Starbucks (with Howard Schultz)

all right, we're rolling, we're rolling. we get to see how you guys do this, it's.

kind of usually a pump-up music. we can do that. I saw your turntable. that's beautiful. what do you want to hear now?

welcome to season 14, episode 5 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 just the IPO. that episode was a mere one hour and 24 minutes, and Starbucks is a 90 billion dollar institution in our world that deserves the full acquired treatment. who, what were we thinking?

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 39,000 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. at any given time.

announcement for you. yes, save the date if you love acquired. you are going to want to be physically in the city of San Francisco on Tuesday, September 10th, 2024.

and we can't say much you know about every detail of it just yet, but it will be the biggest thing that acquired has ever done. it'll be in partnership with our good friends at JP Morgan payments. so mark your calendars now, save the date and if you want to be first to know details, you can sign up at acquired dot FM, slash SF, or click the link in the show notes speaking of JP Morgan.

payments. just like how we say, every company has a story, every company story is powered by payments and JP Morgan payments is a part of so many companies journeys from seed to IPO and beyond, and if you want more from David and I, you.

should check out our second show, ACQ 2, where we interview founders, investors and experts, often as deeper dives in 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 and payments coming up next too. we do 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.

there. this is what I know. there were three founders Jerry Baldwin, Zev Siegel and Gordon Belker 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, which Alfred Pete yeah, Alfred Pete was, you know, more than anyone else in the history of coffee in America was the true pioneer. he brought specialty coffee, Arabica coffee to Northern California, and Jerry Baldwin and Zev became so interested and intrigued with what Pete's 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. now what is not known is that when Starbucks opened in the Pike Place market in 1971, they were using Pete's coffee.

see what was going on. Was Starbucks buying it for use in? They were selling.

it in their store now. but here's the thing. Because this was a consumer device. Yeah, yeah, but you have to remember Starbucks coffee company, from 1971 until around 85-86, only sold pounds of coffee. there was no beverage.

in 1982 as a head of marketing. So when you and Sherry arrive here, like what was the coffee landscape? I mean there were these three soon-to-be-four Starbucks beans stores here in Seattle. Alfred Peet was down in the Bay Area. but what was coffee culture?

was, it was De Minimis. 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 at Starbucks, both equal at the same time. But you couldn't even get a New York Times in Seattle in 1982, 83.. It was not 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 the tourists, and so Starbucks actually started establishing a mail-order business as a result of all the people who were coming into Seattle.

they would buy a bag, and then they would fill out some kind of information and say I'd like to, I'd like to have this mailed to me. Because I don't have anything like it in my city.

Yeah, that's what happened. And 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 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, the logistics costs, you know the scale. This was a small business, but

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 we could do so much more, and then the whole thing blew up for me when I went to Italy in 83..

Okay, so before the Italy trip I just want to really contextualize coffee in America. I think coffee had been declining since like 1940.. 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 specialty coffee.

which was tiny. And I think what you've just described, the reason for that is that coffee was terrible. It was instant coffee, stale coffee, and primarily robusta beans, which is the low-grade coffee that Starbucks was never involved in. Walk us through the two types of beans. There's mainly two types of agricultural coffee grown for commercial use.

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 II, right? It was like, hey, we got to get the troops this product to survive, 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 II and the GI's were kind of the impetus for that kind of quality coffee or not quality coffee to 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 supplier of theirs, but you happen to be a pretty talented salesman from your time at Xerox. Yeah. And I want to make a tie here. Our previous episode was the Microsoft episode, or at least Microsoft volume one.

word processors were in the mid 70s. So my territory was 42nd to 48th Street, from 5th Avenue to the river, and I had to make 50 cold calls, physical cold calls a day. That was a job. The Xerox job taught me incredible amounts about not only selling but humility. Humility.

letter. And does it have a screen or has it a typewriter? No, it's a typewriter. No.

screen. It's like a typewriter with like a, with a little bit of cash, right? Yes.

Yes, exactly. Yeah. Mistakes for one line, right? Yeah. The job at Xerox at the time was like working for Google.

you quitting, well, Hammerplast, but you know, quitting what seemed like a stable of pretty good jobs. Yeah. To drive across the country to provincial little.

Seattle. I mean that's that's nuts. I knew after a couple of years, if I stayed at Xerox for a longer period of time, I was going to be locked in there. But I'll you the story that got me to realize I've got to get out of here. At the end of the year, the performance appraisal at Xerox was basically a scorecard from 1 to 5..

and I'm a 3.

entrepreneurs out there. I got a 3, and as soon as I got the 3, I swear 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. But I was a 3.. Do you think, having that background at Xerox, did that give you a piece of perspective that helped build Starvex?

to what it is today?

common with someone 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 know there's got to be something more than this. There's something deep inside you that caused you to be willing to take a.

risk. I was really insecure about not succeeding and I didn't view what I was doing as the success that I was not destined for, that sounds wrong, that.

I had the appetite for. All. right, so we're getting to the big risk. So the year takes over to 1983.. Yeah.

went to a trade show called Matcha. It's a big convention center and it's a giant houseware show with equipment and all kinds of stuff, and I I was staying at a relatively cheap hotel and walking distant 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 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 this before, and I am just like I'm in a black-and-white movie.

espresso. And there's nowhere else. No one in Seattle had it. Well Cafe Allegro.

had it and that was Dave Olson, and after a few months, or six months or so, Jerry said I don't want to repeat this. I don't want to do it. I don't want to 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 he didn't think it was clean. He didn't like it. Now, between 83 and 85, Jerry Baldwin, because of his love of Peet's and his relation with Alfred Peet, had an opportunity for Starbucks to acquire Peet's Coffee Company, and they did.

financial trouble. And so really, at this point it was like their mentor was retiring, this person who was a steward of the industry. We're operating six points of retail distribution in Seattle for our beans. Why don't we just buy your effectively the same business, but in Northern California and 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. I was so frustrated I said I'm gonna leave Starbucks.

down. So at this point you're in Italy, you're trying to get ideas and investors for what would become Il Dronali. For the first Il Dronali. And only Starbucks and a couple.

other people have committed. But I didn't have enough money. I still needed more money. And you were raising 1.6 million? About 1.6, 1.7 million.

America. Which is stupid, because you watched it happen. Like I ran this store for six.

months and like it was fine. Yeah, they didn't want to do it. So Lavazza and Faema, just get that on the record, turned me down.

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? Eating, more staff. Yeah, more labor, yes.

But the stores weren't that expensive to open because they were small. Less than a thousand square feet. And we understood how to do it. And I was working as a barista with Dave Olson and other people to keep the costs down. We were behind the counter and I had no salary.

increasingly worse from a traditional perspective of leaving a high-quality job, moving across the country, then, just a couple 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. Her parents visit Seattle.

have been over. And that would have been a very understandable response if Sherry had said, I wasn't going to say anything. But look at our situation objectively.

Putting ourselves in your father-in-law's shoes. How could you not feel that way, for?

your daughter and her impending family? Yeah. And her father was a great guy. And I understood, but I was embarrassed and humiliated. How could I not be?

I mean, I guess that's another dimension here, too. This was not 2024.. It's not like being an entrepreneur was a glorified profession here.

In a business that he clearly did not understand. You know, a coffee store.

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 80s. It's time to look at tech. Like, we're now 12 years into Microsoft, Apple's four years past the Macintosh. And you're trying to raise money for a coffee.

house chain. 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.

in Vancouver. You could see it. What would people do after they bought the coffee? You said these are very small places. They would stand up, because the two.

stores didn't have seating. right away. They would stand up at the coffee bar at the window on Columbia Center. And it was at eight, nine o'clock in the morning, they were hanging out there. And then they afternoon, late morning, they were coming back.

Alright, so we're at the pivotal moment. Starbucks and Pete's gets into.

financial trouble. And the debt to equity was north of six to one for a company that was tiny.

And so did you hear from Jerry that the bid had been dropped?

We walk out and I say to Mr. Gates, what just happened? And he said, you're going to buy Starbucks coffee company and my son and I are going to help you. Wow. And we raised the money.

but that's the story. And Sam, I mean, 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?

He was involved in real estate and also in those auto stores.

How did you get him off the Il Giornale cap table? Like, wasn't he an investor?

He and his family were investors to the end until they got out. Oh, wow. Until they got out.

