. And so I went down there and and and basically went down and we took a walk. And I just told him all my problems, everything that was going on. And he just stopped me and he said, This is what you need to do.

1:55:12 Look me, you should. You go back to Seattle and you fire Everyone on your leadership team. I thought he was joking.

1:55:20 I said, what do you mean fire? What are you talking about? Fire everybody. He said, I just told you. F and fire all those people. He's like screaming at me in my face.

1:55:29 Yeah. Fire all those people. That's what I would do. I said, Steve, I can't fire all these people. Who's gonna do the work? І се а промосю. In six months.

1:55:38 Maybe nine. They'll all be gone. He was right. Except for one, the general counsel. They're all gone.

1:55:46 Your whole leadership team turned over after They're all gone. Wow. That's a story about Steve Jobs. Wow. Did you ever talk back and tell him Oh, I talked to him since then and we were on stage together. At an event.

1:55:59 And I told him they're they're all gone. He said, Well. You're six months, nine months late, man. Well think about all the things you could have done. Of course. All right. So while we're in technology land then, um I think today Thirty three percent.

1:56:15 of Starbucks orders are done with mobile order and pay. So obviously this you know, huge pillar of of Starbucks as it exists in our world. How did that start? Yeah. Yeah. You had been on pen and paper. Then you move to Das. And now you have the most sophisticated technology platform of probably any retailer. At the time.

1:56:35 So you're talking to a non tech person. So I'm not f I'm not focused on anything Other than the customer experience. Yeah. Uh Adam Brown to his credit. Along with Steven Gillette who's who was

1:56:49 Shortly. Came to us. With the idea. Of building a mobile app.

1:56:59 I didn't even know what it was. What do you I'm I honestly when in a meeting I'm trying to figure out what are you actually talking about? How are they gonna do that? They created And apps at this point, I mean, if it came out in two thousand nine, which was the first version, the IOS SDK came out in summer two thousand eight. Summer two thousand eight. So it's like, you know, you're one of the very f if they're having this idea and bringing it to you, it's like months after apps exist. Well. They're they get complete credit. For

1:57:29 Assembling. The pieces of all this Convincing us to fund it. And we were off and running. I don't think any of us

1:57:39 Honestly. For myself. Really new What they were actually going to create. They explained it to us, but I didn't really, I didn't get it.

1:57:49 Until I saw it. And then holy shit. Overnight it was just an unbelievable New vehicle.

1:58:01 Now if we fast forward I don't know if you want to do that here. And what it's become. It is the biggest Achilles heel for Starbucks.

1:58:11 Really? And it's not even a close second. And so The mobile app Created

1:58:20 Unbelievable. Convenience. For our customers. But remember. We are an experiential

1:58:29 Brand. And so As this thing was growing. There was never an opportunity.

1:58:39 Because it's Became so seductive. For the company. It also created a even better business model for you, right? It was more efficient and you get the float with customers. All that is true, but at the but it was beginning To deteriorate.

1:58:56 Yeah. the the third place experience in the sense of community. And then it became It over Flowed.

1:59:08 It disproportionately created An environment in our stores. Where the mobile app became The primary vehicle.

1:59:19 As well as a primary vehicle for dissatisfaction. Mm. Because People couldn't get their drink on time. People were confused whether that was their drink.

1:59:29 A lot of anxiety. And the the thing I remember the most is that We were in Chicago at eight A. M. Because people wanted to show me the problem. And so everyone is getting off

1:59:40 The loop, the train. At eight AM and everyone It says the same thing. Your drink's gonna be ready in seven minutes.

1:59:50 And everyone shows up. And all of a sudden we got a mosh pit. And that's not Starbucks. And so The company

2:00:00 Did not do a good job of anticipating. The technological refinements That needed to be put in place. to avoid what was happening. And

2:00:13 I want to be fair to everyone who's managed the company. For about a five year period. Remember, I haven't I wasn't involved in the company from basically twenty eighteen.

2:00:25 Twenty two. Yeah. I not o I wasn't sh I was not involved. You stayed CEO from two thousand eight until twenty seventeen. Then I left. And um

2:00:37 There were no bad people. And no one had bad intentions. But the heritage and tradition of what I've described, which is so vital to the nurturance. was lost. Well it must have been so seductive. Yeah, the stock we were the stock was at record high.

2:00:52 And The company was not investing. Ahead of the curve. And not paying attention. To

2:01:00 the velocity of the mobile app and what it was becoming. Until it was too late. Now the and the company has that problem today, which they will solve. But it's it's late. And also s everyone has caught up to We and we were the only game in town.

2:01:16 And and the novelty of that and the uniqueness of it, especially for our product. Mm-hmm. And everyone's Pretty much copied it. It is interesting to David keeps saying it's so seductive to put some numbers for listeners wondering, you know, w why is the mobile app such an interesting thing. David pointed out the float. So of course, uh if you look at Starbucks uh financial statements, right now, at any given time, there's about one point eight billion dollars of cash that Starbucks has gotten in the form effectively of as an advance from customers that Starbucks can use

2:01:46 To operate. It's like this amazing growth, capital, you know, store expansion, et cetera, et cetera. Right. Uh it's the only one. I mean everyone's uh you know the Amazon has this. Apple Apple has this. The insurance business, yeah. But it's effectively interest free loan from customers and a loan that's not all gonna get called at once. It it's uh it will never get called. Right. The the breakage. And so there's this benefit of like it it's a reasonably predictable amount of cash that comes in that you get to use Um

2:02:17 You know? For your advantage. Uh In terms of velocity, about fourteen billion dollars a year gets loaded onto gift cards. It's unbelievable.

2:02:29 I mean that the if you actually d like look at all of the banks in America, if Starbucks were a bank and you treated the gift cards as deposits, it would be in the top ten percent. Buy deposits. of banks in the United States. It's this like Unbelievable business model.

2:02:46 That's happens to exist inside of this experiential business that powers this experiential business. But to your point, you have to keep it from eating the core. Yeah. L so let's just go back not to the economics, but the The idea itself. And I think

2:03:01 Whether we talked about bottle for Appuccino The cup if you just thread all these things. There is there is a common Through line. And that is

2:03:12 We took A commodity business. And we transformed it. into a premium Product.

2:03:20 brand and experience. But when you are disrupting the market. There has to be some governor. On the on the disruptive innovation. To monitor

2:03:32 How is it being used? How was it being abused? And the era of judgment. In the period where this was Really kind of

2:03:42 Uh where we really took hold this five year period between two thousand eighteen and two thousand twenty two. So government didn't exist. Oh, you feel like it wasn't really taking hold in that whole before. And you know, and and I I'm not criticizing anyone because you know, we're all everyone's trying to do a good job.

2:04:01 But The the The result is There the The runner the the unbelievable success.

2:04:08 It disrupted the experience. Yeah. And now you have stores that are entirely built to just pick up mobile orders. And and my view is We should not

2:04:19 Succumb. To the mobile app. No, I'm not going to be able to do it. when you're in the moment and you and others in the management team things happen. But knowing what you know now. Yeah. Are there.

