Starbucks Corporation

views updated May 18 2018

Starbucks Corporation

2401 Utah Avenue South
Seattle, Washington 98134-1436
U.S.A.
Telephone: (206) 447-1575
Toll Free: (800) 782-7282
Fax: (206) 447-0828
Web site: http://www.starbucks.com

Public Company
Incorporated: 1985 as Il Giornale
Employees: 115,000
Sales: $6.37 billion (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: SBUX
NAIC: 722213 Snack and Nonalcoholic Beverage Bars; 311920 Coffee and Tea Manufacturing; 311520 Ice Cream and Frozen Dessert Manufacturing; 312111 Soft Drink Manufacturing; 422490 Other Grocery and Related Products Wholesalers; 454110 Electronic Shopping and Mail-Order Houses; 533110 Lessors of Nonfinancial Intangible Assets (Except Copyrighted Works)

Starbucks Corporation is the leading roaster, retailer, and marketer of specialty coffee in the world. Its operations include upwards of 7,300 coffee shops and kiosks in the United States, and nearly 3,000 in 34 other countries, with the largest numbers located in Japan, Canada, the United Kingdom, China, Taiwan, South Korea, the Philippines, Thailand, Malaysia, Mexico, Australia, Germany, and New Zealand. In addition to a variety of coffees and coffee drinks, Starbucks shops also feature Tazo teas; pastries and other food items; espresso machines, coffee brewers, and other coffee- and tea-related items; and music CDs. The company also sells many of these products via mail-order and online at starbucks.com. It also wholesales its coffee to restaurants, businesses, education and healthcare institutions, hotels, and airlines. Through a joint venture with Pepsi-Cola Company, Starbucks bottles Frappuccino beverages and the Starbucks DoubleShot espresso drink and sells them through supermarkets and convenience and drugstores. Through a partnership with Kraft Foods, Inc., the company sells Starbucks whole bean and ground coffee into grocery, warehouse club, and mass merchandise stores. A third joint venture, with Dreyer's Grand Ice Cream, Inc., develops superpremium coffee ice creams and distributes them to U.S. supermarkets. From a single small store that opened in 1971 to its status as a 21st-century gourmet coffee giant, Starbucks has led a coffee revolution in the United States and beyond.

ROOTS IN COFFEE RETAILING AND WHOLESALING

Starbucks was founded in Seattle, Washington, a haven for coffee aficionados. The city was noted for its coffee before World War II, but the quality of its coffee had declined so much by the late 1960s that resident Gordon Bowker made pilgrimages to Vancouver, British Columbia, to buy his beans there. His point of reference for the beverage was dark, delicious coffee he had discovered in Italy. Soon Bowker, then a writer for Seattle magazine, was making runs for friends as well. When Seattle folded, two of Bowker's friends, Jerry Baldwin, an English teacher, and Zev Siegl, a history teacher, also happened to be seeking new ventures; the three banded together and literally built their first store, located in Seattle's Pike Place Market, by hand. They raised $1,350 apiece, borrowed another $5,000, picked the name Starbucks, for the punchy "st" sound and its reference to the coffee-loving first mate in Moby Dick, then designed a two-tailed siren for a logo and set out to learn about coffee.

Siegl went to Berkeley, California, to learn from a Dutchman, Alfred Peet, who ran Peet's Coffee, which had been a legend among local coffee drinkers since 1966. Peet's approach to coffee beans became the cornerstone for Starbucks' reputation: high-grade arabica beans, roasted to a dark extreme by a trained perfectionist roaster. Starbucks bought its coffee from Peet's for its first nine months, giving away cups of coffee to hook customers. The plan worked. By 1972 the three founders had opened a second store in University Village and invested in a Probat roaster. Baldwin became the young company's first roaster.

Within its first decade, Starbucks had opened stores in Bellevue, Capitol Hill, and University Way. By 1982 the original entrepreneurs had a solid retail business of five stores, a small roasting facility, and a wholesale business that sold coffee primarily to local restaurants. The first of the company's growth-versus-ethos challenges came at this stage: how does one maintain a near fanatical dedication to freshness in wholesale? Starbucks insisted that the shelf life of coffee is less than 14 days after roasting. As a result, they donated all eight-day-old coffee to charity.

In 1982 Starbucks hired Howard Schultz to manage the company's retail sales and marketing. While vice-president of U.S. operations for Hammarplast, a Swedish housewares company, and working out of New York, Schultz met the Starbucks trio and considered their coffee a revelation. (He had grown up on instant.) He and his wife packed up and drove 3,000 miles west to Seattle to join Starbucks.

There were other changes taking place at Starbucks at the same time. Siegl had decided to leave in 1980. The name of the wholesale division was changed to Caravali, out of fear of sullying the Starbucks name with less than absolute freshness. Blue Anchor, a line of whole-bean coffees being prepackaged for supermarkets, was relinquished. Starbucks learned two lessons from their brief time in business with supermarkets: first, supermarkets and their narrow profit margins were not the best outlet for a coffee roaster who refused to compromise on quality in order to lower prices, and second, Starbucks needed to sell directly to consumers who were educated enough to know why the coffee they were buying was superior.

MID-1980S: THE SHIFT TO COFFEE BARS

In 1983 Starbucks bought Peet's Coffee, which had by then become a five-store operation itself. That same year, Schultz took a buying trip to Italy, where another coffee revelation took place. Wandering the piazzas of Milan, Schultz was captivated by the culture of coffee and the romance of Italian coffee bars. Milan had about 1,700 espresso bars, which were a third center for Italians, after work and home. Schultz returned home determined to bring Italian coffee bars to the United States, but found his bosses reluctant, being still more dedicated to retailing coffee. As a result, Schultz left the company to write a business plan of his own. His parting with Starbucks was so amicable that the founders invested in Schultz's vision. Schultz returned to Italy to do research, visiting hundreds of espresso and coffee bars.

COMPANY PERSPECTIVES

Starbucks mission statement: Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow. The following six guiding principles will help us measure the appropriateness of our decisions: Provide a great work environment and treat each other with respect and dignity. Embrace diversity as an essential component in the way we do business. Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee. Develop enthusiastically satisfied customers all of the time. Contribute positively to our communities and our environment. Recognize that profitability is essential to our future success.

In the spring of 1986, he opened his first coffee bar in the Columbia Seafirst Center, the tallest building west of Chicago. Faithful to its inspiration, the bar had a stately espresso machine as its centerpiece. Called Il Giornale, the bar served Starbucks coffee and was an instant hit. A second was soon opened in Seattle, and a third in Vancouver. Schultz hired Dave Olsen, the proprietor of one of the first bohemian espresso bars in Seattle, as a coffee consultant and employee trainer.

A year later, Schultz was thriving while Starbucks was encountering frustration. The wholesale market had been reconfigured by the popularity of flavored coffees, which Starbucks resolutely refused to produce. The company's managers were also increasingly aggravated by the lack of wholesale quality control, so they sold their wholesale line, Caravali, to Seattle businessman Bart Wilson and a group of investors. In addition, Bowker was interested in leaving the company to concentrate on a new project, Red Hook Ale. Schultz approached his old colleagues with an attractive offer: how about $4 million for the six-unit Starbucks chain? They sold, with Olsen remaining as Starbucks' coffee buyer and roaster; the Starbucks stores were merged into Il Giornale. Baldwin remained president of the now separately operated Peet's Coffee and Tea. In 1987 the Il Giornale shops changed their names to Starbucks, and the company became Starbucks Corporation and prepared to go national.

In August 1987 Starbucks Corporation had 11 stores and fewer than 100 employees. In October of that year it opened its first store in Chicago, and by 1989 there were nine Chicago Starbucks, where employees trained by Seattle managers served coffee roasted in the Seattle plant.

Their methods were costly, using high-grade arabica beans and expensive dark roasting, while suffering the financial consequences of snubbing the supermarket and wholesale markets. Nevertheless, Starbucks' market was growing rapidly: sales of specialty coffee in the United States grew from $50 million in 1983 to $500 million five years later.

In 1988 Starbucks introduced a mail-order catalog, and by the end of that year, the company was serving mail-order customers in every state and operating a total of 33 stores. Because the company's reputation grew steadily by word of mouth, it spent little on ads. Schultz's management philosophy, "hire people smarter than you are and get out of their way," fed his aggressive expansion plans. Industry experts were brought in to manage Starbucks' finances, human resources, marketing, and mail-order divisions. The company's middle ranks were filled with experienced managers from such giants as Taco Bell, Wendy's, and Blockbuster. Schultz was willing to lose money while preparing Starbucks for explosive growth. By 1990 he had hired two star executives: Howard Behar, previously president of a leading developer of outdoor resorts, Thousand Trails, Inc.; and Orin Smith, chief financial and administrative officer for Danzas, USA, a freight forwarder.