Wow. Looking back now, what do you think happened? Did he have any legitimate criticisms of you as running the company?

He had a henchman, who was his money guy, who figured out we could just take this company. and what do we need? Howard Schultz for? He's a young kid. And Sam had experience with retail, with those auto stores.

I see. So he 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 a hundred plus times. He never, ever said anything public about what he did. He never took credit for it.

So for listeners, Howard's told this elsewhere, but you spoke at the Microsoft CEO Summit, you've recounted the story to the Fortune 500 CEOs and Bill Gates III, Microsoft founder, comes up to you afterwards and says, 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. He's hearing it for the first time.

And this is, you know, 2015 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 never told his soul what he did for me. Wow. Again, humility.

It's amazing.

Yeah.

And so were Bill Gates Sr. and Bill Gates III investors in that $3.8 million round?

Bill Sr. was, but I don't know if it was part of Bill or...

But yeah, Microsoft. Interesting. 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 going to 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.

But I had another angel who helped me by the name of Jack Rogers, who became a lifelong friend who passed away a couple years ago. He was part of an investor group, and he brought them along.

So the acquisition goes through.

Yeah. August of 87, we bought the six Starbucks stores. We had the three Ildren Ollies, and there were two stores under construction. So at the end of the calendar year, we had 11 stores and 100 employees in 1987..

All in the Northwest.

Yeah.

Meanwhile, the original Starbucks folks, they've now gone down to California.

They went to California.

When did Pete's open coffee bars?

Many, many years later.

Ah, so you weren't competing right away?

No, no.

But this is one of the great observations, David. Ildren Ollie buys the Starbucks stores, rebrands Ildren Ollie, Incorporated as the Starbucks Corporation. Yeah. And the original Starbucks had owned Pete's and now needs a new name, so it rebrands the company Pete's. So Pete's was actually Starbucks.

But you asked me a question earlier about what did the years at Xerox teach me? So the rejection I was going through, the Italians turned me down, people in the U.S. turned me down. Nobody would believe in the idea. It was like I was cold calling again at Xerox.

The other thing that is worth pointing out is

No debt. I want any debt again because of my childhood.

I was going to ask you, was that informed by what you had seen with the Starbucks situation or your childhood?

No, it was totally my childhood. My parents were always in debt. Bill collectors were always calling. And no, we never had any debt the entire time. Never.

This is probably a good point in time to talk about the business model a little bit. You've alluded to kind of a stigma, at least among potential investors, and the original Starbucks founders of, like the restaurant business. What did the economics 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, and we had a roasting facility on Airport Way in Seattle. The ability to source and roast coffee and put that through the supply chain of a beverage gave us probably at the time, an 80% gross margin.

Yeah, that is not the quote unquote restaurant business that people are imagining.

And I could begin to see, even early on, 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 that the business that Starbucks was in was going to be significantly in the back and the beverage and the romance of the theater.

Even the best, most successful restaurant. you could possibly imagine, how many times are their most loyal customers going to come there in a week?

Well, there was a time in the Northwest when we were really at our peak, where the average customer was coming 18 times a month. I should rephrase it. Maybe the most loyal was coming 18 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 1% of someone's household income and often far less than that. But it is repeat and it is high gross margin. 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's 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 applied to every single store we were opening. You know, by the way, I chose the first 500 locations myself. So I was in it in so many ways. But the economic model in Wall Street, when we went public in 92, now I'm just, when they heard the model, they said, well, we'd never seen a model like that. And the model basically was a sales to investment ratio of two to one.

So what does that mean, sales to investment ratio?

So if the sales were a million dollars, the investment was 500,000.

In year one of operation.

Yeah, yes. And the operating profit was north of 20%.

Wow.

So cash on cash return was.

So yeah, you get that two years or less payback. The retail world had never seen a model like this before. There was no physical storefront that could have this business model before this.

Early on, it became clear to us that customers were also starting to customize the beverage on their own. So we were just, barista was behind the counter and somebody would say, can you put something else in there? Yeah, what do you want? And then, so that just started, the average ticket started growing as a result of the customers personalizing and customizing their beverage.

And to be clear, the era of Starbucks we are in right now, you produce drip coffee and you produce espresso, and you can put that espresso in frothed milk. And that's basically your options. Like none of this, you know.

Yeah, exactly. But can I tell you a mistake I made?

Please. Please.

When Il Dronali was getting ready to open, the standard cup in the world was that terrible styrofoam cup that is used in diners in New York City. Remember that cup?

Yeah.

I put boiling water into that cup, five minutes later, the cup is starting to turn like a golden color because of the chemical.

That can't be good for your insides.

Or the taste of the cup. And so we had to find, we had to change the cup. This was 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 had any kind of cup or lid that was compatible with what I was trying to do. In fact, they didn't understand it.

Right. Why go to the trouble of, you know, this perfected roast of these beautifully sourced arabica beans from all these farmers, if you're going to pour it into styrofoam?

Yeah. Okay.

Did people think you were a hippie? Like when you were telling these, like, are you an LSD or something?

I think they just dismissed me.

You got enough right. You don't need to get them all right.

No, I just, I missed it.

When, uh, the sizing. Grande, Venti.

Oh, that was, uh.

The hidden Trinta. Yeah.

Right. When did that start?

There was a brilliant, brilliant guy who was the architect of the name Starbucks. Named Terry Heckler in Seattle. And he's a fantastic design guy. And we're just sitting one day and I just talking about the importance of language. We got to get the language, right?

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.

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 baristas were having a hard time. with whose cup is it? What are we going to do? And someone at Starbucks, I don't know who it was, started writing names on the cup, writing names.

And this is all, like, you know, to my mind, just starting to create this incredible flywheel, right? If you've got this 80% gross margin business, where the key lever is repeat loyal customer visits, 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 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.

The intimacy with the customer and the barista 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 brand at scale. We didn't spend any money on marketing, zero. There was no money for marketing. And the cup, the iconic cup, became a badge of honor because people were doing something that was new and novel and walking in the street with it.

It's your free billboard.

Yeah.

That people are proud of.

Wow.

Well, listeners, this entire episode. so far, we have broadly been talking about the concept of customer experience with Howard, and we want to talk about another business that has been innovating on the customer experience, and that's JPMorgan Payments. When it comes to digital commerce, JPMorgan Payments is all about personalization and convenience, both for consumers and businesses.

Right.

So, on the consumer side, technology has completely changed expectations for shopping and commerce. Whether it's a sneaker drop or a coffee order, customers expect functionality like ordering in an app, but picking up in-store, getting real-time updates, and having our preferences and past orders synced and remembered.

Yep. And importantly, we expect our payments to be simple, no matter where or how we want to pay, which creates real challenges for the business on the other side of that. to create the magic. Even with super complex transactions like a marketplace website, where you aren't just buying from one single retailer, but a merchant on the other side of that platform. You can imagine there are plenty of technical and regulatory complexities to make that frictionless across different countries and currencies, but with great embedded finance and innovative commerce solutions, you can delight customers without really taking that all on yourself.

Yep. No matter how big or small your company is, you have to manage a complex technology ecosystem that now includes online payments, in-app payments, social payments, in-store payments, digital wallets, and much more in the future.

Oh yes. Like biometric payments, which, remarkably, research shows that will reach 3 billion users and $5.8 trillion in value globally by 2026.. That is insane.

Yep. And just like Howard pioneered many firsts in his industry, JP Morgan is doing the same with biometric payments. It's essentially a pay-by-face solution that allows you to complete transactions seamlessly and securely, removing the need for carrying a wallet or digging into your bag to pull out your phone.

Yeah. If any of you were at the Formula One race in Miami last month, you may have even seen JP Morgan's biometric payments powering the fast lane checkouts in the merch store. In last year's pilot, literally every single payment was processed in under one second.

Crazy. And for businesses, speed of payments is obviously great. to shorten lines. To quantify that, biometric payment solutions have shown to decrease checkout times by up to 35 seconds per transaction and increase purchase value by 4%, driving incremental revenue and maximizing profitability.

I can totally attest to this. as a customer. I basically only use tap to pay with my watch or phone everywhere I go now, which, you know, just felt like sci-fi a few years ago. But unsurprisingly, that capability for merchants to accept contactless payments is now also being powered by JP Morgan payments.