2:04:31 A couple of key design decisions or things that you would rearchitect differently about the Mobile app experience. I I don't think I would have allowed the mobile app. To

2:04:43 be on demand twenty four hours a day. Hm. I I would have slow rolled The The

2:04:52 Availability of it. And then understood how it was being Used. And whether and whether or not it was going to disrupt the experience. But now it's it's you know.

2:05:02 On demand, whatever you want it. And now you can't. You can't shut it off, right? The expectation. Whenever I get that that message, um you know, mobile order ahead is not available at this time. I'm like oh But it's available ninety nine percent of the time. It's not available now.

2:05:17 And because the store's store's overrun. You wouldn't go. Yeah. That breaks my heart. I hate that hate to hear that. Well. No end. I went to the Presidio store yesterday in San Francisco, and I would go there no matter what. I only agree with you in airports. In airports, I'm so time constrained that I'm like if mobile order isn't working the line's too long. Oh but I've had plenty of times where like I'm looking at stores in the radius.

2:05:41 I'm in a I'm traveling, I'm in a new city and it's like, Well I'm only gonna go the one that's open for mobile order and pay. I'm not even gonna try it. I gotta hit one other Howard, I know you hate it, but one other like amazing business model benefit of mobile order and pay. If I'm buying six dollar lattes over and over again with my Visa card and Starbucks is getting hit with thirty cents every time. Instead if I'm buying twenty five dollar gift cards.

2:06:06 Well that's now three out of four times I'm I'm going and buying my coffee and Starbucks doesn't have to pay Visa thirty cents or the bank thirty cents. That's a pretty amazing business unlock. Like

2:06:18 You know, I'm I I'm aware it degrades the experience, so you have to find ways to deal with that, but I I'd be more than willing to sacrifice economics to go back to ways to enhance the experience. Myself. But

2:06:33 I'm on uncharge. Yeah. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is uh no longer the hard part.

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2:08:31 Pillar of the Starbucks tapestry. Then that's real estate. And maybe this is a good time because I feel like around this era is when People started looking at Starbucks and scratching their heads and being like, There's two Starbucks across the corner from one another. These guys must be insane. Uh Talk to us about real estate.

2:08:51 Uh The the basic idea Early on. Uh given The beverages

2:09:00 Velocity and AM. Uh was to find a corner location. In an urban setting. Where we could Vically see pedestrian traffic.

2:09:13 in a significant way. And so we would Go to cities. And count. Just physically count how many people were walking by.

2:09:22 What hours they're walking by? And once we had A model of success It became clear to us what we needed.

2:09:32 And also once we became aware of co tenancies. of certain tenants that would be interesting to us. Um We also were very intrigued with being next to a grocery store. Early on.

2:09:46 Because of the frequency in which people were buying food. Anytime we're in an office building where there was three to four thousand people in a building. That was a home run. But then It became very clear.

2:09:59 But there were locations that we never imagined we could be in. that became wildly successful and just opened up an aperture to us. That basically

2:10:12 We had opportunities to do things that were not traditional for a retailer. Now the other thing which we haven't talked about is a decision I made early on not to franchise, which you haven't surprised you haven't mentioned that. Oh well. There were franchises.

2:10:27 Well I'll uh let me explain that if I can. Which is all part of the real estate strategy. I I never believed That we could Build, maintain And elevate.

2:10:40 The culture of the company, which I viewed as the thing. In a franchise system. Where we had individual franchisees who had their own subculture. And so even though there was pressure early on because of the cost of capital, And we didn't have a lot of money.

2:10:57 to franchise is we we'd ha we'd have no capex. I said no, we resisted that. And I don't think We'd be having this conversation. If Starbucks was a franchise system.

2:11:08 McDonald's. Extraordinary company. But they're in they're a commodity based product. What has you been saying? It's

2:11:16 From the beginning it was about elevating. Yeah. McDonald's great company, but nobody would ever accuse them of elevating, I don't think. Yeah, and that's why I I I don't want uh Starbucks to become transactional. Coffee is personal. The biggest magic. And what you know, the lightning in the bottle is when you go to Japan or Shanghai.

2:11:36 Or Malaysia. And you see the culture. in a way that you just can't believe. Like how did it happen? That we were able to transfer this To another country, different language, different culture, different politics. How'd we do it? That's actually quite befuddling to me.

2:11:54 The food and beverage concepts do not transfer geographies. Young people around the world We all want the same thing. They want opportunity. They want to be respected.

2:12:11 They want to be repr they want they want dignity. They want to make their parents proud. They want to work for a company that they believe in. And when I see what we've done around the world I'm moved emotionally because

2:12:24 The humanity I speak of is universal. That's why when I came back from China what I said was I just want to say something about China and the US. I know all the rhetoric and the propaganda. About our two countries. But what I see

2:12:39 Say we have so much more in common. Then we have differences. And that should be the theme of the world right now. I wanna pick up the thread on China. Now that we're sort of into the twenty tens. Okay.

2:12:52 This decade saw huge ridiculous growth in China store openings. So there were five hundred stores in 2011, right? When you're sort of coming out of that the the rut. By twenty seventeen there were three thousand. Today there's almost seven thousand. And there was a stat that was reported that A new store opened in China every fifteen hours in twenty seventeen. True. Now bring us to that seed that you planted earlier with Belinda being the single most important employee.

2:13:20 China. presented. The enormity. of opportunity. With the

2:13:27 significant challenge of pioneering. And it's a tea drinking culture. No morning business. People eating rice in the morning. We got real estate wrong.

2:13:40 We got breakfast wrong. But it was all coming. From the control of Seattle. Did you go in with Essentially the Starbucks concept. Yeah, it was exha exactly what you see right now. There's no no different.

2:13:53 But they didn't know. The Chinese people hardly knew what coffee was. There was no morning traffic. And in the early days of our partner w we we do we didn't see eye to eye, so we got them out. When Belinda came along

2:14:08 We had A world class operator who had succeeded In Singapore and Hong Kong. She's a strong person. Who

2:14:16 believed that Seattle The way we were organized. Was not a formula for success. You can't have people in Starbucks in Seattle. Designing the breakfast menu.

2:14:27 who have never been to China. Who think we're gonna they're gonna eat blueberry muffins. And so when she said to me, I will do it. If I'm in control

2:14:38 Of everything. So I want to decentralize. China. I report to you. It's you and me.

2:14:46 And John Culver. Who runs international. Mm-hmm. Take Seattle out of the equation. We were failing. What choice do they have?

2:14:57 Hm. She turned it. She's single. Handedly. built the China business.

2:15:04 Today eighteen percent of Starbucks' revenue is China. Yeah. She deserves all the credit. Almost every quarter during the building years.

2:15:17 Of turning it with her. And all the government meetings to tell the Starbucks story and And then we did things in China. Disruptively. Well Linda.

2:15:28 Decided. That she could go to the government. And go to an insurance company. And come back to Starbucks. And get government approval.