KEY DATES

1971:: Gordon Bowker, Jerry Baldwin, and Zev Siegl open the first Starbucks in Seattle's Pike Place Market.
1982:: Howard Schultz is hired to manage retail sales and marketing.
1983:: Peet's Coffee is acquired.
1985:: Schultz leaves the company to found Il Giornale, an operator of coffee bars.
1987:: Schultz buys the six-unit Starbucks chain from the original owners for $4 million, merges them into Il Giornale, renames his company Starbucks Corporation, and begins a national expansion; Baldwin remains president of the now separate Peet's Coffee and Tea business.
1988:: A mail-order catalog is introduced.
1992:: Company goes public.
1993:: First East Coast store opens, in Washington, D.C.
1995:: Frappuccino beverages are introduced.
1996:: Overseas expansion begins with units in Japan, Hawaii, and Singapore; partnership with Dreyer's begins selling Starbucks Ice Cream; partnership with Pepsi-Cola begins selling bottled Frappuccino beverages.
1998:: U.K.-based Seattle Coffee Company is acquired; partnership with Kraft Foods is formed for the distribution of Starbucks coffee into supermarkets.
1999:: Pasqua Coffee Co. and Tazo Tea Company are acquired.
2000:: Schultz steps aside as CEO to become chief global strategist, while remaining chairman; Orin Smith takes over as CEO.
2001:: Starbucks expands to continental Europe with opening of stores in Switzerland and Austria.
2005:: The 10,000th Starbucks opens.

Starbucks installed a costly computer network and hired a specialist in information technology from McDonald's Corporation to design a point-of-sale system via PCs for store managers to use. Every night, stores passed their sales information to Seattle headquarters, which allowed planners to spot regional buying trends almost instantly. Starbucks lost money while preparing for its planned expansion, including more than $1 million in 1989 alone. In 1990 the headquarters expanded and a new roasting plant was built. Nevertheless, Schultz resisted both the temptation to franchise and to flavor the beans. Slowly, the chain developed near-cult status.

RAPID EARLY 1990S GROWTH AS A PUBLIC COMPANY

Starbucks also developed a reputation for treating its employees well. In 1991 it became the first privately owned company in history to establish an employee stock option program that included part-timers. Starbucks also offered health and dental benefits to both full- and part-time employees. As a result, the company had a turnover rate that was very low for the food service industry. Employees were rigorously trained, completing at least 25 hours of coursework on topics including the history of coffee, drink preparation, and how to brew a perfect cup at home. The company went public in 1992, the same year it opened its first stores in San Francisco, San Diego, Orange County, and Denver. Its stores totaled 165 by year's end. The company began special relationships with Nordstrom, Inc. and Barnes & Noble, Inc., offering coffee to shoppers at both chains.

Growth mandated the opening of a second roasting plant, located in Kent, Washington, by 1993. After 22 years in business, Starbucks had only 19 individuals it deemed qualified to roast coffee. One of the 19 was Schultz, who considered it a tremendous privilege. Roasters were trained for more than a year before being allowed to roast a batch, which consisted of up to 600 pounds of coffee roasted for 12 to 15 minutes in a gas oven. The beans made a popping sound, like popcorn, when ready, but roasters also used sight and smell to tell when the beans were done to perfection. Starbucks standards required roasters to test the roasted beans in an Agron blood-cell analyzer to assure that each batch was up to standards. If not, it was discarded.

Starbucks' first East Coast store opened in 1993, in a premier location in Washington, D.C. The chain had 275 stores by the end of 1993 and 425 one year later. Sales had grown an average of 65 percent annually over the previous three years (reaching $284.9 million in 1994), with net income growing 70 to 100 percent a year during that time. Starbucks broke into important new markets in 1994, including Minneapolis, Boston, New York, Atlanta, Dallas, and Houston, and purchased the Coffee Connection, a 23-store rival based in Boston, for $23 million, making it a wholly owned subsidiary. Smith was promoted to president and COO and Behar became president, international. Starbucks also announced a partnership with Pepsi-Cola to develop new ready-to-drink coffee beverages. After Starbucks debuted a frozen coffee drink called Frappuccino in its stores in the summer of 1995, resulting in a sales bonanza, the partnership with Pepsi began rolling out a bottled version in grocery, convenience, and drugstores the following year. Starbucks broke into new markets in 1995, including Pittsburgh, San Antonio, Las Vegas, and Philadelphia. That same year, Starbucks began supplying coffee for United Airlines flights and launched a line of Starbucks compilation music CDs, which were sold in its coffeehouses.

LATE 1990S: INTERNATIONAL EXPANSION AND NEW VENTURES

The following year, in addition to continued North American expansion into Rhode Island, Idaho, North Carolina, Arizona, Utah, and Ontario, the company ventured overseas for the first time. Its initial foreign forays were launched through joint venture and licensing arrangements with prominent local retailers. With the help of SAZABY Inc., a Japanese retailer and restaurateur, the first market developed in 1996 was Japan; through other partnerships, Hawaii and Singapore also received their first Starbucks that year. The Philippines followed in 1997. Meantime, Starbucks entered into a partnership with Dreyer's Grand Ice Cream, Inc. in 1996 to develop and sell Starbucks Ice Cream. Within eight months of introduction, the product became the number one coffee ice cream in the United States. Starbucks' expansion into Florida, Michigan, and Wisconsin in 1997 helped the total number of units reach an astounding 1,412 by year-end, more than double the previous two-year total. Sales approached the $1 billion mark that year, while net income hit $57.4 million, more than five times the result for 1994.

As this rapid growth continued, the company began to be needled by late night talk show hosts for its seeming Starbucks-on-every-corner expansion strategy, while a number of owners and patrons of local coffee shops began speaking out and demonstrating against what they considered overly aggressive and even predatory moves into new territory. Critics complained that the company was deliberately locating its units near local coffee merchants to siphon off sales, sometimes placing a Starbucks directly across the street. In 1996 and 1997 residents in Toronto, San Francisco, Brooklyn, and Portland, Oregon, staged sidewalk protests to attempt to keep Starbucks out of their neighborhoods. One of the company's responses to the scattered resistance was to try to enhance its image through stepped-up advertising. Still, like Wal-Mart Stores, Inc. and its reputation in some quarters as a destroyer of Main Street, Starbucks remained the object of snickers from comedians and derision from a vocal minority of protesters. This undercurrent of hostility burst into the spotlight in late 1999 when some of the more aggressive protesters against a World Trade Organization meeting took their anger out on several Starbucks stores in the company's hometown of Seattle, tagging a number of the 26 downtown locations with graffiti and inflicting more serious vandalism on three stores, which were then temporarily closed.

The anti-multinational protesters in Seattle also singled out stores operated by McDonald's Corporation and Nike, Inc. The lumping of the once modest purveyor of gourmet coffee in with these global giants was in part an outgrowth of the company's aggressive overseas expansion in the late 1990s. Growth in the Pacific Rim continued with the opening of locations in Taiwan, Thailand, New Zealand, and Malaysia in 1998 and in China and South Korea in 1999. By early 2000 the number of Starbucks in Japan had reached 100. The company aimed to have 500 stores in the Pacific Rim by 2003. The Middle East was another target of global growth, with stores opened in Kuwait and Lebanon in 1999, but it was the United Kingdom that was the object of the company's other big late 1990s push. In 1998 Starbucks acquired Seattle Coffee Company, the leading U.K. specialty coffee firm, for about $86 million in stock. Starbucks began rebranding Seattle Coffee's locations under the Starbucks name. Aggressive expansion in the United Kingdom yielded more than 100 units by late 1999. Starbucks hoped to use its U.K. base for an invasion of the Continent, aiming for 500 stores in Europe by 2003.

Growth was not slowing back home either. Areas receiving their first Starbucks in 1998 and 1999 included New Orleans, St. Louis, Kansas City, and Memphis and Nashville, Tennessee. The number of North American locations approached 2,200 by early 2000. Always searching for new revenue streams, Starbucks in 1998 entered into a long-term licensing agreement with Kraft Foods, Inc. for the marketing and distribution of Starbucks whole bean and ground coffee into grocery, warehouse club, and mass merchandise stores. The company also began experimenting with a full-service casual restaurant called Café Starbucks. A further move into food came in early 1999 through the purchase of Pasqua Coffee Co., a chain of coffee and sandwich shops with 56 units in California and New York. Starbucks had already developed its own in-house tea brand, Infusia, but it was replaced following the early 1999 acquisition of Tazo Tea Company, a Portland, Oregon-based maker of premium teas and related products with distribution through 5,000 retail outlets.