So, whether you want a full-stack, omni-channel service with biometric payments or streamlined online payments with the latest APIs, JP Morgan's commerce solutions work to drive your business forward with the foundation and security of a leading global bank and the innovation of a fintech.

The very best of both worlds. That is why we here at Acquired work with JP Morgan. You can check them out, jpmorgan.com slash acquired to learn more and discover more payment solutions powering growth for your business across every industry, from startups to the Fortune 500..

So in this era, 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 1988, I can't believe this was filmed, but a 1988 shareholder and employee meeting, where it's great. The whole thing's like an hour and a half. It's all there. And you are using all the same language that you use today. Back in 1988, we focus on our people.

That's what happened.

The pace of growth, approximately you just doubled stores year over, year over year. Was there some moment in 88, 89, 90, where you're just like looking around, realizing 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 going to do it.

There were regional competitors who were making noise about doing what we were aspiring to do. And I was very mindful because one of them was franchising. That was Gloria Jeans out of Chicago. 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 87, 88..

Because Chicago was the first market outside of Seattle and Vancouver, right? Yes. Even before LA.

And it didn't work right away. Howard Behar should be credited with so much of the cultural texture and the tapestry of the humanity of the company, said, I will go to Chicago and fix it. He went to Chicago and stayed in Chicago through the winter and recalibrated the mistakes we were making. And, of course, he and Oren were so instrumental into the loneliness that exists as an entrepreneur and their ability to help me build the company that you know today.

So I have in my script here, this is literally labeled the H2O era. And 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 Behar.

No, he was the adult in the room. More than the numbers. He had the style. He was quiet. He was a gentleman.

And is it true that the three of you had dinner every Monday night for a decade?

More or less, that is true. Sometimes more than once, if we had a crisis or two, which generally we did, or we had a disagreement. There's a lot of creative conflict, especially between Howard and I. Because he had to operate what we were trying to do. And at times he thought we were growing too fast or ahead of the resources.

Hmm. Because he was basically training all these operators, the sort of management fleet of the company.

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 his job was much harder than mine.

Speaking of system, what did your technology look like at this point?

Don't embarrass him.

No, we had, there was no, there was no technology. No.

Were you running like a Oracle system?

Not at that time, no. Wow. No.

We're talking paper?

It was mostly manual. Wow. Yeah.

I mean, eventually. when they did get point of sale terminals, they were DOS based all the way through, like 2008, right?

Yes, yes.

Like the iPhone was out and you guys had DOS based point of sale systems. Sounds right. But obviously technology was not the secret sauce.

I'm foreshadowing here of the future of the company. Yeah.

So let's take it forward from this 88,, 89, 90.

That's the big fight between Howard and I.

I don't think I realized it was a big fight.

I just felt in my bones. we had to go to LA. Why? And he said, we're not ready for LA. We're going to San Diego.

You went to play in the majors.

Yeah. So we had a meeting about it and it erupted, erupted into a bad scene.

I'm shocked.

We did go to LA and it was fine.

And your conviction of we have to go to LA, was that for?

The equity of the brand, I could see, I could envision the warm weather and everyone walking around with our cups and the media and the celebrities, and 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.

Was there an intentional strategy to 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.

No, there was no, I can never remember a discussion about segmentation of the brand, because we wanted Starbucks to be accessible to all. You'd have a CEO of a company 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?

The quality of the coffee, the experience, and what it felt like to walk around with that cup. at the time. It was a badge. It was like you were in the know.

Yeah.

It wasn't a badge of luxury. It was just like something new.

So it became a trope for decades. now that it's, oh, it's a $6 latte or an $8 latte. Where does that come from? In your mind, is Starbucks premium priced? Is there actually a?

I think the pricing of Starbucks was directly linked to the economic model that I alluded to earlier and the rising costs of labor, rent, and the fiduciary responsibility that we all felt to achieving the promise we had to our shareholders. 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 in later years, maybe in the last couple of years, given the consumer inflationary time, I think it's become a bit of a problem. And certainly I've always said, as Starbucks was growing, that the ubiquity of Starbucks was an enemy to the company.

Can you tell us about the people? This is such a huge pillar to our minds of building Starbucks.

Again, we started this conversation talking about childhood. I really want to build a different kind of company. And how do I do that? in a way that provides respect and dignity? Because I was so imprinted with how my father felt disrespected, devalued, and kind of vilified as a uneducated, blue-collar veteran, working in a series of jobs that he just never made and living through the dysfunction of a poor family, always under pressure with money.

I mean, the health care for part-time workers.

So then health care, I think, 25 years before the Affordable Care Act, what we did was company for health insurers. And that also, I grew up in a family with no health insurance.

Do you want the stats on that initial employee stock grant?

I'd love to hear it.

So the program was called Beanstalk, listeners.

Another great name.

Howard was alluding to. Amazing name. So in 1988, the 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 33-store company.

Yeah. A lawyer, I think Scott Greenberg at the time, came to me and said, we can't do this unless we get approval from the SEC because we were over 500 shareholders.

So we've studied lots of amazing companies on this show who have lots and lots of different business models. One thing that just kept striking us as we were preparing for Starbucks are the similarities to your neighbor here in the Northwest in Costco.

Costco, right.

And how you treat your people specifically.

That's not by accident.

Both from a it's-the-right-thing-to-do perspective and the amazing business model benefit of the retaining employees. It's so expensive to train a new employee. It's not expensive to keep an existing employee. So you can just pay people more. if you keep them for longer.

Do you know the answer to that?

I actually don't. No, we don't know the answer.

I assume the answer to this, but I don't know it.

First, Jeff Brotman invested in Starbucks in the round to buy Starbucks.

No way!

Yeah, in that 87 round. That's when I met Jeff for the first time. Jeff became a board member of the early imprinting of Starbucks. And clearly a mentor, mentor of mine. And then he introduced me to Jim Senegal.

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 more often.

We introduced thousands of beverage customers to Costco through the beans. Wow. So Jeff and Jim were instrumental in so many things and were so kind to me as a young kid. And then we went nationwide with Costco.

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 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.

Yeah. If you thought the Costco revolt was high, you can imagine when I said, we have an opportunity for United Airlines. People thought that was absolutely blasphemy. Don't do that. And again, the exposure 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.

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, but it was low.

Well, you weren't spending any money on marketing.

United Airlines was paying you for coffee, I assume. I don't know exactly how that went down. But yeah, I have to assume that Barnes & Noble was basically the same thing.

Barnes & Noble was a different deal. I met Len Riggio, the founder of Barnes & Noble, very interesting guy, very smart guy, great merchant. And we just started talking. He was from Brooklyn. I was from Brooklyn.

We have a fun piece of trivia that you may know, related to Costco. Do you know where Jeff Bezos and Jim Senegal met for the first time?

It sounds like in a Costco.

Not in a Costco. In the Starbucks, in the Barnes & Noble in Bellevue.

Did not know that.

And that led to so many things, Amazon Prime among them.

Yeah, did not know that. And I still am friendly with Jim Senegal today.

I mean, your companies rhyme in so many ways. That's not surprising at all. I want to talk a little bit, 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 coffeehouse chain in that city?

Well, Boston's an anomaly because of the acquisition. But Bihar was so strident in not expanding to multiple markets at once. And he was 100% right. And so we went to Chicago, went to LA, and we stayed there for quite a while. Went to Portland.

You went to D.

Went to D.

Like a lot of the good real estate was taken by the Coffee Connection, right? Yeah.

And so George and I never saw eye-to-eye, but it was clear that if we came to Boston in a significant way, we were going to impact his business. And I think, to his credit, he was willing to sell. So Coffee Connection was the first acquisition. And we had to tread very lightly after the acquisition because of the loyalty and be careful with the name and solicit George's help and advice. And also, we needed him to kind of validate for us what we were trying to do.

Well, it seemed like, I think the numbers are, it was a little bit after IPO in 94, $23 million. They had 23 locations and they were doing $16 million a year in revenue. So if you just look at the purchase...

I think it was one-time sales.

Or maybe a little over one-time sales. And the original Starbucks, ironically enough, was exactly at one-time sales, right? That's what you bought it from the founders, for. If they had the lock on all the best real estate and they had burned all the capital figuring out what stores we should be in, what stores we shouldn't be in, and then you just get to move into that market for one-time sales, 1.5, whatever it is, with all that already figured out, that's pretty amazing.