2:15:37 For Starbucks. to do the fur do something had never been done before. And provide health insurance. to the parents and grandparents. Of our partners.

2:15:48 Cool. So A Chinese government. I'm so intrigued. Sitting down with them saying

2:15:56 Can you can you explain Why do you want to do this? Right. You don't have to. Yeah. Yeah. Because it's the culture of our company. We we we wanna do Everything we can.

2:16:08 To benefit our people. Humanity and it's universal. But The show. I think important to just

2:16:18 Um Create. Some guardrails. So One day in the early stages of Starbucks.

2:16:28 Howard Beer comes to my office one day. Remember, we're small at this stage. And he says we We got a terrible situation. The manager of the Seattle Trust store on second and Madness in Seattle.

2:16:43 Tom Carrigan. Has eats. Yeah. AIDS at that time. Was like leprosy.

2:16:53 Leprosy. So he Tom comes in. And he says, I need to resign from Starbucks. And he's crying. Do you have any health insurance?

2:17:06 No. So we Covered. Tom Carrigan. From that point on.

2:17:14 But it was those kinds of imprinting moments. And there were many like that. Right. I think it's funny. So I have heard that story probably five times um because I've consumed an incredible amount of Starbucks content over the last couple of months and I've heard a a story about uh

2:17:33 uh Starbucks employees wanting to buy a cow for a farmer in Africa and stories about Flint, Michigan and stories about get the initiative to bring the company together to try to bring the country together when the government was shut down in twenty thirteen, whenever that was. And I I I was getting frustrated watching all these stories because I kept thinking This is not the answer to why Starbucks worked. These are these one off anecdotes. That

2:18:02 Are Sure, they're emblematic of some broader theme, but at the end of the day, like The answer to why Starbucks works. Has to be something about the business model. And every time you walk into the store, X, Y, Z happens. And here's the economics. But it turns out there are

2:18:16 Thousands of these stories. And it's the humanity seeping through. And it's hard for the company to tell the story because everyone just feels like a random one off example, but they're happening in every community in every part of the country. And I think that is the for me as like a business historian, that's been the thing that jumps out is there's no other company that we've studied that has this sort of obsession with people in humanity the way that that Starbucks does. And we're not perfect.

2:18:45 And so we do make mistakes. And when you're When the brand is being shin so brightly. It's a high standard to be held to the case. If you do make a mistake and we are human, we're going to make mistakes.

2:18:59 Unfortunately that becomes The thing. Yeah. Uh It's tough to fight that.

2:19:04 Are are you open? I'd love to kind of flash forward. Uh you know, you were CEO through twenty seventeen, Kevin Johnson took over twenty seventeen to twenty twenty two. You came back for one year as interim CEO, and now Laxman is the the CEO and has been in the seat for about a year. Um You came in after a tumultuous Covid era. and and try to basically figure out who the successor was gonna be and and you know patch the ship in the meantime. A lot of stuff.

2:19:32 has has happened in that last five years, notably with labor unions. I don't wanna make this podcast about labor unions, but I do wanna ask you what have you learned from the experience of you know having to do a deep dive into how we got here. That's a very

2:19:48 Tough. Complex question. Uh I think My

2:19:57 Personal. relationship. with the company. And how Personal it is to me.

2:20:06 And the things that we not I but we Have tried to do to build a different kind of company. Uh When

2:20:16 The country started moving In a post Covid era to a direction that I didn't recognize. very, very hard.

2:20:27 to understand why Starbucks would be under assault or Or Just being challenged this way.

2:20:38 Particularly when you had built a reputation on a very a fresh pattern in a history of being unbelievably you know kind to your people. Yes. Yeah. I entered Starbucks. as the interim CEO when this was already going on. And I think the company

2:20:56 Made some early mistakes. Some of which were Covid related. Again, no textbook had to deal with COVID issues, health issues, safety issues. Uh And then I think uh

2:21:10 underestimated the ground swell. Of Public sentiment. Uh for this movement in America.

2:21:21 And um then became vilified for trying to defend the company in a way that I thought was appropriate. Um I think what's lost in all this is The percentage of stores that have been

2:21:36 Petitions. And the number of people is very small in relationship to the To the whole. And then All the people

2:21:44 in Starbucks who were depending on me. Two Defend the company. And trying to do that. In a

2:21:53 world of disinformation is d very difficult. At the time when I was trying to Restore the company back to health. Clearly Mistakes were made.

2:22:03 This story is still unfolding. And um My heart's with the company and but the thing that I think was lost in the story is The shareholder. Is not the primary

2:22:16 Person. It's the Starbucks partner in the green apron. Which is the cloth of the company. And if we exceed the expectations of the cloth of the company and our people, shareholders and customers are gonna win. That's been my whole life story. And that's basically worked for decades and decades.

2:22:33 It also seems like when you Starbucks has become such an institution in our society That leading a small disruptive organization Everyone gives you the credit for all the positives and all the exciting things you're doing, and you sort of get a pass on anything that didn't work. Move fast and break things. When you're at this scale. Everyone expects you.

2:22:55 to be wildly successful all the time'cause you always have been, but anything that's misaligned, that is where a hundred percent of the focus is. Well I think If you take a step back, not from Starbucks, but if you say to yourself What

2:23:10 company has gotten big in the food business. And stayed true. to its core purpose and reason for being and then stayed positively Inclined to its customers. So if I what are you gonna name?

2:23:26 And so the odds on getting this big And still being revered. for who you once were is very, very difficult. And I would argue

2:23:37 In so many ways we are better today than we were when we were smaller. That is expected of us. Uh But I don't think we get much credit. May maybe we shouldn't. Maybe this is uh Our responsibility.

2:23:51 The elements, the characteristics that built the Starbucks business to culture is compassion, empathy. And love. Those are not just words. It's like real things that are not they're not being taught. In business schools.

2:24:06 And people on the outside view it as not true, I'm telling you. The reason we've succeeded is because the underpinning Of the company's purpose. has been just that.

2:24:18 And it's much harder today. To To execute that. Because you're you're dealing with Cynicism as the first

2:24:27 Order of defense. That you have to overcome. But the responsibility As leaders. is to do just that.

2:24:35 All right. I'm gonna take us to Starbucks today. I'll kinda And then We're gonna go into playbook where we basically

2:24:45 try to take all the lessons we just learned over the last few hours and figure out why did Starbucks work. Um and at such a grand scale that it did. So to catch listeners up on the business today. Starbucks does thirty-six billion dollars in revenue, four point one billion in net income. There are three hundred and eighty thousand employees. You gave me a I think over four four hundred and fifty thousand. Four hundred and fifty thousand, by the way. I must be using an old number. Um, and over the lifetime of the company has employed over five million. Yes.

2:25:15 Five million alum. That is scale right there. Thirty-nine thousand stores globally in eighty-six countries. Almost half of which are in North America, eighteen percent in China. And Uh about half of those are licensed franchise. and half her company operated. And so while we're not

2:25:35 you know, you you mentioned we don't franchise in the traditional McDonald's sense. You do these joint ventures and you do this uh this way of entering countries where you don't need to own and operate the entire store yourself. Then not franchises in the typical sense. Yeah, so tell us about that. Yeah. The joint venture relationships that we've Established and some goes back almost thirty years. In the Middle East.