Starbucks had also launched a web site featuring an online store in 1998, and Schultz began talking about Starbucks becoming a mega-cybermerchant offering everything from gourmet foods to furniture. To this end, the company attempted, but failed, to acquire Williams-Sonoma, Inc., a specialty retailer of high-end kitchenware. Wall Street analysts began questioning the wisdom of moving so far afield from the company's core coffee business. In mid-1999, following Starbucks' announcement of an earnings shortfall, the company's stock plunged 28 percent, leading Schultz to pull back on his ambitious cyber plans.

Other developments included an agreement with Albertson's, Inc. to open more than 100 Starbucks coffee bars in Albertson's supermarkets in the United States; and the acquisition of the five-store San Francisco-based Hear Music chain, in an extension of Starbucks' music retailing ventures. Image problems continued to crop up for the rapidly growing company, whose 1999 revenues of $1.68 billion were nearly six times the figure of five years earlier. In April 2000 a San Francisco-based human rights group called Global Exchange was readying a large protest at Starbucks in 29 cities to publicize its allegations that the coffee company was buying its beans from wholesalers who were paying farmers what amounted to poverty wages. In a preemptive move, which staved off the protests and the resultant bad publicity, Starbucks announced that it would buy more coffee certified as "fair trade," meaning that the farmers who grew it received more than market price for their crop, sometimes as high as three times the 30 cents per pound they typically received.

ACCELERATING GROWTH IN THE EARLY 21ST CENTURY

In the early 21st century, Starbucks was working to achieve Schultz's ambitious goals of 500 stores in both Japan and Europe by 2003, as well as his ultimate goal of 20,000 units worldwide. With about half of that total envisioned to be located outside North America, Schultz decided to spend more time on the company's overseas operations. In June 2000 he stepped down as CEO of the company to become its chief global strategist, while remaining chairman. Schultz began working closely with Peter Maslen, who had taken charge of the international division in late 1999, following the retirement of Howard Behar. Assuming the CEO title was Orin Smith, who retained his previous responsibility for domestic retail and wholesale operations, alliances, and coffee roasting and distribution.

Starbucks' rate of expansion accelerated in the early 2000s: after opening about 1,200 new stores each year from 2001 to 2004, the company added nearly 1,700 new outlets in 2005, pushing the chain past the 10,000 unit mark. About 1,150 of the units opened in 2005 were located in the United States, bringing the domestic total to 7,300. Even this figure did not represent a saturated market, as Starbucks was now aiming to eventually have 15,000 stores in the U.S. market alone. It also expected to eventually increase its international outlets from the approximately 3,000 that were operating in late 2005 to 15,000. Starbucks debuted in continental Europe in 2001 when stores were opened in Switzerland and Austria, and further new territories were entered in each of the following years: Oman, Indonesia, Germany, Spain, Mexico, and Greece in 2002; Turkey, Chile, Peru, and Cyprus in 2003; Paris, France, in 2004; and Jordan in 2005. In addition, the Starbucks unit in Japan was taken public in 2001. During this same period, the company's revenues skyrocketed, surging from $2.17 billion in 2000 to $5.39 billion in 2005. Net earnings increased more than fivefold, from $94.6 million to $494.5 million.

Among the new initiatives during this period, the company in 2001 introduced the Starbucks Card, a stored-value card that customers could use and reload, and also began offering high-speed wireless Internet access at its stores. In 2002 the beverage line was extended to include the first noncoffee/nontea blended concoction, the Crème Frappuccino, a cold, creamy vanilla drink. The Starbucks Card in 2003 was extended into a combined credit and stored-value card. That same year, the company acquired Seattle Coffee Company from AFC Enterprises, Inc. for $72 million, thereby gaining the Seattle's Best Coffee and Torrefazione Italia coffee brands. Starbucks' music endeavors expanded in 2004 with the launch of the first Hear Music media bars at select Starbucks locations. These media bars enabled customers to burn unique compilation CDs from an initial selection of 200,000 songs. Also in 2004 the company entered into an agreement with Jim Beam Brands Co. to develop and market a superpremium coffee liqueur, and the following year Jim Beam began distributing Starbucks Coffee Liqueur to licensed establishments, not to Starbucks outlets. A further expansion of the outlets' beverage offerings came in 2005 when Chantico drinking chocolate debuted in the United States and Canada and the company acquired Ethos Water.

In March 2005 Smith retired as CEO and was succeeded by Jim Donald, who had been president of the firm's North America unit and had been hired away from Pathmark Stores, Inc. in 2002. Donald was a main force behind a drive to broaden Starbucks outlets beyond coffee—not only into music but also into food. Lunch items, typically sandwiches, began to be offered at many North American Starbucks, and testing of hot breakfasts, such as ham, egg, and cheese on a muffin, began in 2004. Rather than morphing into a restaurant chain, however, Schultz (who remained chairman) and Donald aimed to reshape Starbucks into a retailer with a broader array of products and services. At the same time, the global expansion continued toward the eventual goal of 30,000 outlets worldwide and with China potentially rivaling the United States as Starbucks' largest market. In 2006 alone, the company planned to open another 1,800 stores.

Carol I. Keeley

Updated, David E. Salamie

PRINCIPAL SUBSIDIARIES

Olympic Casualty Insurance Company; Seattle Coffee Company; Starbucks Capital Asset Leasing Company, LLC; Starbucks Coffee Company (Australia) Pty. Ltd.; Starbucks Coffee Canada, Inc.; Starbucks Coffee Holdings (UK) Limited; Seattle Coffee Company (International) Limited (U.K.); Starbucks Coffee Company (UK) Limited; Torz & Macatonia Limited (U.K.); Starbucks Coffee International, Inc.; Coffee Concepts (Southern China) Ltd. (Hong Kong); Coffee Concepts (Guangdong) Ltd. (China); Coffee Concepts (Shenzhen) Ltd. (China); Rain City C.V. (Netherlands); Emerald City C.V. (Netherlands); Starbucks Coffee EMEA B.V. (Netherlands); Starbucks Manufacturing EMEA B.V. (Netherlands); Starbucks Coffee (Deutschland) GmbH (Germany); Starbucks Coffee (Ireland) Limited; Starbucks Coffee Trading Company Sarl (Switzerland); Starbucks Coffee Agronomy Company S.R.L. (Costa Rica); Qingdao American Starbucks Coffee Company Limited (China); Starbucks Coffee (Dalian) Company Limited (China); Chengdu Starbucks Coffee Company Limited (China); Starbucks Card Europe, Limited (U.K.); Starbucks Coffee Asia Pacific Limited (Hong Kong); Starbucks Coffee Singapore Pte. Ltd.; Sur-Andino Café S.A. (Chile); Starbucks Coffee (Thailand) Ltd.; Starbucks Global Card Services, Inc.; Starbucks Manufacturing Corporation; Urban Coffee Opportunities, LLC.

PRINCIPAL COMPETITORS

Caribou Coffee Company, Inc.; Diedrich Coffee, Inc.; Dunkin' Brands, Inc.; Peet's Coffee & Tea, Inc.; Panera Bread Company; Cosi, Inc.; ABP Corporation; Tully's Coffee Corporation.

Starbucks Corporation

views updated Jun 11 2018

Starbucks Corporation

2401 Utah Avenue South
Seattle, Washington 98134
U.S.A.
Telephone: (206) 447-1575
Fax: (206) 682-7570
Web site: http://www.starbucks.com

Public Company
Incorporated: 1985 as II Giornale
Employees: 37,000
Sales: $1.68 billion (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: SBUX
NAIC: 722213 Snack and Nonalcoholic Beverage Bars; 311920 Coffee and Tea Manufacturing; 312111 Soft Drink Manufacturing; 422490 Other Grocery and Related Products Wholesalers; 454110 Electronic Shopping and Mail-Order Houses

Starbucks Corporation is the leading roaster, retailer, and marketer of specialty coffee in North America. Its operations include upwards of 2,400 coffee shops and kiosks in the United States and Canada, more than 100 in the United Kingdom, and more than 200 in other countries, including China, Japan, Kuwait, Lebanon, New Zealand, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand. In addition to a variety of coffees and coffee drinks, Starbucks shops also feature Tazo teas; pastries and other food items; and espresso machines, coffee brewers, and other assorted items. The company also sells many of these products via mail order and online at starbucks.com. It also wholesales its coffee to restaurants, businesses, education and healthcare institutions, hotels, and airlines. Through a joint venture with Pepsi-Cola Company, Starbucks bottles Frappuccino beverages and sells them through supermarkets and convenience and drugstores. Through a partnership with Kraft Foods, Inc., the company sells Starbucks whole bean and ground coffee into grocery, warehouse club, and mass merchandise stores. A third joint venture is with Dreyer’s Grand Ice Cream. In addition, it distributes Starbucks premium coffee ice creams to U.S. supermarkets. From a single small store that opened in 1971 to its status as a gourmet coffee giant at the turn of the millennium, Starbucks has led a coffee revolution in the United States and beyond.

