Executive Insights | September 2011 | By Daniel P. Smith

Over the Hill: 40 Years of SBUX

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Amid the growth and increasing attention, Starbucks separated itself from other retailers and quick-service restaurants by offering its employees (partners in Starbucks lingo) a generous benefits package, including health insurance and stock options.

“Treating employees benevolently shouldn’t be viewed as an added cost that cuts into profits, but as a powerful energizer that can grow the enterprise into something far greater,” Schultz writes in Pour Your Heart Into It.

As revenues rose at more than 80 percent a year and unit count exploded, Starbucks went public in 1992. Many wondered whether a trend—a business that had risen so spectacularly as a lifestyle choice—could go public. Starbucks countered by painting itself as a fast-growing enterprise. The initial IPO garnered $29 million to finance growth in new markets and Starbucks began saturating downtown areas in Chicago, San Francisco, San Diego, Los Angeles, Denver, Washington, D.C., Boston, and New York City.

“With national expansion, Schultz was talking in a way unlike anyone else in the specialty coffee business,” says George Howell, who sold his New England–based Coffee Connection chain to Starbucks in 1994. “Sooner or later, you could expect Starbucks in your backyard.”

For Starbucks, the good times rolled, as cafés blanketed Minneapolis, Dallas, Philadelphia, Las Vegas, and many of the nation’s most populous metros. Starbucks coffee then appeared on airlines and in bookstores and supermarkets.

“The consumer couldn’t escape Starbucks,” Howell says.

Then the company began leveraging its brand reputation beyond the walls of its stores, wiggling onto supermarket shelves with Frappuccino, ice cream, and stout beer varieties. Starbucks became a domestic tastemaker, selling CDs and books at its stores. Suddenly, Starbucks wasn’t just a coffeehouse; it was a lifestyle brand, a cultural symbol of affordable luxury.

“Schultz was a master marketer and a master retailer. His knowledge, business moxie, and timing stand at the center of Starbucks’ early success,” says Bruce Milletto, a coffee industry consultant who runs the Portland, Oregon–based Bellissimo Coffee InfoGroup.

In spite of its perceived invincibility, Starbucks could not escape turmoil, including anti-Starbucks backlash.

The siren logo had become recognizable across the nation, a dual sign that Schultz’s dream had reached fruition but, in the process, become big business—often synonymous with heartless, inaccessible, and unresponsive. Fair or not, that was the reality emerging for Starbucks, which tried to cultivate a tone of style and elegance.

“One of Starbucks’ greatest challenges is to try to break the mindset that big can’t be good,” Schultz writes. “If we don’t, we’ll lose the very values that attracted people to us in the first place.”

Yet nothing could slow Starbucks’ surging train.

At the turn of the century, Schultz moved into the chairman’s role, stepping away from the daily grind as CEO to focus on big-picture thinking. Longtime ally Orin Smith took over for a five-year reign before giving way to Jim Donald, an affable man who previously directed Wal-Mart’s grocery operations.

During the opening years of the millennium, store count, profits, and confidence accelerated. Enjoying 20 percent top-line growth year after year, Starbucks continued saturating its existing domestic markets while debuting on six continents. The goal was 20,000 stores.

Starbucks seemed indestructible.

But it wasn’t.

Turmoil & Triumph

By 2007, Starbucks found itself in unfamiliar land: Sales numbers, although still positive, began sliding. Store traffic and stock dropped. For a company knowing only prosperity, the struggles jolted Starbucks’ foundation.

On Valentine’s Day 2007, a disheartened Schultz penned a memo to Starbucks’ leadership team (which was later leaked) sharing his discontent, as well as a challenge to restore the company’s glory.

“Stores … no longer have the soul of the past,” Schultz charged in the memo titled “The Commoditization of the Starbucks Experience.” He continued: “I have said for 20 years that our success is not an entitlement and now it’s proving to be a reality.”

The chairman’s impassioned plea did nothing. Starbucks’ tumble continued.

Then, the recession hit.

To its credit, Starbucks did not blame the economy for its fading fortunes, a mindset that would have further weakened the brand’s performance. Nor did the company make excuses regarding competitors’ gains. Rather, Starbucks looked inward and saw troubling signs—hubris born out of invincibility, stagnant innovation, and operational inefficiencies among the most plaguing problems.