Starbucks’ Schultz: Making His Macchiato

In 1987, Howard Schultz, a former housewares industry executive, acquired an obscure Seattle coffee roaster named Starbucks Coffee Co. Under his direction, Starbucks has grown from 17 stores into a chain with nearly $1 billion a year in sales--the McDonald’s of coffee.

Intent on expansion, Schultz continues to open outlets in new territories and has guided Starbucks into other business lines. Its ice cream is sold in supermarkets, as is a bottled drink, Frappuccino. Its coffee is served on United Airlines flights. It is testing the sale of coffee in supermarkets--pitting itself against deep-pocketed giants such as Procter & Gamble.

Schultz, the 43-year-old son of a truck driver, grew up in the projects in Brooklyn, N.Y., and is now among the nation’s most successful entrepreneurs. He earned $493,654 in salary in 1996; his stock holdings are worth $194.3 million.

Starbucks, no longer a small upstart, faces challenges. It is struggling with keeping a small, personal feeling even though it is a huge chain. Prototype stores have colorful murals, leather couches and even fireplaces--homey touches that contrast with the chrome and wood now found in most Starbucks outlets. Starbucks recently switched advertising agencies, selecting BBDO West in Los Angeles, saying it’s had trouble finding its creative voice. And employees in Canada recently joined a union, a blow to Starbucks’ highly touted commitment to its workers.

Times staff writer Greg Johnson talked to Schultz last week in Westwood, where Schultz was promoting his just-published autobiography, “Pour Your Heart Into It.” What follows is an edited transcript.

Q: You have compared Starbucks to Nike. Why?

A: Who would have thought 20 years ago, when we were all wearing Chuck Taylor Converse sneakers, that a company would start making high-performance tennis shoes that people would spend lots of money on? Nike has built a brand in a commodity business, and Starbucks has done it as well. But while they’ve done it through marketing and mass distribution, we’ve done it with no advertising. Over the last 10 years, the company has spent more money on training than on advertising. And Starbucks is now beginning to leverage its brand. We’ve introduced Starbucks ice cream, which is now the No. 1 coffee ice cream in America. We have bottled Frappuccino and we’re now testing Starbucks coffee on grocery store shelves in Illinois after a successful test in Oregon.

Q: Won’t selling coffee beans through grocery stores cannibalize your existing business?

A: I believe it will be complementary, that it will not dilute the integrity of our company or cannibalize retail store sales. Right now, 87% of what we sell goes through our own retail stores. But over the next five years, that percentage could slip to as low as 60%. I think that will be very healthy, because it will help relieve the burden on our retail operation. Eighty percent of all coffee in America is sold through the supermarket aisles. We’re in the position of possibly creating a significant business on supermarket aisles.

Q: You fought against serving nonfat milk products and misjudged the appeal of iced coffee drinks.

A: I’ve been wrong a number of times. But it speaks well of the processes in our company that people have the confidence to disagree with me. I didn’t think nonfat milk was right for us. I didn’t think iced Frappuccino would be a big item. I was wrong both times. Management teams today have to leave their egos at the door. They have to be willing to recognize we’re in business for one reason: to satisfy our customers, and if we don’t have the right idea, we have to acquiesce to those who do.

Q: But there is a line you won’t cross, right?

A: There’s a point at which you’re no longer selling quality. It’s a fragile balance, but a company has to stand for something. An example: artificial coffee, which is something we don’t sell. And we never will sell it, because it’s the bastardization of coffee.

Q: Are there product deals that you won’t consider?

A: An idea we’ve said no to so far is alcohol. We did a joint venture with Red Hook Ale, but we’ve said no to hard alcohol. I just didn’t think it was right for us at the time. A lot, though, has to do with the maturation of the company and the brand, of what it’s available to absorb.

Q: You write that big companies are almost universally hated by consumers. How do you keep Starbucks from getting tarred and feathered with the charge of being big?

A: Most companies that have gotten big in America haven’t stayed great or good. The challenge for Starbucks is to maintain intimacy with our people and customers. Success at any level is not an entitlement--it has to be earned. And if I ever thought that growth was diluting the guiding principles of our company, I guarantee you I would stop growing. You’ve got to manage for what’s most important--the customers and our people. If you do that, everything else will take care of itself. As for being big? And I can’t help it when people say Starbucks is big. Because it is big.