Roots in Coffee Retailing and Wholesaling

Starbucks was founded in Seattle, Washington, a haven for coffee aficionados. The city was noted for its coffee before World War II, but the quality of its coffee had declined so much by the late 1960s that resident Gordon Bowker made pilgrimages to Vancouver, British Columbia, to buy his beans there. His point of reference for the beverage was dark, delicious coffee he had discovered in Italy. Soon Bowker, then a writer for Seattle magazine, was making runs for friends as well. When Seattle folded, two of Bowker’s friends, Jerry Baldwin, an English teacher, and Zev Siegl, a history teacher, also happened to be seeking new ventures; the three banded together and literally built their first store—located in Seattle’s Pike Place Market—by hand. They raised $1,350 apiece, borrowed another $5,000, picked the name Starbucks—for the punchy “st” sound and its reference to the coffee-loving first mate in Moby Dick —then designed a two-tailed siren for a logo and set out to learn about coffee.

Siegl went to Berkeley, California, to learn from a Dutchman, Alfred Peet, who ran Peet’s Coffee, which had been a legend among local coffee drinkers since 1966. Peet’s approach to coffee beans became the cornerstone for Starbucks’ reputation: high-grade arabica beans, roasted to a dark extreme by a trained perfectionist roaster. Starbucks bought its coffee from Peet’s for its first nine months, giving away cups of coffee to hook customers. The plan worked. By 1972 the three founders had opened a second store in University Village and invested in a Probat roaster. Baldwin became the young company’s first roaster.

Within its first decade, Starbucks had opened stores in Bellevue, Capitol Hill, and University Way. By 1982 the original entrepreneurs had a solid retail business of five stores, a small toasting facility, and a wholesale business that sold coffee primarily to local restaurants. The first of the company’s growth versus ethos challenges came here: how does one maintain a near fanatical dedication to freshness in wholesale? Starbucks insisted that the shelf life of coffee is less than 14 days after roasting. As a result, they donated all eight-day-old coffee to charity.

In 1982 Starbucks hired Howard Schultz to manage the company’s retail sales and marketing. While vice-president of U.S. operations for Hammarplast, a Swedish housewares company, and working out of New York, Schultz met the Starbucks trio and considered their coffee a revelation. (He had grown up on instant.) He and his wife packed up and drove 3,000 miles west to Seattle to join Starbucks.

There were other changes taking place at Starbucks at the same time. Siegl had decided to leave in 1980. The name of the wholesale division was changed to Caravali, out of fear of sullying the Starbucks name with less than absolute freshness. Blue Anchor, a line of whole-bean coffees being prepackaged for supermarkets, was relinquished. Starbucks learned two lessons from their brief time in business with supermarkets: first, supermarkets and their narrow profit margins were not the best outlet for a coffee roaster who refused to compromise on quality in order to lower prices, and second, Starbucks needed to sell directly to consumers who were educated enough to know why the coffee they were buying was superior.

Mid-1980s: The Shift to Coffee Bars

In 1983 Starbucks bought Peet’s Coffee, which had by then become a five-store operation itself. That same year, Schultz took a buying trip to Italy, where another coffee revelation took place. Wandering the piazzas of Milan, Schultz was captivated by the culture of coffee and the romance of Italian coffee bars. Milan had about 1,700 espresso bars, which were a third center for Italians, after work and home. Schultz returned home determined to bring Italian coffee bars to the United States, but found his bosses reluctant, being still more dedicated to retailing coffee. As a result, Schultz left the company to write a business plan of his own. His parting with Starbucks was so amicable that the founders invested in Schultz’s vision. Schultz returned to Italy to do research, visiting hundreds of espresso and coffee bars. In the spring of 1986, he opened his first coffee bar in the Columbia Seafirst Center, the tallest building west of Chicago. Faithful to its inspiration, the bar had a stately espresso machine as its centerpiece. Called II Giornale, the bar served Starbucks coffee and was an instant hit. A second was soon opened in Seattle, and a third in Vancouver. Schultz hired Dave Olsen, the proprietor of one of the first bohemian espresso bars in Seattle, as a coffee consultant and employee trainer.

A year later, Schultz was thriving while Starbucks was encountering frustration. The wholesale market had been reconfigured by the popularity of flavored coffees, which Starbucks resolutely refused to produce. The company’s managers were also increasingly aggravated by the lack of wholesale quality control, so they sold their wholesale line, Caravali, to Seattle businessman Bart Wilson and a group of investors. In addition, Bowker was interested in leaving the company to concentrate on a new project, Red Hook Ale. Schultz approached his old colleagues with an attractive offer: how about $4 million for the six-unit Starbucks chain? They sold, with Olsen remaining as Starbucks’ coffee buyer and roaster; the Starbucks stores were merged into II Giornale. Baldwin remained president of the now separately operated Peet’s Coffee and Tea. In 1987 the II Giornale shops changed their names to Starbucks, and the company became Starbucks Corporation and prepared to go national.

In August 1987 Starbucks Corporation had 11 stores and fewer than 100 employees. In October of that year it opened its first store in Chicago, and by 1989 there were nine Chicago Starbucks, where employees trained by Seattle managers served coffee roasted in the Seattle plant.

Their methods were costly, using high-grade arabica beans and expensive dark roasting, while suffering the financial consequences of snubbing the supermarket and wholesale markets. Nevertheless, Starbucks’ market was growing rapidly: sales of specialty coffee in the United States grew from $50 million in 1983 to $500 million five years later.

In 1988 Starbucks introduced a mail-order catalog, and by the end of that year, the company was serving mail-order customers in every state and operating a total of 33 stores. Because the company’s reputation grew steadily by word of mouth, it spent little on ads. Schultz’s management philosophy, “hire people smarter than you are and get out of their way,” fed his aggressive expansion plans. Industry experts were brought in to manage Starbucks’ finances, human resources, marketing, and mail-order divisions. The company’s middle ranks were filled with experienced managers from such giants as Taco Bell, Wendy’s, and Blockbuster. Schultz was willing to lose money while preparing Starbucks for explosive growth. By 1990 he had hired two star executives: Howard Behar, previously president of a leading developer of outdoor resorts, Thousand Trails, Inc.; and Orin Smith, chief financial and administrative officer for Danzas, USA, a freight forwarder.

Company Perspectives:

Over the years, we have worked tirelessly to make Starbucks an uplifting part of people’s daily lives. We ’ve always known that our brand name must stand for something-it must be authentic, reliable and aspirational. Every day, the passion and enthusiasm of our people and the quality of our coffee enable us to build a rewarding relationship with our customers. This connection has given us the chance to do things no one thought possible, and we believe our greatest accomplishments are yet to come.

Starbucks installed a costly computer network and hired a specialist in information technology from McDonald’s Corporation to design a point-of-sale system via PCs for store managers to use. Every night, stores passed their sales information to Seattle headquarters, which allowed planners to spot regional buying trends almost instantly. Starbucks lost money while preparing for its planned expansion, including more than $1 million in 1989 alone. In 1990 the headquarters expanded and a new roasting plant was built. Nevertheless, Schultz resisted both the temptation to franchise and to flavor the beans. Slowly, the chain developed near-cult status.

Rapid Early 1990s Growth As a Public Company

Starbucks also developed a reputation for treating its employees well. In 1991 it became the first privately owned company in history to establish an employee stock option program that included part-timers. Starbucks also offered health and dental benefits to both full- and part-time employees. As a result, the company had a turnover rate that was very low for the food service industry. Employees were rigorously trained, completing at least 25 hours of coursework on topics including the history of coffee, drink preparation, and how to brew a perfect cup at home. The company went public in 1992, the same year it opened its first stores in San Francisco, San Diego, Orange County, and Denver. Its stores totaled 165 by year’s end. The company began special relationships with Nordstrom’s and Barnes & Noble, Inc., offering coffee to shoppers at both chains.

