Howard Schultz

Born 19 July, 1953
Chairman and CEO, Starbucks

In 1981, working as the General Manager of Hammarplast, a Swedish drip coffeemaker manufacturer, Schultz traveled from New York to Seattle to check out Starbucks, a popular coffee bean store that had been buying their machines. 

“I walked away … saying, ‘God, what a great company, what a great city. I’d love to be a part of that.’”

It took Schultz a year to convince the Starbucks owners to hire him. When they finally made him director of marketing and operations in 1982, he had another epiphany – in Italy coffee bars not only served excellent espresso, they also served as meeting places. They were a big part of Italy’s societal glue, and there were 200,000 of them in the country.

The Starbucks owners resisted Schultz’s plans to serve coffee in the stores, saying they didn’t want to get into the restaurant business. Frustrated, Schultz quit and started his own coffee-bar business, called Il Giornale (pronounced ill jor-nahl-ee).

Schultz drew up plans to raise an initial $400,000 in seed capital and another $1.25 million in equity – enough to launch at least eight espresso bars and prove the concept would work in Seattle and elsewhere. The seed capital was raised by the end of January 1986, but it took Schultz until the end of the year to raise the remaining $1.25 million.

He made presentations to 242 potential investors, 217 of whom said no. Many who heard Schultz’s hour-long presentation saw coffee as a commodity business and thought that Schultz’s espresso-bar concept lacked any basis for sustainable competitive advantage (no patent on dark roast, no advantage in purchasing coffee beans, no way to bar the entry of imitative competitors). Some noted that consumption of coffee had been declining since the mid-1960s, others were skeptical that people would pay $1.50 or more for a cup of coffee, and still others were turned off by the company’s hard-to-pronounce name.

Being rejected by so many potential investors was disheartening. Nonetheless, Schultz continued to display passion and enthusiasm in making his pitch and never doubted that his plan would work. He ended up raising $1.65 million from about 30 investors; five of whom became directors of the new company.

The first Il Giornale store opened in April 1986. On the first day, 300 customers had been served, and within six months, Il Giornale was serving more than 1,000 customers a day.

Six months after opening the first store, Il Giornale opened a second store in another downtown building. A third store was opened in Vancouver in April 1987. Vancouver was chosen to test the transferability of the company’s business concept outside Seattle. To reach his goal of opening 50 stores in five years, Schultz needed to dispel his investors’ doubts about geographic expansion. By mid-1987 sales at the three stores were equal to $1.5 million annually.

In March 1987 the owners of Starbucks decided to sell the whole operation and in August of the same year Schultz bought it for $3.8 million.

The following Monday morning, Schultz returned to the Starbucks offices at the roasting plant, greeted all the familiar faces and accepted their congratulations, then called the staff together for a meeting on the roasting-plant floor. He began:

“All my life I have wanted to be part of a company and a group of people who share a common vision… I’m here today because I love this company. I love what it represents… In five years, I want you to look back at this day and say “I was there when it started. I helped build this company into something great.”

 Schultz told the group that his vision was for Starbucks to become a national company with values and guiding principles that employees could be proud of. He indicated that he wanted to include people in the decision-making process and that he would be open and honest with them.

Schultz said he believed it was essential, not just an intriguing option, for a company to respect its people, to inspire them, and to share the fruits of its success with those who contributed to its long-term value. His aspiration was for Starbucks to become the most respected brand name in coffee and for the company to be admired for its corporate responsibility. In the next few days and weeks, however, Schultz came to see that the unity and morale at Starbucks had deteriorated badly in the 20 months he had been at Il Giornale. Some employees were cynical and felt unappreciated. There was a feeling that prior management had abandoned them and a wariness about what the new regime would bring. Schultz determined that he would have to make it a priority to build a new relationship of mutual respect between employees and management.

As the company began to expand rapidly in the ’90s, Schultz always said that the main goal was “to serve a great cup of coffee.” But attached to this goal was a principle: Schultz said he wanted “to build a company with soul.”

This led to a series of practices that were unprecedented in retail. Schultz insisted that all employees working at least 20 hours a week get comprehensive health coverage — including coverage for unmarried spouses. Then he introduced an employee stock-option plan. These moves boosted loyalty and led to extremely low worker turnover, even though employee salaries were fairly low.

Why was Schultz so generous? He remembers his father, who struggled mightily at low-paying jobs with little to show for it when he died.

Schultz has said that his model for expanding Starbucks is McDonald’s, with a few key differences. One is that Starbucks owns most of its stores, while McDonald’s franchises. Schultz doesn’t believe it’s possible to build a strong brand around franchises — although McDonald’s is an obvious exception. Another difference is that Starbucks has managed to blossom without national advertising. Finally, Starbucks sells premium products to a fairly upscale, urban clientele.

In order to sustain the company’s growth and make Starbucks a strong global brand, Schultz believed that the company had to challenge the status quo, be innovative, take risks, and alter its vision of who it was, what it did, and where it was headed. Under his guidance, management was posing a number of fundamental strategic questions:

• What could Starbucks do to make its stores an even more elegant “third place” that welcomed, rewarded, and surprised customers?
• What new products and new experiences could the company provide that would uniquely belong to or be associated with Starbucks?
• What could coffee be, besides being hot or liquid?
• How could Starbucks reach people who were not coffee drinkers?
• What strategic paths should Starbucks pursue to achieve its objective of becoming the most recognized and respected brand of coffee in the world?