It probably seemed high at the time, though.

I'm sure it did. Well, isn't that the thing about valuations? It always seemed like in the good old days, everything was undervalued. Yeah. Okay, let's talk about the IPO.

I think there 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 and security as a kid. So I was a driving force all along. Certainly the year before with Beanstalk is an indication what I was planning. If Beanstalk was turned down, I would have waited. That had to be done.

And what was the revenue at the time?

I don't remember exactly. I know what the market cap was the day we went public.

I think you ended up doing 93 million that year, but the year before it was 50 million or something like that. Companies went public when they were smaller back then, but you were a small cap IPO.

Yeah, we were. And we got turned down by Goldman Sachs, you know that?

I did not know that.

I couldn't believe it. I wanted Goldman Sachs. They were the patina on the prospectus to have Goldman Sachs.

It would be a very Starbucks thing for Goldman Sachs to be the elite left.

Well, Blankfine, I had a good friend who was a senior partner there, who's since passed away. I thought I had it locked. I mean, it was just so many things about it, New York, everything. And they said, no, you're too small.

Well, the thing that Dan Levitin told us years ago, when we did an episode on the Starbucks IPO, was that you were really only considering smaller banks because it was going to be a smaller IPO.

Well, I was considering it because of Goldman Sachs, because they told you you had no choice. I had no choice. And Brotman at the time was not a big fan of Wertham Schroeder, which was Dan Levitin's thing. And so Alex Brown became the lead. But I also, you know, I had my own ego attached to this.

I was looking up. I was trying to figure out, you know, your public comps. at the time. I think there were zero publicly traded coffee companies, not bean companies, not retailers, not coffeehouse chains. I mean, truly unheard of.

You have a huge investor education problem, right?

Yeah, I think we had to take them through everything. We had the product there. You know, we served coffee. I, you know, gave them the whole show. We had a short video that was probably in black and white.

Fascinating. I mean, I go there and eat many, many meals sitting in your store.

Yeah, well.

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 going to take us through the IPO. You know, you're the first publicly traded coffee company. You do end up doing $93 million in revenue that year. Do you remember the exact price?

Yes, we went out at $17, and the price was $21.

Can you imagine today a $250 million market cap company going public? And people considering that a success. I mean, this is a great.

At the time.

For your employees, how crazy is that? What, 12, 18 months before? Yeah. I guess 12 months before. It's six bucks a share.

They tripled their money.

Yeah. Fantastic. And that was when you started calling them partners, right? When they became. 91..

As soon as Beanstalk was instituted, everyone was a partner.

And is that when you did the lowercase? When titles all became lowercase?

No, everyone was lowercase from the beginning. Oh. Out of respect. Everyone's lowercase.

Listeners, when you look up a Starbucks employee on LinkedIn, it always looks like, is that a typo? And then you realize there's a pattern. All employees always put lowercase titles. So another interesting thing about the, I was reading the S1 last night. The management team, inclusive of you, owned 18%.

Not intentionally. No.

Okay. Not a strategy.

No, that was not a strategy.

Interesting. So then, from there, you opened 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 going to be a good coffee city.

I don't know how you found that out, but that's accurate.

In 1995, you crossed 500 stores. You had just bought the Coffee Connection, as we talked about, in Boston. And they had one asset that was perhaps much more valuable than any of the real estate or any of the sales that you would generate from there. They owned the trademark on the word Frappuccino.

And I'm so smart that I looked at that Frappuccino with disdain. Really? I didn't like the name. I didn't like the beverage. I didn't think it was appropriate for Starbucks.

Putting myself in your shoes back then. Now, Starbucks and Frappuccino, it's like a synonym. It's like you can't disentangle them. But yeah, it's very different than coffee.

Completely different. A blended cold drink. That was the first cold drink we've ever introduced. It was not a coffee-forward beverage. When we introduced it in Southern California, it went crazy.

So what changed your mind to greenlight it?

I didn't have a choice. I mean, Coffee Connection had it. Then we had it in Boston. People wanted it. And I just went along.

And you ended up reformulating it, right? It wasn't exactly what the store...

The store manager in Santa Monica reformatted it. And she was on it. I think Howard Behar loved it. People in California loved it. There's a fantastic story about Frappuccino because of what we did with it.

Was that your first bottled drink in retail?

Yeah. So I went to Atlanta and Pepsi in the same day.

Atlanta being Coke.

I went to Coke. I went to Pepsi in the same day. The Coke meeting lasted less than 30 minutes. I can't remember who I met with. They dismissed me.

And this is 95-ish?

Mid-90s.

500 stores, your public company.

But on the East Coast, Starbucks wasn't really well known. So I went to Pepsi in Purchase, New York, met Roger Enrico, the iconic CEO, and Craig Weatherup, the president of Pepsi. They loved the idea. And we started talking about this. Subsequently, Craig Weatherup and I, on a napkin, I swear, shook hands and created a multi-billion dollar business for Pepsi and Starbucks and a 50-50 JV and bottled Frappuccino.

How did you find yourself at Coke and Pepsi pitching a bottled beverage?

And was there an internal revolt? Because I could imagine people saying, this is a bridge too far.

I don't think people knew what I was even doing. I mean, I think maybe a few people, I just had the thought, we got to 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 store shelves, you had to pull it all off because you needed to create new manufacturing processes and spin up new factories in order to make enough to actually satisfy demand.

Basically correct. And we also, early on, had a recall where they found glass in the bottle. And Pepsi, to its credit, took all the blame for that and fixed it. From minute one, the power of Starbucks and bottled Frappuccino and doing something we had never known. It was no bottled coffee, let alone.

I mean, I'm just thinking about between the cups, but then United Airlines and Costco and the CPG products, there's got to have been like 50 billion Starbucks logos printed.

I'm sure that was maybe more.

I'm sure I could estimate it better.

You can see where the size of the equity of the brand was much bigger than the size of the company. Much bigger. Right.

Because at this point, you were like 800 stores.

Then something else happened. And that is we wake up one day and someone says, Starbucks is in a movie. And 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. I knew nothing about it. And then someone said, you've got to see this movie. Starbucks.

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. It was so in it that we didn't have time to look up. 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 in terms of the infrastructure. And so you're constantly back and forth, trying to create that fragile balance between the seductive nature and the intoxication of growth and success and the foundation necessary to support it and not falling too far behind where you lose it.

Putting a bow on Frappuccino, the year after it launched in 1996, Frappuccinos were 7% of revenue, which I can attest to. Maybe freshman year of high school, I had my first tall mocha Frappuccino with whipped cream and a little chocolate drizzle on top. And now here I am drinking, what are we drinking here?

You're drinking coffee from India.

Yeah. And it's so good. No cream, no sugar, no this. And so the Frappuccino began my journey to the good stuff. So that's the Frappuccino story.

Okay. And there's a couple of things about this. I started taking a couple of trips to Europe and Asia just to get a sense of what the opportunity would be and how would we do it. I quickly wrote off Europe because coffee was there. I didn't think we could possibly enter as an American company.

This would be like a American luxury leather goods company coming in and competing with Hermes.

Yeah, not going to happen. And so we said, we just took it off the map. And then we narrowed our focus very quickly on Japan. Japan had a couple of thousand coffee stores named Dotour. You walk in there and it was smoke-filled, mostly men, dark, but they were successful.

Aren't there some consultants you could possibly pay to help this?

And so we hired a consultant who came back with a big book, presented it to the board. I had a preview and it basically was, this is a non-starter. You can't possibly succeed there. And in the meeting, I could feel my blood just boiling because with every statement, it was getting worse. The economics won't work.

It's like they've never met you.

And more intentional. And so we kept thinking about this. And then one day, we get a handwritten letter from a Japanese company.

High-risk, high-reward.

I'm so nervous. At 6am, we get in the car, it's so hot. The tie around my neck, it feels like a noose. We're driving up to the store in Naginza. It's like 200 people online.

Why were there people lined up around the block? Why did it work so well instantly? Was it a strong coffee culture?

No, it was the iconic reputation and anticipation of something that they had convinced themselves was unique, proprietary, not in Tokyo, not in Japan, that they wanted to have. By the way, the research, that cup was all over Tokyo. in months. Everyone was walking around with that cup.

This is nine years after 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 globally desirable brand there by 1996..