Growth mandated the opening of a second roasting plant, located in Kent, Washington, by 1993. After 22 years in business, Starbucks had only 19 individuals it deemed qualified to roast coffee. One of the 19 was Schultz, who considered it a tremendous privilege. Roasters were trained for more than a year before being allowed to roast a batch, which consisted of up to 600 pounds of coffee roasted for 12 to 15 minutes in a gas oven. The beans made a popping sound, like popcorn, when ready, but roasters also used sight and smell to tell when the beans were done to perfection. Starbucks standards required roasters to test the roasted beans in an Agron blood-cell analyzer to assure that each batch was up to standards. If not, it was discarded.

Starbucks’ first East Coast store opened in 1993, in a premier location in Washington, D.C. The chain had 275 stores by the end of 1993 and 425 one year later. Sales had grown an average of 65 percent annually over the previous three years (reaching $284.9 million in 1994), with net income growing 70 to 100 percent a year during that time. Starbucks broke into important new markets in 1994, including Minneapolis, Boston, New York, Atlanta, Dallas, and Houston, and purchased the Coffee Connection, a 23-store rival based in Boston, for $23 million, making it a wholly owned subsidiary. Smith was promoted to president and COO and Behar became president, international. Starbucks also announced a partnership with Pepsi-Cola to develop new ready-to-drink coffee beverages. After Starbucks debuted a frozen coffee drink called Frappuccino in its stores in the summer of 1995, resulting in a sales bonanza, the partnership with Pepsi began rolling out a bottled version in grocery, convenience, and drugstores the following year. Starbucks broke into new markets in 1995, including Pittsburgh, San Antonio, Las Vegas, and Philadelphia. That same year, Starbucks began supplying coffee for United Airlines flights and launched a line of Starbucks compilation music CDs which were sold in its coffee houses.

Late 1990s and Beyond: International Expansion and New Ventures

The following year—in addition to continued North American expansion into Rhode Island, Idaho, North Carolina, Arizona, Utah, and Ontario—the company ventured overseas for the first time. Its initial foreign forays were launched through joint venture and licensing arrangements with prominent local retailers. With the help of SAZABY Inc., a Japanese retailer and restaurateur, the first market developed in 1996 was Japan; through other partnerships, Hawaii and Singapore also received their first Starbucks that year. The Philippines followed in 1997. Meantime, Starbucks entered into a partnership with Dreyer’s Grand Ice Cream, Inc. in 1996 to develop and sell Starbucks Ice Cream. Within eight months of introduction, the product became the number one coffee ice cream in the United States. Starbucks’ expansion into Florida, Michigan, and Wisconsin in 1997 helped the total number of units reach an astounding 1,412 by year-end, more than double the previous two-year total. Sales approached the $1 billion mark that year, while net income hit $57.4 million, more than five times the result for 1994.

Key Dates:

1971:: Gordon Bowker, Jerry Baldwin, and Zev Siegl open the first Starbucks in Seattle’s Pike Place Market.
1982:: Howard Schultz is hired to manage retail sales and marketing.
1983:: Peet’s Coffee is acquired.
1985:: Schultz leaves the company to found II Giornale, an operator of coffee bars.
1987:: Schultz buys the six-unit Starbucks chain from the original owners for $4 million, merges them into II Giornale, renames his company Starbucks Corporation, and begins a national expansion by opening stores in Chicago. Baldwin remains president of the now separate Peet’s Coffee and Tea business.
1988:: A mail-order catalog is introduced.
1992:: Company goes public.
1993:: First East Coast store opens, in Washington, D.C.
1995:: Frappuccino beverages are introduced.
1996:: Overseas expansion begins with units in Japan, Hawaii, and Singapore. Partnership with Dreyer’s begins selling Starbucks Ice Cream. Partnership with Pepsi-Cola begins selling bottled Frappuccino beverages.
1998:: U.K.-based Seattle Coffee Company is acquired. Partnership with Kraft Foods is formed for the distribution of Starbucks coffee into supermarkets.
1999:: Pasqua Coffee Co. and Tazo Tea Company are acquired.
2000:: Schultz steps aside as CEO to become chief global strategist, while remaining chairman; Orin Smith takes over as CEO.

As this rapid growth continued, the company began to be needled by late night talk show hosts for its seeming Starbucks-on-every-corner expansion strategy, while a number of owners and patrons of local coffee shops began speaking out and demonstrating against what they considered overly aggressive and even predatory moves into new territory. Critics complained that the company was deliberately locating its units near local coffee merchants to siphon off sales, sometimes placing a Starbucks directly across the street. In 1996 and 1997 residents in Toronto, San Francisco, Brooklyn, and Portland, Oregon, staged sidewalk protests to attempt to keep Starbucks out of their neighborhoods. One of the company’s responses to the scattered resistance was to try to enhance its image through stepped-up advertising. Still, like Wal-Mart Stores, Inc. and its reputation in some quarters as a destroyer of Main Street, Starbucks remained the object of snickers from comedians and derision from a vocal minority of protesters. This undercurrent of hostility burst into the spotlight in late 1999 when some of the more aggressive protesters against a World Trade Organization meeting took their anger out on several Starbucks stores in the company’s hometown of Seattle, tagging a number of the 26 downtown locations with graffiti and inflicting more serious vandalism on three stores, which were then temporarily closed.

The anti-multinational protesters in Seattle also singled out stores operated by McDonald’s Corporation and Nike, Inc. The lumping of the once-modest purveyor of gourmet coffee in with these global giants was in part an outgrowth of the company’s aggressive overseas expansion in the late 1990s. Growth in the Pacific Rim continued with the opening of locations in Taiwan, Thailand, New Zealand, and Malaysia in 1998 and in China and South Korea in 1999. By early 2000 the number of Starbucks in Japan had reached 100. The company aimed to have 500 stores in the Pacific Rim by 2003. The Middle East was another target of global growth, with stores opened in Kuwait and Lebanon in 1999, but it was the United Kingdom that was the object of the company’s other big late 1990s push. In 1998 Starbucks acquired Seattle Coffee Company, the leading U.K. specialty coffee firm, for about $86 million in stock. Starbucks began rebranding Seattle Coffee’s locations under the Starbucks name. Aggressive expansion in the United Kingdom yielded more than 100 units by late 1999. Starbucks hoped to use its U.K. base for an invasion of the Continent, aiming for 500 stores in Europe by 2003.

Growth was not slowing back home either. Areas receiving their first Starbucks in 1998 and 1999 included New Orleans, St. Louis, Kansas City, and Memphis and Nashville, Tennessee. The number of North American locations approached 2,200 by early 2000. Always searching for new revenue streams, Starbucks in 1998 entered into a long-term licensing agreement with Kraft Foods, Inc. for the marketing and distribution of Starbucks whole bean and ground coffee into grocery, warehouse club, and mass merchandise stores. The company also began experimenting with a full-service casual restaurant called Café Starbucks. A further move into food came in early 1999 through the purchase of Pasqua Coffee Co., a chain of coffee and sandwich shops with 56 units in California and New York. Starbucks had already developed its own in-house tea brand, Infusia, but it was replaced following the early 1999 acquisition of Tazo Tea Company, a Portland, Oregon-based maker of premium teas and related products with distribution through 5,000 retail outlets.

Starbucks had also launched a web site featuring an online store in 1998, and Schultz began talking about Starbucks becoming a mega-cybermerchant offering everything from gourmet foods to furniture. To this end, the company attempted, but failed, to acquire Williams-Sonoma, Inc., a specialty retailer of high-end kitchenware. Wall Street analysts began questioning the wisdom of moving so far afield from the company’s core coffee business. In mid-1999, following Starbucks’ announcement of an earnings shortfall, the company’s stock plunged 28 percent, leading Schultz to pull back on his ambitious cyber plans. In early 2000, however, the company did enter into an agreement with Kozmo.com Inc., an operator of an Internet home-delivery service providing its customers with videos, snacks, magazines, books, and other items. Kozmo.com agreed to pay Starbucks $150 million over a five-year period to place drop boxes in Starbucks stores for the return of videos and other items, and to begin delivering Starbucks coffee, Tazo teas, and other items to its customers.

Other developments included an agreement with Albertson’s, Inc. to open more than 100 Starbucks coffee bars in Albertson’s supermarkets in the United States; and the acquisition of the five-store San Francisco-based Hear Music chain, in an extension of Starbucks’ music retailing ventures. Image problems continued to crop up for the rapidly growing company, whose fiscal 1999 revenues of $1.68 billion were nearly six times the figure of five years earlier. In April 2000 a San Francisco-based human rights group called Global Exchange was readying a large protest at Starbucks in 29 cities to publicize its allegations that the coffee company was buying its beans from wholesalers who were paying farmers what amounted to poverty wages. In a preemptive move, which staved off the protests and the resultant bad publicity, Starbucks announced that it would buy more coffee certified as “fair trade,” meaning that the farmers who grew it received more than market price for their crop, sometimes as high as three times the 30 cents per pound they typically received.