2:26:02 In Latin and Central America. Now in Italy. In the EU In India. And what does it mean to be your partner? So

2:26:13 Uh every country is different depending on the economics of that country, the political issues. Uh some countries have been an eighty twenty Starbucks owns eighty, they own twenty, some are fifty fifty, some are uh some of the eighty twenty started out as Oh, eighty for us and they bought it in over the way. Hm uh it depends. So but the the key thing is Whether it's Alberto Torado and Latin or Central America, Mohammed Al Shy in the Middle East.

2:26:41 The Tata group in India, the Prakashi family in in In Italy. They understand the culture and values of Starbucks. And so tactically w what you know, you said it's not a franchise in the t traditional way. What are

2:26:57 Starbucks responsible for and what is the partner responsible for? Starbucks is responsible for roasting the coffee. Mm-hmm. For all the recipes which are consistent with Starbucks worldwide. A co design of the store where we're designing the store with the J V or the licensed partner. And they control all the operations.

2:27:18 Hm. And so all of Starbucks's franchise or license stores are done in this way where there's a partner in a country. license franchises of any kind unless It's certain real estate that we can't get that we want access to. Like the a roadway.

2:27:39 uh on a highway in Switzerland. Or something odd. And airports are this way, right? Airports are m master licensed with the with the master licensee like Whoever has it in like Marriott or whoever has it. I gotcha. Or Target that has two thousand Starbucks stores.

2:27:56 And those are target operated, yes. I see. A great partner. And Brian Cornell, great guy. And it's interesting the basically, you know

2:28:06 Half of Starbucks stores look like the Platonic ideal of coming out of the Starbucks HQ, here is how we imagine this this store to be. And half of them are. There's some reason why we alone can't do this and need a partner and you, you know, you spend a lifetime doing this. I mean ideally you want the customer experience to be the same. worldwide, regardless of the shape and size of the store where it's located.

2:28:30 Makes sense. Which is not always the case. I I admit that. So one market that we haven't talked about that I I wanna ask you about while we're in this. Then we'll get the playbook. Is

2:28:41 Italy. Yeah. The whole thing. Came out of Milan. Right. And yet For decades

2:28:47 Fifty No Starbucks. Fifty years. No no Starbucks really. And the belief, at least as I see it, is they've perfected the coffee house concept. Don't bring an imitation in here. Okay. But it's worked.

2:29:03 It's it's working phenomenally well. Why is Starbucks being so well received in Italy? So I I'm I know I'm gonna be Chastise what I'm about to say. But it's true.

2:29:15 The by and large. Coffee in Italy is not as good as it once was. There are certain coffee companies that have maintained the standard But by and large the coffee is not as good. I'm gonna be

2:29:29 Killed for that button. That's that's that's my truth. If you don't believe you have a better product, who does? Yeah. But I I didn't think we earned the right. To go to Italy until we were

2:29:42 Really ready to present our s. in the best possible way because I knew The knives would be out for us in ways that we could couldn't even possibly imagine, given the the history and the cultural relevance of espresso in the coffee bar. And so we waited and waited and waited until

2:30:00 The roastry. And so Uh before we get to Italy, I'd have to explain the roastry for you. Please. I mean the first time I went in there, uh Kidney Candy store wide eyes. So there's six roastries starting in Seattle. Chicago, New York. Tokyo, Shanghai, and Milan.

2:30:19 The roastery itself. is probably the most entrepreneurial creative Project. that I could recall in my history of Starbucks. What is the experience we could create that just

2:30:33 absolutely blows people away. So what did I do? As a kid. I've loved this movie. And so I invited

2:30:44 most creative people in the company to my house. And I said we're gonna watch a movie. Of course they thought I was nuts. And I turn on Willie Wonka. I was gonna say that. Turn on Willie Wonka Wonka with Gene Wilder. And we went to work.

2:31:00 Starting to design a space. Now we realized early on And this was what, twenty thirteen, fourteen? Eight years ago. Now we realized economically

2:31:11 This is a tough business model. So what are we trying to do? We're trying to create an experience that is accretive to the brand. And significantly elevate Starbucks, which is fighting ubiquity all the time, every day. And so

2:31:29 We created this thirty thousand square foot space in Seattle, which we opened seven years ago. Which is the most Dynamic Entertaining

2:31:41 vehicle of theater, romance, seduction. And we open it. To rave reviews. And we're manufacturing. Like Willie Wonka did.

2:31:51 We're manufacturing and roasting coffee in the space. Which makes the smell of themazing. So we open it up. And then Over time we start opening a coup more. We got approval from the Chinese government to

2:32:05 Manufacture in the center j of Shanghai. We open up a forty thousand square foot in Shanghai. We open up an incredible space in Tokyo. We open up in the old crate and barrel space in North Michigan Avenue in Chicago. We open up in the meatpacking business in New York. But the shrine.

2:32:23 Has to be Milan. This is the way to go back. And this is the way we open on Italy. Now. Our partner in Italy. is the Prakasse family, fantastic people who are in the real estate business. And they are showing me I'm going back and forth to Milan like all the time because they've got real estate and I gotta see it. I gotta touch it, I gotta smell it. I keep going back and back and back.

2:32:45 No, not the right sight, not the right site. And I'm standing On the corner of of Carduzo Square And I look at this face and I say, what about that? And he says. That's the post office.

2:33:00 You can't get the post. I said well it's empty. It's empty. You can't get it. So I said, Can I meet the landlord? How it's the government. I said, Well, who who who's responsible for it? So they arrange a meeting for me.

2:33:14 And I meet the broker who's involved in this, but it's it's empty space. And find out the story is. that these government buildings during the financial crisis were sold. to private equity. So I said, Who's the landlord?

2:33:29 I'm not I can't tell you. You have to tell me you're the landlord. Private equity that's letting real estate sit empty? Okay, it turns out I know I'm gonna get killed for the story, you're gonna have to fix this. Turns out.

2:33:45 The owner. It's Blackstone. No. I knew it. I knew it. Of course. Of course. I said w why am I in Italy? I call John Gray. No way. I said, John, I'm in Milan. Do you realize you own this space in Cartuzo Square used to be a

2:34:03 Post office. He said, I I don't know, let me check, you know. Yeah. So John. I'm coming to see you.

2:34:09 Tomorrow. I'm on the next flight. We do the deal with John Gray. Amazing. Unbelievable. We've got being the number two person at Blackstone. So uh

2:34:21 And John's a big fan of Starbucks. He had previously been in Seattle for a wedding or a bar mitzvah or something and saw the roasteries, so he knew exactly what I was talking about. And so That is how we entered. In Milan.

2:34:34 Yeah. We have thirty stores. We have thirty traditional stores in Italy. Did they already exist before the roastry open? Milan opened first. First the roastry. Then thirty stores we in we're in Milan, we're in Roman, we're in Florence. And um

2:34:52 Two, three years later. What do you think the number one beverage is? It's espresso. For Starbucks. Yeah. Straight espresso. Espresso is the number one beverage.

