12 January 2013

Starbucks History

Uncommon Grounds by Mark Pendergrast, 1999, Excerpts

Many of the disaffected baby boomers had hitchhiked through Europe or were stationed there while serving in the military, and they had discovered the joys of espresso, fine foods, specialty coffee shops, and the cafe. With heightened international tastes, they were also searching for community, for grassroots verities. They found them in aromatic fresh-roasted whole beans, tumbling from small roasters. Many had been directly inspired by a pilgrimage to Berkeley to inhale the atmosphere at Peet’s.

Jerry Baldwin, Gordon Bowker, and Zev Siegl started a small, quality roasting business in Seattle. With a bare-breasted, twin-tailed mermaid as a logo, Starbucks opened on March 30, 1971, and was an immediate hit, selling primarily whole beans and supplies.

By 1980 the specialty coffee was entrenched in the big cities on the East and West coasts of the United States and reaching further into the heartland. Specialty coffee proved to be the perfect drink for the go-go 1980s, which witnessed the triumph of yuppies – young urban professionals – willing to pay top dollar for life’s luxuries.

In March 1987, Howard Schultz bought Starbucks which lost $330,000 in 1987. It appeared that another business cycle was beginning. Just as the traditional coffee industry had gone through fragmented growth and merger, the specialty coffee movement would also consolidate. In the process, would it also lose its soul?

In 1990 the company turned the corner, building a new roasting plant and showing a small profit. Shultz began to hire MBAs and corporate executives with experience running chain franchises, creating complex computer systems, and training employees nationwide to deliver standardized consumer goods. He recruited many of them in the early 1990s from fast-food companies such as KFC, Wendy’s McDonald’s, Burger King, Pepsi, and Taco Bell, and they brought professional management to the preexisting coffee idealism – though the two did not always coexist comfortably. By the end of 1991, there were just over one hundred stores with $57 million in sales, and Schultz was preparing to take Starbucks public in order to finance even more rapid expansion. On June 26, 1992, Starbucks launched its initial public offering [IPO], going public at $17 a share with a market capitalization of $273 million. Howard Schultz had paid less than $4 million for the company only five years earlier. Within three months, the stock price had reached $33, making Starbucks worth $420 million.

A darker aspect to this coffee surge was that many yuppies were recovering cocaine addicts by the early 1990s, and they turned to maximum-strength coffee as an alternative recreational drug that they could take along with their antidepressants, antipsychotics, and other prescriptions. These aging baby boomers had come full circle, back to the drink of their parents, after a childhood of Cokes and coming-of-age with cocaine. The television show “Frasier” placed the pretentious psychologist in Seattle, where he and his friends drink cappuccinos at the Cafe Nervosa.

The chain paid slightly above minimum wage – better than most fast-food companies – and provided an innovative benefits package that included part-time employees who worked twenty hours a week or more. As a result, employee turnover at Starbucks was only 60 percent a year, compared to the industry standard of 200 percent of more.

In 1989 the sociologist Ray Oldenburg published The Great, Good Place, a lament over the passing of community meeting places like the old country store of soda fountain. Schultz loved the book and adopted Oldenburg’s academic term, christening Starbucks as a “third place” beyond home or work, “an extension of people’s front porch,” where people could gather informally. Modern coffeehouses such as Starbucks do arguably provide a much-needed space for friends and strangers to meet, especially as our cultural ethos becomes more paranoid and fragmented.

Shultz, however, was not in business primarily to provide community. He was in it to win. Starbucks mounted a blitzkrieg across the country following the initial public offering, growing to 165 stores in 1992, 272 by 1993, and 425 in 1994. By mid-decade, the company was opening an average of a store every business day, targeting appropriate locations by studying the demographics of mail-order customers. Though Schultz could have quadrupled his rate of expansion by franchising Starbucks, he chose to open only company-owned stores, except in airports or other odd spots the demanded licensure. This way he could maintain strict control over quality and training.

Starbucks became a household word without mounting a national advertising campaign. Indeed, the company spent less than $10 million on advertising in its first twenty–five years. It was a veritable “word-of-mouth wonder,” as a stunned Advertising Age reporter put it.

Starbuck’s overwhelming success, with its aggressive tactics, inevitably brought criticism along with adulation. Specialty competitors complained that Starbucks used predatory retail tactics, frequently opening outlets directly across the street from their stores. Defensive Starbucks executives denied they were targeting competitors. 

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