In the early 21st century, Starbucks was working to achieve Schultz’s ambitious goals of 500 stores in both Japan and Europe by 2003, as well as his ultimate goal of 20,000 units worldwide. With about half of that total envisioned to be located outside North America, Schultz decided to spend more time on the company’s overseas operations. In June 2000 he stepped down as CEO of the company to become its chief global strategist, while remaining chairman. Schultz would work closely with Peter Maslen, who had taken charge of the international division in late 1999, following the retirement of Howard Behar. Assuming the CEO title was Orin Smith, who retained his previous responsibility for domestic retail and wholesale operations, alliances, and coffee roasting and distribution.

Principal Subsidiaries

The Coffee Connection, Inc.; Starbucks New Venture Company; Starbucks Coffee International, Inc.; Starbucks Holding Company; Starbucks Manufacturing Corporation; SBI Nevada, Inc.; Circadia Corporation; Starbucks U.S. Brands Corporation; Starbucks Asset Management Corporation; Starbucks Foreign Sales Corporation; Starbucks Coffee Holdings (UK) Limited; Starbucks Coffee Company (UK) Limited; Seattle Coffee Company International (U.K.); Torz & Macatonia Limited (U.K.); Tazo Tea Company; Pasqua Inc.; Starbucks Coffee France, EURL; Starbucks Coffee Asia Pacific Ltd.; Starbucks Coffee Company (Australia) Pty Ltd (90%); Tympanum, Inc.

Principal Competitors

ABP Corporation; AFC Enterprises, Inc.; Allied Domecq PLC; BAB Holdings, Inc.; Diedrich Coffee, Inc.; Einstein/Noah Bagel Corp.; Farmer Bros. Co.; Green Mountain Coffee, Inc.; Kraft Foods, Inc.; Nestlé S.A.; New World Coffee-Manhattan Bagel, Inc.; New York Bagel Enterprises, Inc.; Panera Bread Company; Peet’s Coffee & Tea; The Procter & Gamble Company; Sara Lee Corporation; Tully’s Coffee Corporation.

Starbucks Corporation

views updated May 17 2018

Starbucks Corporation

2203 Airport Way South
Seattle, Washington 98134
U.S.A.
(206) 447-1575
Fax: (206) 442-7756

Public Company
Incorporated: 1985
Employees: 11,000
Sales: $284.9 million
Stock Exchanges: NASDAQ
SICs: 5499 Miscellaneous Food Stores; 5149 Groceries & Related Products Nee

Starbucks Corporation is the leading roaster, retailer, and brand of specialty coffee in North America. From a single small store that opened in 1971 to more than 535 locations in 1995, Starbucks has led a coffee revolution in the United States.

Starbucks was founded in Seattle, Washington, a haven for coffee aficionados. The city was noted for its coffee before World War II, but the quality of its coffee had declined so much by the late 1960s that resident Gordon Bowker made pilgrimages to Vancouver, British Columbia, to buy his beans there. His point of reference for the beverage was dark, delicious coffee he had discovered in Italy. Soon Bowker, then a writer for Seattle magazine, was making runs for friends as well. When Seattle folded, two of Bowker’s friends, Jerry Baldwin, an English teacher, and Zev Siegl, a history teacher, also happened to be seeking new ventures; the three banded together and literally built their first store by hand. They raised $1,350 apiece, borrowed another $5,000, picked the name Starbucks— for the punchy “st” sound and its reference to the coffee-loving first mate in Moby Dick —then designed a two-tailed siren for a logo and set out to learn about coffee.

Siegl went to Berkeley, California, to learn from a Dutchman, Alfred Peet, who ran Peet’s Coffee, which had been a legend among local coffee drinkers since 1966. Peet’s approach to coffee beans became the cornerstone for Starbucks’s reputation: high-grade arabica beans, roasted to a dark extreme by a trained perfectionist roaster. Starbucks bought its coffee from Peet’s for its first nine months, giving away cups of coffee to hook customers. The plan worked. By 1972 the three founders had opened a second store in University Village and invested in a Probat roaster. Baldwin became the young company’s first roaster.

Within its first decade, Starbucks had opened stores in Bellevue, Capitol Hill, and University Way. By 1982 the original entrepreneurs had a solid retail business of five stores, a small toasting facility, and a wholesale business that sold coffee primarily to local restaurants. The first of the company’s growth versus ethos challenges came here: how does one maintain a near fanatical dedication to freshness in wholesale? Starbucks insisted that the shelf life of coffee is less than 14 days after roasting. As a result, they donated all eight-day-old coffee to charity.

In 1982 Starbucks hired Howard Schultz to manage the company’s retail sales and marketing. While V.P. of U.S. operations for Hammarplast, a Swedish housewares company, and working out of New York, Schultz met the Starbucks trio and considered their coffee a revelation. (He had grown up on instant.) He and his wife packed up and drove 3,000 miles west to Seattle to join Starbucks.

There were other changes taking place at Starbucks at the same time. Siegl had decided to leave in 1980. The name of the wholesale division was changed to Caravali, out of fear of sullying the Starbucks name with less than absolute freshness. Blue Anchor, a line of whole-bean coffees being prepackaged for supermarkets, was relinquished. Starbucks learned two lessons from their brief time in business with supermarkets: first, supermarkets and their narrow profit margins were not the best outlet for a coffee roaster who refused to compromise on quality in order to lower prices, and second, Starbucks needed to sell directly to consumers who were educated enough to know why the coffee they were buying was superior. In 1985 Starbucks bought Peet’s Coffee, which had by then become a five-store operation itself.

Meanwhile, in 1983 Schultz had taken a buying trip to Italy, where another coffee revelation took place. Wandering the piazzas of Milan, Schultz was captivated by the culture of coffee and the romance of Italian coffee bars. Milan had about 1,700 espresso bars, which were a third center for Italians, after work and home. Schultz returned home determined to bring Italian coffee bars to the United States, but found his bosses reluctant, being still more dedicated to retailing coffee. As a result, Schultz left the company to write a business plan of his own. His parting with Starbucks was so amicable that the founders invested in Schultz’s vision. Schultz returned to Italy to do research, visiting hundreds of espresso and coffee bars. In the spring of 1986, he opened his first coffee bar in the Columbia Seafirst Center, the tallest building west of Chicago. Faithful to its inspiration, the bar had a stately espresso machine as its centerpiece. Called II Giornale, the bar served Starbucks coffee and was an instant hit. A second was soon opened in Seattle, and a third in Vancouver. Schultz hired Dave Olsen, the proprietor of one of the first bohemian espresso bars in Seattle, as a coffee consultant and employee trainer.

A year later, Schultz was thriving while Starbucks was encountering frustration. The wholesale market had been reconfigured by the popularity of flavored coffees, which Starbucks resolutely refused to produce. The company’s managers were also increasingly aggravated by the lack of wholesale quality control, so they sold their wholesale line, Caravali, to Seattle businessman Bart Wilson and a group of investors. In addition, Bowker was interested in leaving the company to concentrate on a new project, Red Hook Ale. Schultz approached his old colleagues with an attractive offer: how about $4 million for Starbucks? They sold, with Baldwin staying on as president of the Feet’s Coffee subsidiary and Olsen remaining as Starbucks’s coffee buyer and roaster. In 1987 the II Giornale shops changed their names to Starbucks, and the company became Starbucks Corporation and prepared to go national.

In August 1987 Starbucks Corporation had 11 stores and fewer than 100 employees. In October of that year it opened its first store in Chicago, and by 1989 there were nine Chicago Starbucks, where employees trained by Seattle managers served coffee roasted in the Seattle plant.

Their methods were costly, using high-grade arabica beans and expensive dark roasting, while suffering the financial consequences of snubbing the supermarket and wholesale markets. Nevertheless, Starbucks’s market was growing rapidly: sales of specialty coffee in the United States grew from $50 million in 1983 to $500 million five years later.

In 1988 Starbucks introduced a mail order catalogue, and by the end of that year, the company was serving mail-order customers in every state and operating a total of 26 stores. Because the company’s reputation grew steadily by word of mouth, it spent little on ads. Schultz’s management philosophy, “hire people smarter than you are and get out of their way,” fed his aggressive expansion plans. Industry experts were brought in to manage Starbucks’s finances, human resources, marketing, and mail-order divisions. The company’s middle ranks were filled with experienced managers from such giants as Taco Bell, Wendy’s, and Blockbuster. Schultz was willing to lose money while preparing Starbucks for explosive growth. By 1990 he had hired two star executives: Howard Behar, previously president of a leading developer of outdoor resorts, Thousand Trails, Inc.; and Orin Smith, chief financial and administrative officer for Danzas, USA, a freight forwarder.