Honestly, I haven't thought about it in that way.

That's so fast. I mean, to build something that-.

Didn't seem fast to us.

I bet.

The parallels to the Microsoft story are just so apt. Japan was Microsoft's first international market.

I did not know that.

It was half their business, and it started in the same way. Bill and Paul got a cold call from Kei Nishi, who was a guy in Japan who had somehow gotten a hold of the basic interpreter, loved it, and said, I'm so passionate about this. I want to bring it to Japan. 50% of Microsoft's revenue for the first at least five years.

They stayed 50% international permanently.

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So Japan's 96.

2,000 stores.

2,000 stores.

Because we had a goal of 2,000 by 2,000.

99, you also open in Beijing. What's the calculus on entering China? And did you realize it could become such a pillar of the company like it is today?

I honestly don't think we had any real understanding of what we're getting into. And we went there with a partner. that didn't work out. I should tell you that we had a theory of the case, that any international market that we opened that didn't speak English, we needed a partner. And so Japan was a partner, successful.

You closed all the stores?

No, no. We got out of the partnership, bought them out, and became company owned.

And so that was legal to do that, to be an American-owned company operating in China.

Yeah. But we struggled in China for almost a decade. Lost money. There was tremendous pressure inside the company to close China.

Really?

Yeah.

When did Belinda get involved with Starbucks?

Belinda was working. She started with Starbucks in Singapore, but she was working in Hong Kong. We were open in Hong Kong. And I saw something in her. It was just extraordinary operator and had a touch with people.

What year was that? That she took over the role?

I think it's about a decade after we opened.

Okay. Well, I asked...

And she's still there today.

I asked because I want to come back to it. There's a whole interim between 2000 and 2008 where you are not the CEO of the company. So in 2000,, I mean, 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, but, like you read all those investment banking reports and it's like, hey, Starbucks, here's all these price targets for Starbucks. And here's what we think they're going to do in earnings.

I did a hundred quarterly conference calls as CEO. A hundred.

Yeah, that's a lot. 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.

Which is your preferred communication style. I mean, it seems like whenever I see you up speaking, there's no teleprompters. It's from the heart. So at this point, I don't want to say, it would be incorrect to say Starbucks is running itself, but like it's in a great place. Right.

Executive chair, with Oren as the CEO.

In 2000.

I think I was physically and emotionally exhausted.

And at this point, it's 3,500 stores. The company's doing 2.2 billion in revenue. It kind of feels like, okay, I can get some distance. I can do other things in life. It's going to work out.

Oren never wanted to be the CEO. He's not a front guy.

And so how long had he been in that role of CEO?

I'd say less than three years, two years.

But basically the 2008 happens.

So the cataclysmic financial crisis is unfolding. And that plus the cracks that we were experiencing, board meeting.

And that was never your intent. When you stepped away, you thought you were stepping away.

It was not my intent to come back. And it was certainly not my intent that we're going to run into problems. And so, in the Christmas vacation of 2007,, I knew I was going to return in January. So I was on holiday. And I was starting to think through what I was going to do on that holiday.

And when you came back in 2008,, I mean, this is the whole crux of your book onward. There's an entire book's worth of material here. So we're not going to do it all. But suffice to say, just to put some numbers on it, the market cap had dropped from $30 billion to less than $7 billion. Same source sales, the comparables number.

I, first of all, every rock I turned over was worse than I thought. There were a lot of unperforming stores that should have never been opened that we need to close. I think we closed 1,000 stores. And I had a company-wide meeting. I remember it vividly because I started crying and apologized to everybody that we got to close stores, we got to lay people off.

You say that we were trying to save Starbucks. And in my head, I always thought, what could have been that bad? This is big, successful company. It's fast growing, it's profitable. And then I read you were seven months from being insolvent.

So we didn't have enough cash. We never had negative comps in the history of Starbucks. So negative, I didn't...

Every single quarter was better than 12 months.

Never had a negative comp month in my history of the company. I didn't understand it, such an anomaly.

The big conference room.

And so in 2008,, no American company was traveling. And so the municipalities were hungry for Starbucks to potentially have a meeting at a discount. And so 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. And when we heard that, we realized we've got to go to New Orleans.

I can see why he was freaked out about this. Like, if word got out to Wall Street that you...

Yeah, well, social media didn't exist at that time, but 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 of how many customers it would take per store to turn comps around. And the number was low. It's like less than 10 per day or 11 per day.

Right, because you could actually imagine, okay, if 10 more people walk in the door today and I delight them in a particular way that brings them back tomorrow, like, we're turning this thing around or we're turning this one store around. And if everybody does that...

And the problem when you get this big is you start thinking about large numbers. But if you reduce it to the 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 like an effing tidal wave. And we never looked back. And less than a year was turned.

And you did crazy. I mean, the tactics involved in the turnaround.

We closed the stores.

For what? Noon onward, right? For an entire afternoon and evening.

Because the previous administration had done things that diluted the integrity of coffee to maximize yield.

Like what? What does that mean?

Well, let's say you're making a batch of brewed coffee. Yep. Well, what if that brewed coffee was based on a number of ounces of coffee? What if you just reduced this a little bit? No one's going to know.

Little, 10,000 little.

Sounds good in theory.

Scratches of efficiency that dilute the experience.

Yeah. Huh.

But that does seem like it reflects a misunderstanding of the fundamental business. That this is a business, about a store with high gross margins based on customer loyalty.

But we were beginning to face headwinds.

And what are the headwinds?

Headwinds were the level of attrition of customers.

As the financial climate deteriorated. Yeah, yeah. Spending that $6 on the latte daily habit gets harder to justify.

And we weren't as good as 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. And success breeds hubris. And it did.

How could it not? I mean, how could you... Starbucks today is so freaking ubiquitous. Which again, is one of the things I love about it. It's consistent.

But the worst thing that Starbucks could have become. And the worst thing that Starbucks could become, is a utility.

Which is a thing I love and do every day. And depersonalizes the experience by definition. Yes.

Starbucks demands nurturance. It's 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. The immersion doesn't quite hit them in the heart or the soul or the conscience of the company.

Have you ever figured out a way to measure these things in a way that, like, as long as these numbers, 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 haven't been smart enough to figure that out. I think the interesting thing to me today is that the Asian business is operating at a much higher level of the soft side of Starbucks than we are in the US.

Now I understand your Belinda Wong comment.

That doesn't answer your question about quantifying it. But when I am in Asia, I see things that are very elevated to the brand, that speak to the financial performance of those markets, which are very high.

Before we get to today, I want to talk about some other things that happened in 2008.

I don't know how we did that.

Well, we just went through a lot of the ways of how you did that. There's a couple other things here, one of which is technology. I'm told there's a story you have about Steve Jobs around this point in time.

Yeah, there's a funny story, another story.

You're cycling with Michael Dell, right?

Cycling with Dell almost every day. Michael introduced me to Benioff, didn't know him.

He's a pretty good Hawaii crew.

So I get back, and Adam Brotman is a key 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 future meeting scheduled for Starbucks and Apple.

Infinite loop at their old campus? Yeah, yeah.

And so I went down there, 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. He just looked at me, and he said, you go back to Seattle, and you fire everyone on your leadership team. I thought he was joking.

Your whole leadership team turned over after?

They were all gone.

Wow.

That's the story about Steve Jobs. Wow.

Did you ever call him back and tell him?

No, I talked to him since then, and we were on stage together at an event. I told him they're all gone. He said, well, you're six months, nine months late, man. Think about all the things you could have done. Of course.

All right.

That's that story.

So, while we're in technology land, then, I think today 33% of Starbucks orders are done with mobile order and pay. So obviously this huge pillar of Starbucks as it exists in our world, how did that start?

Yeah.

You had been on pen and paper, then you moved to DAS. And now you have the most sophisticated technology platform of probably any retailer.

At the time. So you're talking to a non-tech person. So I'm not focused on anything other than the customer experience. Adam Brotman, to his credit, along with Steven Gillette, who was at Starbucks, very shortly, came to us with the idea of building a mobile app.

And apps. at this point, I mean, if it came out in 2009,, which was the first version, the iOS SDK came out in... Summer 2008.. Summer 2008.. So it's like, you're one of the very...