2:35:04 Wow. So we're I don't take The the success in Italy for granted, we've got to continue to earn it. But what I'm most proud of is that

2:35:13 We've respected the Italian people and coffee culture for fifty years. And they they embraced us. And so the implication of espresso being the number one beverage is it's not tourists. It's the Italians coming to Starbucks. There's a lot of tourists coming into the roastry, but yes, it's and that they're choosing to get their espresso At Starbucks, no. Yeah. Yeah.

2:35:32 So I mean so and you know, Italy I'm going to Italy I think next week, but Just For me The the the gratification, the satisfaction of

2:35:43 Yeah. f complete full circle from nineteen eighty three. It's just beyond belief. For me. I'm wondering

2:35:51 Another Backdrop to the roastary. And really throughout all the twenty tens. Must have been third wave coffee. And

2:36:00 I'm sure it was on your radar screen. Yes. At the same time It doesn't seem like it's ever made a dent in Starbucks. There's always been stories that all these competitors were going to steal business from Starbucks, but from nineteen eighty three to all the way today.

2:36:18 the consumption, especially coffee, is still a small amount relative to the macro opportunity. So all those people have expanded the market. With and for Starbucks. Now we created an industry that didn't exist. And they have followed us and done really good things, but

2:36:34 And we're not threatened by that. Interesting. So you think Third wave coffee brought consumers into the culture market. Yes. That have then also become Starbucks consumers. And maybe they wouldn't have been Coffee culture consumers at all. Yes.

2:36:50 Hm. How do you define third wave coffee? Actually Howard's probably the best person to ask. I mean It's a Very Uh intentional

2:37:00 Independent coffee store. That is small enough that they're roasting their own coffee. Or getting coffee from a small proprietary Roaster. Mm-hmm.

2:37:11 And creating a very unique handcrafted experience. Uh That In many ways, Starbucks can't do in scale.

2:37:22 Right. Yeah. And so I I tip my hat to them. There's no coffee experience in the world. That comes close to the roastry.

2:37:30 Any of them. And do those roasteries break even, or are they this like marketing showpiece that loses? Some are making money and some aren't. Wow. I mean I think but I don't I you know I don't I've never viewed it that way. Billboards you couldn't put a price On the hundreds of thousands of people that come into this roastary.

2:37:50 And have an experience of a lifetime. And I took Mr. Arnold to the restroom. Really? In Milan? In Seattle. In Seattle. In his son, yeah. Wow. Yeah, spin it.

2:38:01 I've taken a lot of Oh. Retail CEOs And Iconic business people through the roastry.

2:38:10 I bet. Wow. Wow. What was Bernard doing in Seattle? I don't know what he was doing in Seattle, but I sp spent a fair amount of time with him and his son, the son and now run Tiffany. Oh great.

2:38:22 Wow. And he his level of curiosity was uh very high. I remember he was he kept looking at the leather railing And the stitching. And I just said, spending a lot of time on the leather. I bet he was. Maybe there's a partnership to be done. Okay. So now the the question sort of becomes what

2:38:42 Or the set of circumstances that had to be true in order for Starbucks today to exist. And the the one thing we haven't Talked about. Or one of the things is how much Of

2:38:54 What Starbucks has accomplished. If it wasn't an addictive Substance. Like it's kind of this incredible thing that

2:39:04 It's a legal drug that all the research anyone's ever done into caffeine is by and large It's neutral to helpful. And like every other drug that

2:39:14 you know, at at some point people have enjoyed whether it's smoking or drinking, and more as research comes out over time, we find out shoot, that wasn't good for us. That's not the case for coffee. What an amazing thing to get to build a business. On This delightful thing we have to consume every day'cause we're addicted and it's pretty good for you. And it gives you superpowers. Yeah. I I'd like to

2:39:37 believe. It's not based on What you are characterizing as an addictive. Beverage. I'd like to believe.

2:39:46 It's the experience that has been created. around the enjoyment of the coffee and the experience that happens. Uh I also think And we d we we haven't really spoken that much about it is

2:39:59 I can't State enough. Over the last Two decades what Customization.

2:40:07 meant to the company. And how Customers created a personal beverage. Well beyond. What the menu was.

2:40:16 And I don't know any other Business. Yeah. In which The

2:40:21 the incrementality of the price has been dictated by the consumer. The base price is X. But most people are doing something In X plus Y. I I have a a very specific drink that I like, and when I go to coffee shops that are not Starbucks,

2:40:38 I can't get it. because it feels taboo to order. Like I like an iced almond milk latte with whipped cream. And when I go to most Coffee houses. I'm like, I can't ask for whipped cream on top of that. But Starbucks are like, of course. That's what we do here. This is something that I think has translated incredibly well to the mobile app. Yes. And that no other food company

2:41:00 has really the level of customization. Actually added velocity to customization. It powered customization. Yeah. And I think the Starbucks Barista.

2:41:15 deserves so much credit because They are Dealing with so many different Variations.

2:41:24 Some of which you're making for the first time. On the fly. Hard to do. It's a hard work. It has to be A good number because there's I don't know if it's I haven't done the math, billions, trillions of combinations of possible drinks. And so

2:41:39 It has to be every single day as a barista you're making something for the first time. Yes. I think I I the the the number that people use inside the company is a hundred thousand. Different. variations of beverages that are being made consistently. A hundred thousand different beverages.

2:41:59 This is actually a really interesting way to lead into playbook. Because On the surface, it's like an obvious question, right? Like Yes, it's an addictive substance, caffeine is of course. On the other hand.

2:42:12 you're in a highly competitive market. Right. Yeah. Selling a commodity. And the market actually is not just coffee. Yeah. Let's stick with this theme. It's caffeine.

2:42:22 Broadly. Well, there's Coca-Cola, there's Pepsi there's, you know Well, not only that, but every food company, every retail food business from McDonald's on, took a page out of Starbucks, went to school on us, put espresso machines in their stores and started doing Coffee beverages. Right. That also expanded the market.

2:42:41 I think the real question is Here. Nobody has built Starbucks. Despite decades in a highly competitive market. With

2:42:49 Whether it's third wave or competitors in other geographies or domestic competitors or McDonald's getting into the business. Or Folders and Maxwell House. There is a unique tapestry that we've been weaving throughout this episode that

2:43:06 You know, in Hamilton Elmer's terms, has Power here. Mm-hmm. Yes. Coffee.

2:43:13 So here's my second one in addition to the the the Um It's w Addictive but delightful. It

2:43:21 Is perceived to be virtuous. to be a barista. Where it is not perceived to be virtuous to flip burgers. And I don't know if that's something Starbucks created. I don't know if that's something inherent. to the product.

2:43:36 I don't know if that's because it has this Italian lineage. But there's all these incredible benefits. That Starbucks and any other coffeehouse chains get to enjoy because

2:43:49 It's respected. to do that work. And uh I'm curious, w why do you think that's respected when similar ways of spending your hours in restaurant work isn't.