Starbucks installed a costly computer network and hired a specialist in information technology from McDonald’s Corporation to design a point-of-sale system via PCs for store managers to use. Every night, stores passed their sales information to Seattle headquarters, which allowed planners to spot regional buying trends almost instantly. Starbucks lost money while preparing for its planned expansion, including more than $1 million in 1989 alone. In 1990 the headquarters expanded and a new roasting plant was built. Nevertheless, Schultz resisted both the temptation to franchise and to flavor the beans. Slowly, the chain developed near-cult status.

Starbucks also developed a reputation for treating its employees well. In 1991 it became the first privately owned company in history to establish an employee stock option program that included part-timers. Starbucks also offered health and dental benefits to both full- and part-time employees. As a result, the company has a turnover rate that is very low for the food service industry. Employees were rigorously trained, completing at least 25 hours of coursework on topics including the history of coffee, drink preparation, and how to brew a perfect cup at home. The company went public in 1992, the same year it opened its first stores in San Francisco, San Diego, Orange County, and Denver. Its stores totaled 165 by year’s end. The company began special relationships with Nordstrom’s and Barnes & Noble, Inc., offering coffee to shoppers at both chains.

Growth mandated the opening of a second roasting plant, located in Kent, Washington, by 1993. After 22 years in business, Starbucks had only 19 individuals it deemed qualified to roast coffee. One of the 19 was Schultz, who considered it a tremendous privilege. Roasters were trained for more than a year before being allowed to roast a batch, which consists of up to 600 pounds of coffee roasted for 12 to 15 minutes in a gas oven. The beans make a popping sound, like popcorn, when ready, but roasters also use sight and smell to tell when the beans are done to perfection. Starbucks standards required roasters to test the roasted beans in an Agron blood-cell analyzer to assure that each batch is up to standards. If not, it’s discarded.

Starbucks’s first East Coast store opened in 1993, in a premier location in Washington D.C. The chain had 275 stores by the end of 1993 and 400 by August 1994. Sales had grown an average of 65 percent annually over the previous three years, with net income growing 70 to 100 percent a year during that time. Starbucks broke into important new markets in 1994, including Minneapolis, Boston, New York, Atlanta, Dallas, and Houston, and purchased the Coffee Connection, a 23-store rival based in Boston, for $23 million, making it a wholly owned subsidiary. Smith was promoted to president and COO and Behar became president, international. Starbucks also announced a partnership with Pepsi-Cola to develop new ready-to-drink coffee beverages. In the summer of 1995, Starbucks and Pepsi test-marketed a cold coffee-based beverage called Mazagran in the Santa Monica area.

In early 1995 Starbucks made an $11 million minority investment in Noah’s New York Bagels, a small retailer with high growth potential. Starbucks broke into new markets including Pittsburgh, San Antonio, Las Vegas, and Philadelphia. By April 1995, the company had 539 Starbucks stores, a national mailorder operation, and a specialty sales group.

Principal Subsidiaries

The Coffee Connection; Starbucks New Venture Company.

Starbucks Corporation

views updated May 23 2018

Starbucks Corporation

2401 Utah Avenue South
Seattle, WA 98134
(206) 447-1575
www.starbucks.com

Starbucks began selling roasted arabica coffee beans from a small shop in Seattle, Washington, in 1971. Through taste tests and word of mouth, Starbucks coffee soon became the beverage of choice among coffee drinkers of all ages, and additional Starbucks stores opened in Seattle and in the state of Washington. Yet what truly made Starbucks an American icon was the opening of its coffee bars, where customers were served a variety of coffees in a relaxed atmosphere filled with distinctive background music. From its earliest coffee bar in 1984 to over five thousand locations in 2002, Starbucks has become an international phenomenon with sales of over $2.65 billion worldwide.

All about the Beans

The story of Starbucks is all about the beans—coffee beans. Writer Gordon Bowker loved coffee, especially the dark aromatic blends he had tasted during a trip to Italy. Italian coffee beans, however, were not available in Seattle, Washington, where he lived. Bowker did find a source for beans in Canada, and to satisfy his craving and that of friends and colleagues at Seattle magazine where he worked, Bowker found himself traveling to Vancouver, British Columbia, more and more frequently during the 1960s.

After the magazine went out of business, Bowker and two friends, Gerry Baldwin and Zev Siegl, decided to start a company to bring Italian coffee beans to Seattle. They came up with about $10,000 to launch their company, and picked an unusual name for their gourmet coffee venture: "Starbucks." The name was a marketing tactic, since many retail analysts believed company names beginning with the "st" sound were remembered more clearly than others. Some say, however, that the name Starbucks was taken from a character in Moby-Dick, the famous novel by Herman Melville (1819-1891). Whichever story is true, the name was destined for greatness, as was the logo the partners came up with to stamp on their product—a longhaired mermaid with a split tail.

The Starbucks partners began by going to a coffee master, Alfred Peet, who owned and operated Peet's Coffee in California and was famous for his expertly roasted coffee beans. The partners wanted to follow in his footsteps, so they bought dark arabica beans from Peet, learned how to roast them, and began brewing their own coffee. They opened their first store in 1971 in Seattle, in a bustling market area called Pike's Place.

Starbucks at a Glance

Employees: 47,000
CEO: Orin C. Smith
Subsidiaries: Starbucks Coffee International, Inc.; Starbucks Ice Cream Partnership; Coffee Connection; Tazo Tea Company; Peet's Coffee Company; Seattle Coffee Company; Pasqua Inc.
Major Competitors: Caribou Coffee; Diedrich Coffee; Green Mountain Coffee; Seattle's Best Coffee; Second Cup Ltd.
Notable Products: Frappuchino bottled drinks; Hear Music; Starbucks Barista Athena espresso machine; Starbucks Barista Burr grinder; Starbucks ice cream; Tazo teas

To lure customers, Starbucks gave away free coffee samples to anyone passing by. The simple plan worked and people began to return for the rich, dark coffee unlike any they had tasted at home or work. Starbucks unique coffee had no bitter aftertaste like most coffees sold in grocery stores by the can or even served in restaurants. Since the only place to get Starbucks coffee was at the Starbucks store, the partners soon had a hit and enough money to open a second shop in University Village in 1972.

Timeline

1971:: The first Starbucks opens in Seattle, Washington.
1982:: Howard Schultz is hired as marketing director.
1984:: Schultz opens his first II Giornale coffee bar serving Starbucks coffees.
1987:: Schultz and II Giornale acquire Starbucks; name changes to Starbucks Corporation.
1988:: Company launches mail-order catalog.
1990:: Starbucks secures contract with Horizon Air; builds a new roasting plant.
1991:: The first airport kiosk opens in Seattle.
1992:: Nordstrom department stores begin selling Starbucks coffee.
1993:: Company signs deal with Barnes & Noble.
1994:: Sheraton hotels (now Starwood Hotels) begin serving Starbucks.
1995:: Company begins packaging and selling music CDs; secures contract with United Airlines; Frappuccino is introduced.
1996:: Locations open in Japan and Singapore; Starbucks ice cream is introduced.
1997:: Starbucks opens in the Philippines; the Starbucks Foundation is established.
1998:: Starbucks opens in Malaysia, New Zealand, Taiwan, Thailand, and the United Kingdom; products begin appearing in grocery stores.
1999:: New stories open in China, Kuwait, Korea, and Lebanon.
2000:: Starbucks is launched in Saudi Arabia and Hong Kong; Marriott hotels begin serving Starbucks.
2001:: Company signs contract with Hyatt hotel chain; new shops open in Austria, Israel, and Switzerland.
2002:: There are 5,500 Starbucks worldwide in twenty countries.

Within ten years, Starbucks was booming with five stores and its own bean-roasting plant. The partners had also begun selling coffee beans to some area restaurants. Having the firm's name associated with successful eateries not only gave the Starbucks name a boost, but serving it helped build the brand's status as a quality coffee. To help keep up with demand for Starbucks products, Howard Schultz was hired as marketing director in 1982; his guidance proved pivotal to the young company's future.

Starbucks Takes Off

In 1983, Schultz went to Italy to sample coffees and was charmed by the country's espresso bars—long counters with pull-up seats and a casual atmosphere. He believed a similar setup would benefit Starbucks in Washington. Bowker, Baldwin, and Siegl, however, were not as convinced and declined to pursue the new venture, although they did offer to help finance Schultz. Naming his new coffee bar Il Giornale Coffee Company to reflect his Italian inspiration, Schultz opened his doors in downtown Seattle in 1984.