Q: A comedian now jokes that “they just opened a new Starbucks--in my living room.” How big will your company get?

A: We’ve just about entered most of the major markets. Our new market this year has been Florida. Now we’re going to markets that are less sophisticated, the secondary and tertiary markets. But we’re seeing similar responses to when we started expanding to big markets. There’s a huge country out there. Most Americans drink two cups of coffee each day, and most of it is stale [product]. Remember, we have minuscule market share [of the supermarket coffee business], despite Starbucks’ success.

Q: Starbucks hired Goodby, Silverstein & Partners, the “Got Milk” people, in 1995. Did they “get coffee” for you?

A: Well, first we recruited [marketing executive] Scott Bedbury, who’d earlier been with Nike. And we had the Goodby connection for the last 2 1/2 or three years. They’re great people, a fantastic agency. But for whatever reason, we have not found the creative voice for the company. We just changed to BBDO West, which, ironically, is part of the same company, Omnicon, that owns Goodby. I’ve known the guy [David Lubars] over at BBDO West for years, and I think he can, with his organization, find the Starbucks creative voice. But we might conclude that we don’t have to advertise at all. I definitely don’t want to go down the same road as everyone else. Let’s find a more noble purpose than traditional 30- to 60-second sound bites.

Q: I get the feeling that in addition to not knowing exactly what to say, you’re not even sure how to say it.

A: I don’t know yet what we want to say. I do know one thing, and I know it instinctively: Starbucks is not going to be a traditional advertiser of 30- and 60-second commercials. We’re going to go a different way. We’ve tested TV in the past, but as for how Starbucks will be communicating the brand through media, we don’t know yet.

Q: Let’s talk about the weather. El Nino can cause drought, frost, flooding. In 1995, a frost in Brazil sent coffee prices skyrocketing. I imagine you pay close attention to weather reports.

A: I went to bed one night in 1995 and when I woke up the next morning the price of coffee was up 300%. So now we have to worry about frost in Brazil and this new thing called El Nino. To date, it’s much ado about nothing. But speculators are using it to manipulate the coffee market for their own self-interest. El Nino does have the strong possibility of causing drought in Colombia and Indonesia. If that were to happen--and we really won’t know until October or November--the cost of coffee could be affected. But the crop won’t be affected until late 1998 or 1999. El Nino shows that we have a challenge. We’re completely vulnerable at all times--as is the whole coffee market--to strange weather patterns.

Q: Your company offers relatively high wages and health-care packages to part-time employees. But some employees in Canada are now represented by a union.

A: The important thing about Starbucks is that we’ve brought our people along with us as we’ve grown. We offer our people stock options, along with health care for our part-time people. Some great companies are unionized and some bad companies are not. So the question is not whether a company is unionized. We have 97 stores in western Canada, and nine of those stores elected to be represented by a union. The agreement we have with the union is almost a mirror image of the agreement we have with our people in the other stores, so it’s not a big deal. This is a democracy, and our people have a right to make a choice.

Q: You describe your board members as trusted advisors more than supervisors. That’s a contrast to most companies, where board members seem intent on playing more of an activist role these days.

A: It wasn’t always that way. This is a group of directors--of people--who have been together for about 10 years now. We’ve raised this child together. I’ve been the leader, the visionary, but I’ve had incredible help and guidance from a group of people I respect and love. We still have lots of creative conflict in the boardroom. We don’t always see eye-to-eye, but we come out with consensus.

Q: You say the average American drinks two cups of coffee a day. How much do you drink?

A: Four or five cups--decaffeinated at night.

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On the Bean

Starbucks Coffee Co. is growing even though U.S. coffee consumption has remained flat and Starbucks doesn’t sell beans in grocery stores, which generate 80% of all coffee sales. Growth in Starbucks revenue and stores since its initial public offering in 1992:

Revenue

1997*: $860.8 million

Number of stores

1997*: 1300

* Through Aug. 24

Source: Starbucks Coffee Co.