2:44:02 First of all, I I've never heard it quite like that and I think that's a very interesting insight. There is craft. And art. to the expression. of making the beverage.

2:44:16 I also think the intimacy of the relationship With the customer. Is so different. And Baristas know the names of their customers. They know their dog's name.

2:44:30 I I I saw a a a video where The barista knows the name of the dog and knows the It's just the whole thing is just like a magical dance. That happens.

2:44:43 When the the cars pull in and all of a sudden It's not a transaction. One of the beauties that we've been we have been able to do is elevate the experience of the drive thru, not all the time. So I think your question is steeped in

2:44:59 One is a commoditized environment. And the other clearly is not. And the challenge for Starbucks. is continuing to innovate. For the barista.

2:45:13 And when you in this category To extend that. Point. You start from a place of This is a good job.

2:45:22 And you can sort of improve the experience for that employee. So they can in improve the experience for your customers. Whereas in other things that are commoditized, they start from a position of, I have to do this job. And it's a really tough uphill battle to invest in your people. Whereas Starbucks kind of has a tailwind. But it is a hard job. Certainly. And we have to honor The people who are doing it.

2:45:46 More so today than ever before. Yep. Another one that I have is It's funny, it flies in the face of some of the um pitfalls of ubiquity that we were discussing before. The fact that it is everywhere uh almost cheapens the experience. To me, Starbucks' ubiquity is a massive feature.

2:46:05 The fact that I can go Anywhere in the world and get basically my same order. Or certainly anywhere in America and get my same order. I can even do it from the mobile app in a way that I'm very familiar with ordering. Uh it's reliable, it's predictable. Like it's the same reason I bank with Chase and I buy Apple products. It's this thing that I just know works everywhere and I never have to you know, take any risk on. And uh Starbucks didn't have that when it was starting, but it really feels like

2:46:34 It's reached this scale that no one else can really compete with the level of ubiquity. So Ubiquity Earlier on in our conversation I said ubiquity is an enemy of Starbucks. Mm-hmm.

2:46:48 And it's an enemy because we can't be defined. by our ubiquity. We have to be defined. By the one store you come into. Not based on the thousands, but that experience you have in the store. Yeah. So if the ubiquity

2:47:03 is driving Trust. And driving convenience. We have to ensure the fact that we are providing that intimacy in the store. and not allowing ubiquity to commoditize the experience.

2:47:19 That is the framework. of the daily challenge of the company. Mm-hmm. Frustratingly for those of us who are trying to analytically put this puzzle together. The humanity is actually the answer. Yeah. Scaling humanity is actually the answer. You know, along with this long list here, this obsessive quality of product, the fact that product isn't just product, but experience is the product as all ever it's everything you experience around consuming the beverage itself.

2:47:45 It's uh a a bunch of the things we've already talked about. You invest in your employees, they take care of the customers, who takes care of the shareholders, but the shareholders are last. It's the fact that Um Oh yeah, we talked about the store cash flow dynamics that you can scale in a really cash efficient way when, you know, you're paying the stores back in in less than two years every time. Every store is a billboard. So you're intentionally picking real estate in these places where you're

2:48:11 building familiarity with people. They're walking by over and over and over. You're extending the brand by doing United Airlines, by going to grocery stores. Everything is a billboard. Everything is a billboard. Yeah. That's the like w why pay for customer acquisition when you can you know, part of the product in people's h hands. Yeah. Um The third place. you know, very novel idea at first. Turned out that was something basically the entire country and then the wor the world wanted to participate in.

2:48:39 Not obvious at first. And it's so easy to think about these things that now we take completely for granted. Like Starbucks. Is infrastructure in our society. It is assumed. Like when I go to an airport or a city and there's not an easy way to get to a start. I'm like, what is this place? What backwoods place am I in? Like it's it's it's expected. And when you

2:49:03 live with something, you know, most of your life. You forget that it was once A crazy idea. I think that's the Yeah. I think I think the other piece that you didn't just list off there, uh that we've covered in depth is is you know the costs go like investment in your employees and the people and the reduction of turnover.

2:49:21 And Probably much more so the reduction of turnover. In Starbucks's case It really is like that's like

2:49:33 A key the key element to Building the humanity, right? Like I don't know the employees at my Costco store. What's the stat that you have on um I've heard you say it a number of times on um employee tenure at Starbucks versus others in the category? It's a two X, is what I believe.

2:49:50 that employee tenure is two X longer or turnover is half of what it is industry wide. Yes. Makes a huge difference. And you've talked about bean stock, you've talked about comprehensive health insurance. When I think about the most important thing we probably have done in the last Twenty years.

2:50:09 It's been the unique relationship that we established with Arizona State University and its president Michael Crowe. Could we create free college tuition, a four year free college tuition Through Arizona State. For every single partnered Starbucks and we did it.

2:50:27 And thousands of Starbucks partners are engaged. And going to school. And thousands. have graduated. The college achievement plan

2:50:37 demonstrates going back to the early years of the speeches I was giving about what is the responsibility for a for-profit company in the world we're living in. And it's not just to make money. Here's one that we haven't talked about. Uh as much about You were part of the secular trend of gourmet coffee.

2:50:59 And I'm curious if you view that to be a true statement or if you're saying no. We created. This entire wave. It wasn't gonna happen. It wasn't just like

2:51:11 I don't want to sound Arrogant at all, but I think it's so clear that Starbucks created an industry. That did not exist. And As a result

2:51:22 Tens of thousands of stores have followed in our wake and We created an employment industry that did not exist. Not to mention it's five million This five million a loan.

2:51:36 Yeah. That's a lot of people who have gone on to do other things after and and I think one thing that's always been missed is that Starbucks Has always been a great first job. So in your mind then Let's say There's a parallel universe where Howard Schultz doesn't exist.

2:51:53 The year is nineteen ninety five. Is there a nationwide chain not called Starbucks with gourmet coffee. taking off in the United States because the conditions were perfect for it.

2:52:08 I would assume that there would have been a national franchise Business. That would have occupied the coffee space. But would have been more commoditized. A dunk of donuts.

2:52:22 For instance. Yeah, I not I don't think anything would have been executed like Starbucks. But I think some someone would have showed up. Right.

2:52:33 The opportunity was just Right. Th the there was clearly demand there. We were coming off this horrible you know, Folgers and Maxwell House era and there was this growing demand. But that doesn't mean that a company like Starbucks would have been created. It means just in some way that consumer demand would have been satisfied. But just remember our intent.

2:52:54 was not to build a global business. Uh you know, the first business plan and I've I've said this many times, when I was raising money was a hundred stores. And I I wasn't raising the money and I didn't couldn't afford to reprint the whole document, whatever that was at the time. And I white it out. No one's even gonna know what that means. I wipe out white it out a hundred and seventy five.

2:53:15 When was the last time you used Whiteout? Yeah. It's been a while. It's a bit. Wait, really? So you Yeah, I white it out seventy five,'cause I couldn't Did it feel too ambitious? Yeah, people didn't believe. Think you're crazy. But we never we we you know.