Il Giornale served Starbucks coffee, but also invited customers to sample different kinds of coffee beverages, including espresso—coffee's much richer, stronger cousin. The laid-back, friendly atmosphere became a popular alternative to fast-food outlets or even restaurants, welcoming patrons to linger and relax. Il Giornale was a success, and Schultz soon made plans to open more stores.

While II Giornale tested the coffee bar theory, Starbucks bought Peet's Coffee & Tea in 1985. The partners, however, became a little restless. Schultz, fresh from his Il Giornale triumph, offered to buy them out for $3.8 million. Bowker, Baldwin, and Siegl sold their shares to Schultz, but kept Peet's Coffee & Tea business. Schultz then combined Starbucks with II Giornale and renamed the whole operation Starbucks Corporation in 1987. All Il Giornale locations became Starbucks, for a grand total of seventeen, and while Schultz made plans to build Starbucks coffee bars across the United States.

During 1988, Starbucks doubled the number of its locations and introduced a mail-order catalog, making the brand available to customers in all fifty states. An advanced computer system had been installed at the Seattle headquarters, as well as in each Starbucks location, to monitor sales and inventory. Each location reported its numbers to Seattle every day, allowing Schultz and a growing number of executives to keep track of which coffees sold best in which areas. By the end of 1990, there were eighty-four Starbucks, seven hundred national employees (called either partners or "baristas"), and a new bean-roasting plant. In addition, Horizon Air was serving Starbucks coffee during all of its flights.

A Cultural Phenomenon

The new decade brought immense growth for Starbucks, including the opening of its first airport shop in Seattle in 1991. Nordstrom signed on to serve Starbucks coffees in its department stores in 1992, and Barnes & Noble began offering Starbucks coffee in its bookstores in 1993. The company began its move into charity, by donating thousands of coffee sample packs to CARE, an international relief organization based in Atlanta, Georgia. Starbucks also changed from a private company owned by Schultz and investors, to a publicly-held corporation selling shares on the Nasdaq stock exchange.

The money raised from selling stock paid for the company's explosive growth throughout the 1990s; by 1995 there were fifteen thousand employees (both full-and part-time) and new Starbucks were opening at a rate of one per week. Talking about the company with Bill McDowell of Restaurants & Institutions magazine, Schultz said, "We want to represent something more than a company that takes your money and sells you some coffee." As for the future, Schultz predicted, "People will be surprised not only with what we'll do, but how we'll do [it]."

True to his word, Schultz steered Starbucks to greater heights. To keep up with the growing demand, two additional bean-roasting facilities were opened just as competitors were starting to pop up. Schultz was not overly concerned; he spent his time and energy building the Starbucks brand both within the United States and outside it. Discussing Starbucks's competition in the Puget Sound Business Journal, John Rohs, a New York-based analyst of the restaurant and beverage industry declared that rival companies would not be able to "compete with the kind of guiding spirit Howard Schultz has brought to Starbucks." Allan Hickok, a financial analyst for Piper Jaffray in Minneapolis, Minnesota, made predictions too, stating to Restaurants & Institutions, "[Starbucks is] going to take over the world. There's nobody out there even close to matching them."

Competitors aside, Starbucks moved ahead at breakneck speed in 1996 to satisfy its four million weekly American patrons. New products included a joint venture with PepsiCo, Inc. (see entry) to sell flavored iced coffee drinks in bottles, called Frappuccino, and even ice cream, through a partnership with Dreyer's Grand, a premium ice cream producer. Starbucks also pushed into Asia, opening several shops in Japan and Singapore.

By the end of 1997, there were over fourteen hundred Starbucks locations, and the coffee retailer was opening a new shop nearly every day. Over the next two years the brand's beverages were available in a number of convenient places, including airlines (Horizon, United, and Canadian), hotels (Sheratons, Westins, Hiltons), bookstore chains, and grocery stores. The company had also started to buy competitors like the Boston-based Coffee Connection, with twenty-three stores; Seattle Coffee Company's sixty shops in the United Kingdom; and Pasqua Inc., a coffee retailer located in California. Schultz and Starbucks also continued to encourage social responsibility and the Starbucks Foundation, formed in 1997, helped promote literacy among children and teenagers.

To keep quality and freshness at their peak, coffee beans are not kept past eight days at any Starbucks location; any "old" coffee beans are donated to local shelters.

As Starbucks approached the end of the century, the firm created a Web site and continued its worldwide expansion with over 2,100 locations in the United States and abroad. According to the National Coffee Association, there were over seven thousand coffeehouses in America in 1999, up from only five hundred in 1991. Much of the credit for this tremendous growth was obviously due to Starbucks. To maintain its edge over rivals the company devised two new concepts: Café Starbucks, which served soups, sandwiches, and desserts along with its signature beverages, and Circadia Coffee Houses, full-service restaurants with live music, which first opened in San Francisco. The music played in Starbucks stores had also gained in popularity, so much so that the firm bought Hear Music, a San Francisco music company, to compile and sell its growing selection of compact discs.

The Future of Starbucks

In 2000, Schultz pulled back a bit and turned over the duties of president and chief executive to Orin Smith, who had been hired back in 1990 as a vice president and chief financial officer (CFO). Schultz became chairman of the board and "chief global strategist," which kept him actively involved in the company he had taken from a handful of locations in 1985 to over 3,300 in 2000, with sales of over $2 billion.

Starbucks coffee and a wide range of other products, from teas and juices to sandwiches and music CDs, could be found all over the world in China, Hong Kong, Japan, and even the Middle East. And more hotel chains signed on to serve Starbucks beverages, including Marriott International and Hyatt Hotels. Another roasting plant, in Nevada, opened in 2001 along with Starbucks shops in Austria, Israel, and Switzerland. Japan celebrated the opening of its three hundredth location, which brought the total number of Starbucks, worldwide, to almost 5,500.

With this growth came an ongoing commitment to community awareness and giving to charitable causes. Starbucks gave over $1 million to struggling coffee farmers in developing countries after severe weather conditions threatened crops in 2000; teamed with Jumpstart, which finds tutors for kids in need; and continued its fight for literacy through the Starbucks Foundation with numerous grants given to schools and educational organizations. After the World Trade Center tragedy in New York City on September 11, 2001, Starbucks not only stayed open serving coffee to all the workers, but donated $1.2 million to the relief fund.

Starbucks served four hundred thousand customers a week in 1991. By 1995, there were three million customers per week, and by 2002 over twenty million coffee drinkers visited Starbucks each week in the United States.

Starbucks has come a long, long way from one shop in Seattle in 1971 to a global powerhouse with one of the most recognized names in the world. Although it is the number-one gourmet coffee retailer in the United States, the company's world coffee conquest is far from over. New locations in Spain were opened in 2002 and new shops were slated to open in Germany, Greece, Latin America, and Mexico late in the year and into 2003.

While many people flinched at paying a couple of bucks for a cup of coffee when it could be brewed at home for a quarter a cup, these same folks became devoted Starbucks customers after tasting its rich, flavorful coffees. Starbucks is more than just an excellent cup of coffee, it is an entire package—offering an inviting environment with chairs, tables, and even computers; fresh, premium brews and snacks; and soothing, unusual background music. It started with coffee beans but became a cultural experience for over twenty million Americans and millions more worldwide.

Leading American Businesses

Starbucks Corporation

Starbucks Corporation

ROOTS IN COFFEE RETAILING AND WHOLESALING

MID-1980S: THE SHIFT TO COFFEE BARS

COMPANY PERSPECTIVES

KEY DATES

RAPID EARLY 1990S GROWTH AS A PUBLIC COMPANY

LATE 1990S: INTERNATIONAL EXPANSION AND NEW VENTURES

ACCELERATING GROWTH IN THE EARLY 21ST CENTURY

PRINCIPAL SUBSIDIARIES

PRINCIPAL COMPETITORS

FURTHER READING

Starbucks Corporation

Starbucks Corporation

Roots in Coffee Retailing and Wholesaling

Mid-1980s: The Shift to Coffee Bars

Company Perspectives:

Rapid Early 1990s Growth As a Public Company

Late 1990s and Beyond: International Expansion and New Ventures

Key Dates:

Principal Subsidiaries

Principal Competitors

Further Reading

Starbucks Corporation

Starbucks Corporation

Principal Subsidiaries

Further Reading

Starbucks Corporation

Starbucks Corporation

All about the Beans

Starbucks at a Glance

Timeline

Starbucks Takes Off

A Cultural Phenomenon

The Future of Starbucks

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