Well, they get complete credit for assembling the pieces of all this, convincing us to fund it, and we were off and running. I don't think any of us, honestly, for myself, really knew what they were actually going to create. They explained it to us, but I didn't really... I didn't get it until I saw it. And then, holy shit, overnight, it was just an unbelievable new vehicle.

Really?

And it's not even a close second. And so the mobile app created unbelievable convenience for our customers. But remember, we are an experiential brand.

It also created an even better business model for you, right? It was more efficient and you get the float with customer funds.

All that is true, but it was beginning to deteriorate at a rapid rate, the third place experience and the sense of community. And then it became...

You stayed CEO from 2008 until 2017.

Then I left.

Well, it must have been so seductive.

Yeah, the stock was at record high and the company was not investing ahead of the curve and not paying attention to the velocity of the mobile app and what it was becoming. Until it was too late. And the company has that problem today, which they will solve, but it's late. And also everyone has caught up to... We were the only game in town and the novelty of that and the uniqueness of it, especially for our product, and everyone pretty much copied it.

It is interesting. David keeps saying it's so seductive. To put some numbers for listeners wondering, you know, why is the mobile app such an interesting thing, David pointed out the float. So, of course, if you look at Starbucks financial statements right now, at any given time, there's about $1.8 billion of cash that Starbucks has gotten in the form, effectively as an advance from customers, that Starbucks can use to operate. It's like this amazing...

Investing in the growth, capital, store, expansion, et cetera, et cetera.

Right.

We're not the only one. I mean, everyone...

You know, Amazon has this. Apple. Apple has this.

Berkshire has this. The insurance business.

But it's effectively interest-free loan from customers and a loan that's not all going to get called at once.

Some of it will never get called.

Right. The breakage. And so there's this benefit of, like, it's a reasonably predictable amount of cash that comes in that you get to use, you know, for your advantage. In terms of velocity, about $14 billion a year gets loaded onto gift cards. It's unbelievable.

Yeah. So let's just go back, not to the economics, but the idea itself. And I think, whether we talked about bottle frappuccino, the cup, you just thread all these things. There is a common through line. And that is, we took a commodity business and we transformed it into a premium product, brand, and experience.

Oh, you feel like it wasn't really taking hold in that whole run before.

It was taking hold. And I'm not criticizing anyone, because we're all, everyone's trying to do a good job. But the result is, the unbelievable success, it disrupted the experience.

Yeah. And now you have stores that are entirely built to just pick up mobile orders.

And so, and my view is, we should not succumb to the mobile app.

Looking back now, I'm not, when you were in the moment and you and others in the management team, things happened, but knowing what you know now, are there a couple of key design decisions or things that you would re-architect differently about the mobile app experience?

I don't think I would have allowed the mobile app to be on-demand 24 hours a day.

The expectation's been set.

No, you just can't.

Whenever I get that message, you know, mobile order ahead is not available at this time, I'm like, ugh! But it's available 99% of the time. It's not available now.

And because the store's.

I won't even go to a store if it doesn't have it.

The store's overrun. You wouldn't go.

Yeah.

That breaks my heart. I hate that. I hate to hear that.

Well, 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 I'm looking at stores in the radius. I'm traveling. I'm in a new city and it's like, well, I'm only going to go to the one that's open for mobile order and pay. I'm not even going to try.

I got to hit one other.

I'd be more than willing to sacrifice economics to go back to ways to enhance the experience myself, but I'm not in charge.

All right, listeners, this is the perfect time to talk about another one of our favorite companies and longtime Acquired partners, Pilot.

We talk all the time on Acquired, about Jeff Bezos, his AWS-inspired axiom that startups should focus on what makes your beer taste better. In other words, only spend your limited time and resources only on what's actually going to move the needle for your product and customers, and outsource everything else that you need to do as a company, but doesn't fit that bill.

Yeah, while we're in beverage land, Starbucks is actually a great example of this. There are so many things that are not proprietary to Starbucks. For the most part, they don't own the real estate that the stores are in. They don't manufacture the bottled beverages like Frappuccinos that you see in grocery stores. They use Pepsi for that.

Haha, love that. For startups and growth-stage companies, accounting is example number one of this idea. Every company needs it, it needs to be done by a professional, and you don't want to take any risk of something going wrong. But at the same time, it has zero impact on your actual product or customers.

So enter. Pilot. Pilot both sets up and operates your entire company's financial stack. So finance, accounting, tax, and even CFO services like investor reporting, from your general ledger all the way up to budget and financial sections of your board decks. And they've been doing this now for years across thousands of startups from Silicon Valley and everywhere else.

Yep, and when you say thousands of companies, Pilot does this, for, these are now companies like OpenAI, Airtable, and Scale, as well as large e-commerce and other companies. So it's not just that they have experience across startups, they can also keep working with you as you scale to the growth phase and beyond. So if your company or a company you start in the future wants to go back to focusing on what makes your beer or coffee taste better, go on over to pilot.com slash acquired and tell them that Ben and David sent you.

Thanks, Pilot.

Moving on from technology and mobile order and pay. There's one more, to my mind, key pillar of the Starbucks tapestry, and 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.

The basic idea early on, given the beverages velocity in AM, was to find a corner location in an urban setting where we could physically see pedestrian traffic in a significant way. And so we would go to cities and count, just physically count how many people are walking by, what hours they're walking by. And once we had a model of success, it became clear to us what we needed. And also, once we became aware of co-tenancies of certain tenants, that would be interesting to us, we also were very intrigued with being next to a grocery store early on because of the frequency in which people were buying food. Anytime.

Oh, well, there were franchises.

But let me explain that, if I can, which is all part of the real estate strategy. I never believed that we could build, maintain, and elevate 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 to franchise, 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, because.

Well, as you've been saying, from the beginning, it was about elevating. McDonald's, great company, but nobody would ever accuse them of elevating, I don't think.

And that's why I don't want Starbucks to become transactional. Coffee is personal. The biggest magic and the lightning in the bottle is when you go to Japan or Shanghai 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 policy? How did we do it?

That's actually quite befuddling to me, because so many food and beverage concepts do not transfer geographies.

I think it transferred, because young people around the world, we all want the same thing. They want opportunity, they want to be respected, 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 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 is that we have so much more in common than we have differences.

I want to pick up the thread on China, now that we're sort of into the 2010s. This decade saw huge, ridiculous growth in China store openings. So there were 500 stores in 2011, right when you're sort of coming out of the rut. By 2017, there were 3,000.. Today, there's almost 7,000..

True.

Now bring us to that seed that you planted earlier, with Belinda being the single most important employee.

China presented the enormity of opportunity with the significant challenge of pioneering.

It's a tea-drinking culture.

Tea-drinking culture, no morning business, people eating rice in the morning. We got real estate wrong. 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 exactly what you see right now. There's no different. But they didn't know. The Chinese people hardly knew what coffee was. There was no morning traffic.

Today, 18% of Starbucks' revenue is China.

Yeah. She deserves all the credit.

Right, you don't have to. Yeah.

Because it's the culture of our company. We want to do everything we can to benefit our people. Humanity, and it's universal.

Right. I think it's funny. So I have heard that story probably five times, because I've consumed an incredible amount of Starbucks content over the last couple months. And I've heard a story about Starbucks employees wanting to buy a cow for a farmer in Africa, and stories about Flint, Michigan, and stories about the initiative to bring the company together to try to bring the country together when the government was shut down in 2013,. whenever that was.

And we're not perfect. And so we do make mistakes. And when the brand is being shined so brightly...

It's a high standard to be held to.

We live in an environment where, if you do make a mistake, and we are human, and we're going to make mistakes, unfortunately, that becomes the thing. And it's tough to fight that.

I'd love to kind of flash forward. You were CEO through 2017.. Kevin Johnson took over 2017 to 2022.. You came back for one year as interim CEO. And now Laxman is the CEO and has been in the seat for about a year.

That's a very tough, complex question.

Particularly when you had built a reputation on a pattern and a history of being unbelievably.

kind to your people.

I entered Starbucks as the interim CEO when this was already going on. I think the company made some early mistakes, some of which were COVID related. Again, no textbook. how to deal with COVID issues, health issues, safety issues.

That's basically worked for decades and decades. It also seems like 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 get a pass on anything that didn't work. When you're at this scale, everyone expects you to be wildly successful all the time, because you always have been, but anything that's misaligned, that is where 100% of the focus is.