2:53:30 Japan was the Turning point of Thinking we could build an international business. But we didn't we w none of us had any international experience. No one. In the whole entire company.

2:53:41 I mean In any ways. You could say this shouldn't have happened. Yeah. Okay, so this brings us to the

2:53:49 m absolute magic of founder led businesses. Mm. I mean when you have A founder at the helm. You get All this leeway from shareholders

2:54:01 from employees, you can take crazy risks. And people know it's'cause you're you, but for you it wouldn't exist at all. So Run with it. What are the biggest innovations that have happened at Starbucks, not under Howard Schultz? What a question.

2:54:19 I'm pausing. N not because there hasn't been any. Uh because I'm sure there has been. But I'm hard pressed to kind of think about what it was. I don't think you were uh

2:54:32 running the show when the pumpkin spice latte came out. Yes, I was. You were. I had one. Yeah, so I didn't like it. Oh. Yeah.

2:54:42 It does feel like you were um obsessed with the purity of the Italian coffee bar for a long time and then at some point you were like Actually what I'm obsessed with is serving customers.

2:54:54 in whatever they want from us. Well the Il Gianali store only played Italian opera? And had no ch had no chairs. I mean it wouldn't have scaled as well. I I I'm recalling my time from Rome two years ago. That's literally I'm walking around Rome and that's everywhere. Yeah. completely different than No, I think I had to see the light. I had to understand we were Not a business to please me, but please the customers.

2:55:15 I mean s what is it, seventy percent of drinks are now cold beverages. And it was when you started zero percent. Didn't have a cold beverage. For the first decade it was zero. So I to me there's this thread of um At some point Shaking off your own opinions and saying We're gonna do what the custom wants us to do.

2:55:35 To a degree. Yeah. But I was clearly lead there was a leading question around innovations, not under Yeah, so what's the point? What's the what's your It's not that it's not that there hasn't been innovation. I think

2:55:51 Uh There's a burden That the organization has and a reliance On the founder.

2:55:59 That over time can become unhealthy. And Not that I didn't want succession. I just I wasn't Wasn't

2:56:08 Really? On my mind. And Mm. the the marketing and the merchant mentality of Starbucks

2:56:18 What Always with me. And probably did not allow others who were well intended and could have done good things. were following and leaning on me.

2:56:30 Which is not the healthiest thing. over the long longevity of the company. And I think that has covered up mistakes. Mm. That that's covered up things and then was revealed when I left. I mean it's the very things that make the business successful, the founder bets.

2:56:49 That then at some point in the company's second act kind of hold it back. founder Maverick acts. At some point you need to figure out how as a company to not Well, the the other thing about that is Most founder led companies

2:57:12 are entrepreneurially driven. They're they're not It's not that they're not following the rules. They're making the rules. Especially if you're creating an industry that did not exist.

2:57:24 Founder leaves I'm not talking about me, it's you historically. And companies lose not only the extent of the entrepreneurial DNA But they lose

2:57:37 The ability to be on offense. Mm. And the worst thing That a company can do like a sports team. is start playing defense.

2:57:47 Because you're afraid to fail. That is a disease. None on like Another disease which has happened to Starbucks, which is ubrus.

2:57:57 The worst. thing that could happen to a company is believing. Nate. You are incapable of doing anything but succeeding. And you deserve the success.

2:58:07 But if you start playing defense and don't have the The offensive mind It's It's not gonna go well. And I think over time that has happened at Starbucks.

2:58:21 You've transitioned from being the CEO to someone else three different times. If you could go back let's even just say the first time, if you could go back Years nineteen ninety nine. Or nineteen ninety seven, so you can start.

2:58:33 working on some talent development. Um What would you do differently? To make sure that succession I would have believed Warren when he said I only want to do this for a couple of years.

2:58:45 Mm. And I convinced myself I could just get on and do this. Five years, maybe ten years. And so when he kept saying you know I I don't I want I don't want to do this anymore. Like

2:58:54 So I was stuck because I was not prepared. to look around the room and say, God, I I think he could do it and if I would have spent maybe A year. Or two, and but I didn't. I I was very

2:59:07 I I believe that I can convince Norman to stay longer. And so I think and also Jim Donald's a great guy, but I I I think the immersion of an outsider at that time, given we were moving into a crisis. Not a Starbucks crisis, but the

2:59:24 Financial. Very difficult. So It's on me, I think, when I look back and I just did not do a very good job of recognizing the internal talent and cultivating it.

2:59:38 But I wanna I wanna say one more thing about Starbucks. And it's the complexity of it. We're in multiple businesses. So We're in the agricultural business.

2:59:50 We are buying coffee from thirty producing countries. Around the world. We are subject. to weather and the agricultural issues. Some of which are

3:00:00 Many of which are not in our control. Political All kinds of stuff. Second. We are manufacturing.

3:00:10 A com a a P uh commodity. That is very, very challenging because it's coming from thirty producing countries and each coffee each coffee from every country has its own proprietary taste profile. That has to be roasted differently.

3:00:28 And when you're blending it like a winery. It's it's art. And so We're we're an agricultural buyer. We are a manufacturer.

3:00:39 We are a retailer. We are a wholesaler. We are managing J V relationships. In eighty countries We have J Vs with two behemoth companies, Nestle and PepsiCola.

3:00:54 And above all else. We're in the people business. Managing The behavior The motivation.

3:01:02 And the opportunity creation. For five almost five hundred thousand people. And we're a public company. In which the expectations based on our success. Абгард.

3:01:16 Not to mention you're a quasi financial institution too. Yeah. And we've got Yeah, all of that. And uh And lastly I think the

3:01:26 The personal responsibility. Of a founder. In my case Who loves this company As much as I love my family.

3:01:36 And So it's it's it's a challenging, fragile thing. On a very personal level. And you can't escape it. If you you made your point. You want to go somewhere and get I mean, you can't escape it, so it's always around you. I'm so glad you're bringing this up.

3:01:53 It really resonates. To us hearing you say that, like w it's the way we feel about acquired yes in our show. Yeah. And like to imagine like that's easy for us. We have no stakeholders. We never would expect that this would scale to five hundred thousand people. If it did

3:02:09 I can't even imagine the complexity of that. But you also have now that you've achieved this level of success. You you you have an expectation that you've gotta keep Not reinventing, but you've got to make sure that you're as good as you've been. No better.

3:02:25 Yeah, you gotta be better. Again. And your success is not an entitlement. Like Starbucks. Just isn't.

3:02:32 And w and when and when you have success It gets harder. The bar keeps getting higher. Yeah, that's just human expectations. I I'm going into this, I was thinking, um I had some funny thing occurred to me, which was at some point, why does Starbucks need to grow anymore? It's already everywhere. And of course, like it's a public company, so it can it it literally has just has to keep growing.

3:02:52 But it's just human expectation that things keep getting better than they were last year. They should. Well people should just figure it out and make it better. We all think that about every product and experience that we have.

