Executive Insights | September 2011 | By Daniel P. Smith

Over the Hill: 40 Years of SBUX

The company maintains it can regain the unstoppable success it experienced in the past.

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It’s a rainy Monday morning in downtown Park Ridge, Illinois, a Rockwellesque suburb on Chicago’s northwestern edge. The overcast sky feels Seattle-like, a fitting day to observe the ebbs and flows of traffic at Starbucks.

At one stand-alone Starbucks location, once home to a community bank, interior tables fill with soccer moms, retirees, and laptop-wielding students. All morning, the line extends about six people deep.

About 400 meters away in another Starbucks store—this one adjacent to the town’s historic movie house—a similar scene repeats itself: packed tables and a lengthy line of customers paying homage and income to the specialty coffee giant.

The consistent traffic weaves a decisive narrative.

Now celebrating its 40th year, Starbucks has evolved from local whole-bean retailer into a global company rivaling not only the world’s top quick-service restaurants, but the globe’s biggest consumer brands as well.

It’s a reality no one could have predicted four decades before.

Seattle Roots

Founded in April 1971 by Gerald Baldwin, Gordon Bowker, and Zev Siegl, the original Starbucks store in Seattle’s Pike Place Market was a quaint outlet full of character and coffee aroma. The product, namely dark-roasted blends, took center stage. None of the men envisioned a business empire.

Baldwin and Bowker were college roommates at the University of San Francisco, where they became enamored with Peet’s Coffee and Tea, arguably the nation’s patriarch of specialty coffee. Corralling Siegl into the plan, the trio invested about $9,000 to open the original Starbucks.

In Starbucks’ first decade, word of mouth pushed it to expand its operations. Baldwin and Bowker (Siegl would exit in 1980) opened four additional retail spots and the Starbucks name spread.

In his first visit to the store, future Starbucks CEO and chairman Howard Schultz described Starbucks Coffee, Tea, and Spice as “a temple for the worship of coffee.”

The New Yorker, then a kitchen equipment salesman, was smitten.

After courting Baldwin to hire him, Schultz joined Starbucks in 1982 as its marketing chief. During a 1983 trip to Milan, Schultz noted the romance of Italian coffee bars—then rare in the U.S.—and urged Baldwin and Bowker to consider expanding operations to embrace fresh beverages.

“We treated coffee as produce, something to be bagged and sent home with the groceries,” Schultz writes in Pour Your Heart Into It, his 1997 chronicle of Starbucks’ ascent. “We stayed one big step away from the heart and soul of what coffee has meant throughout the centuries.”

Baldwin and Bowker hesitated, concerned that the expansion, particularly for an already profitable private enterprise, would alter the company’s original intent. Schultz continued pressing for a trial of his espresso bar.

In April 1984, Baldwin finally relented when Starbucks opened its sixth Seattle outlet. There, Schultz was given a sliver of the 1,500-square-foot store to sell beverages. The store immediately outperformed the most ambitious expectations.

Starbucks would never be the same.

Still, Schultz, a dreamer type from the Brooklyn projects, imagined bolder possibilities for Starbucks: coffee stores throughout the nation becoming a “third place” for consumers, a common spot they frequent beyond home and work. He had a vision of what Starbucks could be and what it would become.

Yet Baldwin and Bowker, the Starbucks gatekeepers, refused to enter the restaurant business.

In late 1985, Schultz left Starbucks intent to raise $1.7 million to fund his coffee bar idea, a remarkable sum for a novel retail concept. He succeeded. On April 8, 1986, Schultz opened Il Giornale, an Italian-style espresso bar in Seattle.

Sixteen months later, with Baldwin and Bowker seeking change of their own, Schultz captured nearly $4 million from investors and acquired Starbucks, blending the name and the company’s core values with his vision.

By the end of 1987, Starbucks had 11 stores, 100 employees, and a mission to build a national brand.

The Schultz Effect

Throughout the 1990s, Starbucks blossomed into an American giant, growing from a local retail business into a national name with more than 1,300 units.

Much of Schultz’s attention focused on domestic expansion, infrastructure, and management development. He labored to avoid expansion’s pitfalls. Rather than franchising to finance growth, he raised additional capital. He surrounded himself with top talent and became maniacal about real-estate selection.

Starbucks opened 30 new stores in fiscal 1990, the first year the company turned a profit; 32 in 1991; and 53 in 1992. Expansion, profits, and attention intensified.

“Give people good coffee, something they consume every day, and they will support you,” Schultz told The New York Times in 1992.

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