Well, I think, if you take a step back, not from Starbucks, but if you say to yourself, what company has gotten big in the food business and stayed true to its core purpose and reason, and then stayed positively inclined to its customers, what are you going to name? The odds on getting this big and still being revered for who you once were is very, very difficult. I would argue, in so many ways, we are better today than we were when we were smaller. That is expected of us, but I don't think we get much credit. Maybe we shouldn't.

All right. I'm going to take us to Starbucks today. I'll map that out and give you the stats. Then we're going to go into Playbook, where we basically try to take all the lessons we just learned over the last few hours and figure out why did Starbucks work at such a grand scale that it did. To catch listeners up on the business?

I think over 450,000.

450,000. now. Globally. I must be using an old number. And over the lifetime of the company, it has employed over 5 million.

Yes. 5 million alums.

At a scale right there. 39,000 stores globally in 86 countries, almost half of which are in North America, 18% in China, and about half of those are licensed franchise and half are company operated. You mentioned we don't franchise in the traditional McDonald's sense. You do these joint ventures and you do this way of entering countries where you don't need to own and operate the entire store yourself.

They're not franchises in the typical sense.

Yeah, so tell us about that.

I think we should talk about that. Yeah. The joint venture relationships that we've established, and some goes back almost 30 years, in the Middle East, in Latin and Central America, now in Italy, in the EU, in India.

What does it mean to be your partner?

Every country is different, depending on the economics of that country, the political issues. Some countries have been an 80-20.. Starbucks owns 80.. They own 20.. Some are 50-50..

And so tactically, you said it's not a franchise in the traditional way. What are Starbucks responsible for and what is the partner responsible for?

Starbucks is responsible for roasting the coffee, for all the recipes, which are consistent with Starbucks worldwide, a co-design of the store, where we're designing the store with the JV or the licensed partner, and they control all the operations.

And so all of Starbucks' franchise or licensed stores are done in this way, where there's a partner in a country. Yes.

There are no individual licensed franchises of any kind, unless it's certain real estate that we can't get, that we want access to, like a roadway on a highway in Switzerland, or something odd. I see.

And airports are this way, right?

Airports are master-licensed, with the master licensee, whoever has it, like Marriott, or whoever has it. I gotcha. Or Target that has 2,000 Starbucks stores.

And those are Target-operated? Yes. I see.

And great partner. And Brian Cornell, great guy.

And it's interesting.

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.

Makes sense.

Which is not always the case. I admit that.

So one market that we haven't talked about that I want to ask you about while we're in this, and then we'll get to Playbook, is Italy. Yeah. The whole thing came out of Milan. And yet, for decades...

50 years.

No Starbucks. 50 years, no Starbucks in Italy. And the belief, at least as I see it, is they've perfected the coffeehouse concept. Don't bring an imitation in here.

Yeah.

But it's worked. It's working phenomenally well. Why is Starbucks being so well-received in Italy?

So I know I'm going to be chastised for what I'm about to say, but it's true. 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 going to be killed for that, but that's my truth.

If you don't believe you have a better product, who does? Yeah.

But I didn't think we earned the right to go to Italy until we were really ready to present ourselves in the best possible way, because I knew the knives would be out for us in ways that we couldn't even possibly imagine, given the history and the cultural relevance of espresso in the coffee bar. And so we waited and waited, and waited until the roastery. And so, before we get to Italy, I have to explain the roastery for you.

I mean, the first time I went in there, kid in a candy store, wide eyes.

So there are six roasteries, starting in Seattle, Chicago, New York, Tokyo, Shanghai, and Milan. 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 absolutely blows people away? So what did I do?

I was going to say that has to be. It's got to be.

Turned on Willy Wonka with Gene Wilder. And we went to work, starting to design a space. Now we realized early on.

And this was what? 2013,, 14, eight years ago.

Now we realized economically, this is a tough business model. So what are we trying to do? We're trying to create an experience that is a creative to the brand and significantly elevate Starbucks, which is fighting ubiquity all the time, every day. And so we created this 30,000 square foot space in Seattle, which we opened seven years ago. Which is the most dynamic, entertaining vehicle of theater, romance, seduction.

Which makes the smell of the, it's just amazing.

We open it up. And then over time, we start opening a couple more. We get approval from the Chinese government to manufacture in the center of Shanghai. We open up a 40,000 square foot in Shanghai. We open up an incredible space in Tokyo.

This is the way to go back.

And this is the way we open on Italy. Now, our partner in Italy is the Percassi 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. I got to see it.

Private equity. that's letting real estate sit empty?

It's empty.

I know where this is going.

OK, it turns out, I know I'm going to get killed for this story. You're going to have to fix this. It turns out, the owner of the space is Blackstone.

I knew it. I knew it.

Of course.

Of course.

So I said, why am I in Italy?

I called John Gray. You've got to go to New York.

I called John Gray, a friend of mine. No way. I said, John, I'm in Milan. Do you realize you own this space in Cartuzzo Square that used to be a post office? He said, I don't know.

I'm on the next flight.

We do the deal with John Gray.

Amazing. John Gray, of course, being the number two person at Blackstone.

And John's, a big fan of Starbucks. He had previously been in Seattle for a wedding or bar mitzvah or something, and saw the roasteries. He knew exactly what I was talking about. And so that is how we entered in Milan. Now, we have 30 stores.

Did they already exist before the roastery opened?

No, Milan opened first.

First, the roastery.

Then 30 stores. We're in Milan. We're in Rome. We're in Florence. And two, three years later, what do you think the number one beverage is?

Yeah, yeah.

Straight espresso. Espresso is the number one beverage. Wow. And so I don't take the success in Italy for granted. We've got to continue to earn it.

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 roastery, but yes.

And that they're choosing to get their espresso at Starbucks, not it. Yeah.

Yeah. So I'm going to Italy, I think, next week. But for me, the gratification, the satisfaction of a complete full circle from 1983 is just beyond belief for me.

I'm wondering another backdrop to the roastery, and really, throughout all the 2010s, must have been third wave coffee. And 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 has always been stories that all these competitors were going to steal business from Starbucks. But from 1983 to all the way today, 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 we're not threatened by that.

Interesting. So you think, third wave coffee brought consumers into the coffee culture market that have then also become Starbucks consumers, and maybe they wouldn't have been coffee culture consumers at all? Yes.

How do you define third wave coffee? Actually, Howard is probably the best person to ask.

I mean, it's a very intentional, independent coffee store that is small enough that they're roasting their own coffee, or getting coffee from a small proprietary roaster, and creating a very unique, handcrafted experience that, in many ways, Starbucks can't do in scale. Right. And so I tip my hat to them, but there's no coffee experience in the world that comes close to the roastery, any of them.

And do those roasteries break even, or are they this marketing showpiece that loses?

Some are making money, and some aren't.

Wow.

But I've never viewed it that way.

It's like the billboards.

You couldn't put a price on the hundreds of thousands of people that come into this roastery and have an experience of a lifetime. And I took Mr. Arnault to the roastery.

Really? I did, yeah. In Milan?

In Seattle. In Seattle? He and his son, yeah. Wow. And I spent a good amount of time with him.

Wow. What was Bernard doing in Seattle?

I don't know what he was doing in Seattle, but I spent a fair amount of time with him and his son. His son now runs Tiffany.

Oh, great.

Wow. And his level of curiosity was very high. I remember he kept looking at the leather railing and the stitching, and I just said, you're spending a lot of time on the leather.

I bet he was.

Maybe there's a partnership to be done.

Okay, so now the question sort of becomes, what are the set of circumstances that had to be true in order for Starbucks today to exist? And the one thing we haven't talked about, or one of the things, is how much of what Starbucks has accomplished could have happened if it wasn't an addictive substance. It's kind of this incredible thing that 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 at some point people have enjoyed, whether it's smoking or drinking, as research comes out over time, we find out, shoot, that wasn't good for us. That's not the case for coffee.

And it gives you superpowers. Yeah.

I'd like to believe it's not based on what you are characterizing as an addictive beverage. I'd like to believe it's the experience that has been created around the enjoyment of the coffee and the experience that happens. I also think, and we haven't really spoke that much about it, is I can't state enough over the last two decades what customization meant to the company and how customers created a personal beverage well beyond what the menu was. I don't know any other business in which 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 have a very specific drink that I like, and when I go to coffee shops that are not Starbucks, I can't get it because it feels taboo to order. 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, they're like,

of course, that's what we do here. This is something that I think has translated incredibly well to the mobile app, and that no other food company has, really, the level of customization.