3:03:04 And eben. Well, listeners, we were thinking about how to land this episode, and you know, in our normal episodes we land the plane in some way or come up with the one thing you really You can't leave the episode without thinking about, and I feel like we covered a lot of those in playbook. And so rather than drilling into that again, We were talking with Howard and he threw out this idea. I I really do have one more thing to say.

3:03:29 Yeah, given this moment that Starbucks is in right now here in summer of twenty twenty four. This felt like the right way to address that. Back to the interview. Well Howard we're We're at the end here and

3:03:42 Uh I think listeners may be wondering, okay, but what about Starbucks today? Yeah. And the last few years have seen, you know, you come back as an CEO for a year, transition to a new CEO. It's been about a year after that. Um and it's been a a rough couple of years. I mean, part of it is coming out of the pandemic, but um I think anybody who tuned into last earnings call is wondering what's up with the future of this company. Um, can you give us a little bit of narration on what brought you back the things you did and where the company is today? Yeah.

3:04:13 L let me try and go back to When I returned as an interim CEO in April of twenty two. Um I was asked by the board

3:04:26 to come back to the company and I I said no. I I My my life has changed. I have I have no desire to come back. I have no intent to come back. But it was clear to me. As the weeks were going on. that the company was heading into a existential crisis.

3:04:43 And If your listeners take anything away from what we've talked about is my love of the company is so significant that I I changed my life. And uh

3:04:55 I came back to the company. Now when I came back And I wanna be fair. I I don't want to criticize anyone. But when I came back.

3:05:04 I saw things that really surprised me about the lack of investment. over a four to five year period. And also I didn't like the way the stock buybacks We're

3:05:16 were being used to Basically Uh increase CPS. And uh it's no way to run a company. So the first first d day I came back And I knew what the market would do.

3:05:28 is I I announced that we were suspending stock buybacks and stock went down. I expected it and I announced That we were gonna take. Basically the money we're using to stock buybacks for the year. And I think it's north of two billion dollars invest back into

3:05:43 The people of Starbucks. The partners which I did. The most important thing I did though Because I'm not a messiah. But I have an instinct about the company and I know the inner workings of the company better than anyone else. I know the people.

3:05:56 And so In a in a year's time. Despite the under investment and the challenges We we brought the company back to a much healthier place. Operationally and certainly the stock price.

3:06:09 I think when I Came back. When I when I started it was in the seventies when I left, it was you know but that's an output. That's investors voting on the performance. Yeah, yeah. We we don't have to talk about the stock price if you don't want to. Um Nevertheless.

3:06:25 Um Again. Succession. And uh The board.

3:06:32 Let a succession Process. You have to remember, I wasn't on the board. For five for A long four or five years.

3:06:41 And I resigned When I when I decided to leave the company after a year, despite the board asking me to stay another year. I just said I've I've done my duty. We have to find a new CEO.

3:06:54 They wanted you to be interim CEO for a second. Yeah, they wanted it it was up to it was up to me. I I just thought we And so the board led a search. Uh There was a number of candidates. Uh

3:07:06 Lacksman was chosen. I met him. I approved his Hiring. Uh but the search commodity was driving the process.

3:07:17 So now we're a year later. Um and I think we're probably let's just fast forward. It hasn't been a great year for Starbucks. In fairness, Talaxman. There's a lot of external issues that have contributed.

3:07:30 To the Pressure like on every company. But The company Have not

3:07:36 Executed. The way that I think It should have. I go into the stores, I know like I I know the company and I think we're we're not we're not at our best right now. Why did I write the letter?

3:07:50 I didn't write the letter because he had a bad interview on Kramer. This is on LinkedIn. Yeah. I wrote the letter because I had written a couple of other letters. probably the iconic letter I wrote was entitled The Soul of the Brand. And I was writing that letter because I was able I don't get financial information, so I don't have any

3:08:11 understanding whether the company's making the quarter or not, I was as surprised as anyone else. Drop. in revenue and in profit. But I wrote the soul of the brand because I could smell

3:08:24 Instinctively. that there were things going on that just did not feel right to me, that the shine was off the brand. The partners were Maybe not as inspired as they had been. The first thing I wanna say is

3:08:38 I've made it clear. to the Starbucks board. Howard Schultz. And I've made it clear to locksman. Howard Schultz has no desire or intent.

3:08:47 to return as CO of Starbucks. If you want, I'll say it again. But I don't. But I can't ignore What we've just discussed the next last few hours.

3:09:00 If the company is doing a drift towards mediocrity. And I hold leadership and the board responsible for that. And my letter Was not accusatory

3:09:12 My letter was not predatory. My letter was steeped in In counsel and advice. Байстон Форті Пірс в Experience. in building this company.

3:09:25 That's the advice and counsel I'm giving you. If you want to take the advice, it's up to you. If you don't You're responsible for the outcome. And so I'm I'm not I have no operational role.

3:09:37 I'm not on the board. And I'm watching from afar and rooting and cheering for Starbucks. I wrote the letter. And hope that it would be a catalyst for a positive Interpretation.

3:09:49 And what were your recommendations in the letter? The one thing is We're not A beverage company serving coffee. We are a coffee company.

3:10:01 Serving people. And we need to be much more coffee forward. And we cannot continue to allow the mobile app to be a runaway train. that is gonna consist consistently dilute the integrity.

3:10:18 Of the experience of Starbucks. We're not in the transaction business. We have to We have to execute transactions. But that has to go through the lens.

3:10:28 Of being an experienced business. Experience place. People are longing for human connection. Even if they're on a mobile app. Let's provide it.

3:10:39 But I also recognize this is a complex time. It's difficult. Uh but That's your job. Yeah.

3:10:47 Make sense. Well To finish the episode. I can definitely say uh as a unabashed fan, the same way I opened the episode. Um

3:11:00 Rutin fur. Everyone over Yeah. Thank you very much. And I I think you know, Starbucks is so resilient. Uh

3:11:08 Starbucks has had many, many challenges. Uh I have great faith in the company and the equity of the brand and the people. who wear the cloth of that company. The green apron.

3:11:19 Yeah. Thanks, Howard. Thanks, Eard. Thank you. Great. Really enjoyed it. All right listeners.

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3:11:52 The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. This is where StatSIG comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed. to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. All right, well, listeners, thank you for being on the journey with us. That was super fun to do with Howard. If you want to talk about this episode, come to the Slack, acquired.fm slash slack.

3:12:35 And if you want to Keep going with acquired. You're out of episodes. You know, you you've uh decided that I've listened to the entire back catalog and I really wish they had a second show. Good news we have one. So check out ACQ2. lots more interviews there and I know the backlog and it's only getting better from here, and you can imagine that having a great piece in the Wall Street Journal and hitting number one on Apple and Spotify, which we will reflect on at some point, a totally surreal few weeks here, certainly um Prime the pump for a whole bunch of great interviews that we've got coming on ACQ two. And listeners, we will see you next time. We'll see you next time.

3:13:12 Who got the truth? Is it you, is it you, is it you Who got the truth now

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