And I think the mobile app actually added velocity to customization. It powered customization.

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 it has to be. every single day, as a barista, you're making something for the first time.

Yes. I think the number that people use inside the company is 100,000 different variations of beverages that are being made consistently.

This is actually a really interesting way to lead into Playbook, because on the surface, it's like an obvious question, right? Yes, it's an addictive substance, caffeine, of course. On the other hand, you're in a highly competitive market.

Right.

Selling a commodity.

And the market actually is not just coffee. It's, let's stick with this theme, it's caffeine broadly. 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.

And I think the real question is, for us here, nobody has built Starbucks despite decades in a highly competitive market with whether it's third wave or competitors in other geographies, or domestic competitors, or McDonald's getting into the business, or Folgers and Maxwell House. There is a unique tapestry that we've been weaving throughout this episode that, you know, in Hamilton Helmer's terms, has power here.

Yes. Coffee, so here's my second one in addition to the,

First of all, I've never heard it quite like that. And I think that's a very interesting insight.

And in this category, to extend that point, you start from a place of. this is a good job and you can sort of improve the experience for that employee so they can 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. 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 pitfalls of ubiquity that we were discussing before. The fact that it is everywhere almost cheapens the experience. To me, Starbucks' ubiquity is a massive feature. 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.

So ubiquity, earlier on in our conversation, I said, ubiquity is an enemy of Starbucks. 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. So if the ubiquity 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. That is the framework of the daily challenge of the company.

Frustratingly, for those of us who are trying to analytically put this puzzle together, the humanity is actually the answer. Scaling humanity is actually the answer. You know, along with this obsessive quality of product, the fact that product isn't just product, but experience is the product. It's everything you experience around consuming the beverage itself. It's a bunch of the things we've already talked about.

What is this place? What?

Backwoods. Place. am I in? It's expected. When you live with something most of your life, you forget that it was once a crazy idea.

I think the other piece that you didn't just list off there that we've covered in depth is the Costco-like investment in your employees and the people and the reduction of turnover. And in Costco's case, I think it's probably much more so. the reduction of turnover. In Starbucks's case, it really is like that's a key, the key element to building the humanity, right? I don't know the employees at my Costco store.

What's the stat that you have on.

It's a 2x is what I believe.

That employee tenure is 2x longer or turnover is half of what it is industry-wide. Yes. It makes a huge difference.

And you've talked about being stock. You've talked about comprehensive health insurance. When I think about the most important thing we probably have done in the last 20 years, it's been the unique relationship that we established with Arizona State University and its president, Michael Crow. Could we create free college tuition, a four-year free college tuition through Arizona State for every single partner at Starbucks? And we did it.

Here's one that we haven't talked as much about.

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.

Right.

Yeah. That's a lot of people who have gone on to do other things after.

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. The year is 1995.. Is there a nationwide chain, not called Starbucks, with gourmet coffee taking off in the United States because the conditions were perfect for it?

I would assume that there would have been a national franchised business that would have occupied the coffee space, but would have been more commoditized.

A Dunkin' Donuts, for instance.

Yeah. I don't think anything would have been executed like Starbucks. But I think someone would have showed up. Right. The opportunity was just too much white space.

There was clearly demand there. We were coming off this horrible 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.

Just remember, our intent was not to build a global business. The first business plan, and I've said this many times, when I was raising money was 100 stores. And I wasn't raising the money, and I couldn't afford to reprint the whole document, whatever that was at the time. And I whited it out. No one even knew what that means.

When was the last time you used a whiteout?

Yeah.

It's been a while. It's been a while. Wait, really?

Yeah, I whited it out 75 because I couldn't.

Did it feel too ambitious?

Yeah, people didn't believe.

Think you were crazy?

But we never. We, you know, Japan was the turning point of thinking we could build an international business, but none of us had any international experience. No one in the whole entire company. I mean, in many ways, you could say this shouldn't have happened.

Yeah.

Okay, so this brings us to the absolute magic of founder-led businesses. I mean, when you have a founder at the helm, you get all this leeway from shareholders, from employees. You can take crazy risks, and people know it's because 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?

What a question. I'm pausing, not because there hasn't been any,

I don't think you were running the show when the pumpkin spice latte came out.

Yes, I was.

You were?

I thought I had won. Yeah, yes, I was. I didn't like it. Oh! Yeah.

It does feel like you were 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 in whatever they want from us.

Well, the Il Gennale store only played Italian opera and had no chairs.

I mean, that would have scaled as well.

I'm recalling my time from Rome two years ago. That's literally, I'm walking around Rome, and that's everywhere. Yeah. It's completely different than here.

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.

I mean, what is it, 70% of drinks are now iced beverages, and it was when you started zero percent.

Didn't have a cold beverage.

For the first decade, it was zero.

To a degree. Yeah.

But, I was clearly leading, that was a leading question around innovations, not under.

Yeah, so what's the point? What's your, it's not that there hasn't been innovation. I think there's a burden that the organization has and a reliance on the founder that, over time, can become unhealthy. And, not that I didn't want succession, I just, I wasn't really on my mind.

I mean, it's the very things that make the business successful, the founder bets, that then, at some point, in the company's second act, kind of hold it back. You have all this muscle memory, as a company, of relying on founder maverick acts. Yeah. At some point, you need to figure out how, as a company, to not.

Well, the other thing about that is, most founder-led companies are entrepreneurially driven.

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, the year is 1999, or 1997, so you can start working on some talent development, what would you do differently to make sure that succession...

I would have believed Oren when he said, I only want to do this for a couple of years. I convinced myself, I could just get Oren to do this for five years, maybe ten years. When he kept saying, I don't want to do this anymore. I was stuck because I was not prepared to look around the room and say, God, I think he could do it. If I would have spent maybe a year or two, but I didn't.

Not to mention you're a quasi-financial institution, too.

Yeah, and we've got all of that. And lastly, I think, the personal responsibility of a founder, in my case, who loves this company as much as I love my family. And so it's a challenging, fragile thing on a very personal level. You can't escape it.

I'm so glad you're bringing this up. It really resonates to us hearing you say that. It's the way we feel about Acquired and our show. And to imagine, that's easy for us. We have no stakeholders.

But you also have, now that you've achieved this level of success, you have an expectation that you've got to keep, not reinventing, but you've got to make sure that you're as good as you've been.

No, better.

Yeah, better. You've got to be better. Again, and your success is not an entitlement, like Starbucks. It just isn't. And when you have success, it gets harder, because the bar keeps getting higher.

Yeah, that's just human expectations. Going into this, I was thinking, I had some funny thing occur to me, which was, at some point, why does Starbucks need to grow anymore? It's already everywhere. And of course, it's a public company, so it literally just has to keep growing. But it's just human expectation that things keep getting better than they were last year.

Indeed.

Well, listeners, we were thinking about how to land this episode. In our normal episodes, we land the plane in some way, or come up with the one thing you really 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're talking with Howard, and he threw out this idea. I really do have one more thing to say.

Yeah, given this moment that Starbucks is in right now, here in summer of 2024, this felt like the right way to address that.

Back to the interview. Well, Howard, we're at the end here.

Let me try and go back to when I returned as an interim CEO in April of 22.

But that's an output. That's investors voting on the performance.

Yeah, yeah. We don't have to talk about stock price if you don't want to.

They wanted you to be interim CEO for a second.

Yeah, they wanted. It was up to me. And so the board led a search.

This is on LinkedIn.

Yeah. I wrote the letter because I had written a couple of other letters.

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 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 going to consistently dilute the integrity of the experience of Starbucks. We're not in the transaction business.

Yeah, makes sense.

Thank you very much. I think, you know, Starbucks is so resilient. Starbucks has had many, many challenges.

Thanks, Howard.

Thanks, Howard.

Thank you. Great. Really enjoyed it.

All right. Well, listeners, thank you for being on the journey with us. That was super fun to do with Howard. Remember the huge announcement from the top of the show, San Francisco in September. Click the link in the show notes to stay fully in the loop on what that is, when we are able to share more details.

We'll see you next time.

Who got the truth now?

Huh?