Starbucks (with Howard Schultz)
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How right? We're rolling. We're rolling.

We get to see how you guys do. This is kind of age.

usually a pump .

up music. I feel point. We can do that.

We can.

I say, beautiful.

What do you want to hear?

Now we're starting .

then keep in this on track.

Easy, you wait, you wait, you who got no?

down.

Welcome to season fourteen, episode five of acquired the podcast about great companies and the stories and playbooks behind them. And then gilbert.

David and we .

are your hosts. Seven years ago, David and I did an episode on the starbucks IPO just the IPO. That episode was a myr one hour and twenty four minutes. And starbucks is a ninety billion dollar institution in our world, deserves the full acquired treatment.

who?

What are we thinking? Well, IT actually was amateur. Our fact that David .

get to .

start somewhere. Well, today we have a very special third cohoes to discuss this third place. Howard shouldn't. Howard started working at the small chain of three starbucks stores in one thousand nine hundred eighty two, eventually buying IT and becoming CEO.

As you probably know, he is effectively the founder of the starbucks we know today that exists on every corner of the earth. I come to you, David and listeners, as an unabashed starbuck's fan in this to motus time for the company. I am absolutely pulling for them in every way possible, and that is going to come through in our conversation.

You may have seen the news recently that they had a very rough last quarter with a key metric that you may remember from previous episodes as same store sales these dropped and their stocks Price plumaged. As a result, this is on top of a tumulus pandemic era and some of their stores unionizing and a change in leadership. We thought that this would be the perfect time to sit down with Howard and unpack, why did starbucks work in the first place? And how does IT work at such grand scale? What can other founders and business leaders learn from what got them here? And although he is no longer CEO, where do they go now?

This really is incredible. One of the very, very small number of food and beverage establishments that is scaled to the entire world. Yeah.

most of those types of concepts do not work in different countries and continents, but starbucks is different today there, in over eighty countries, with thirty nine thousand stores across the world. There are even huge in china, a country that didn't consume very much coffee until starbucks arrived. There are a bank scale financial institution as well.

At any given time, starbucks holds one point seven billion dollars that customers have loaded on the gift cards, but not yet spent. So how did they go from one store selling beans, not even drinks and cups, just beans, to the default meeting place in communities everywhere today, we tell that story. And listeners, this episode has video.

We recorded IT in person in seattle at the shells family foundation. And you can watch IT on youtube. All right? Well, listeners, we have a giant's announcement for you.

Yes, save the date. If you love acquired, you are going to want to be physically in the city of san Francisco on tuesday, september tenth, twenty twenty four.

And we can't say much you know about every detail of IT just yet, but I will be the biggest thing that acquired has ever done. It'll be in partnership with our good friends at J P. Morgan payments. So mark your calendars now, save the date, and if you want to be first to know details, you can sign up at acquired dt F M slash S F, or click the link in the showed tes.

Speaking of J P morn payments, just like how we say every company has a story. Every company story is powered by payments. And J P. Payments is a part of so many companies journeys from seed to IPO and beyond. And if you want .

more from David night, you should check out our second show, A C Q two, where we interview founders, investors and experts, often as deeper dives in topics recovered on the main show. Recent episode been awesome with the C E O and the founder of synopsis of starfish space, further expLoring the space industry. And we've got some great stuff and payments coming up next to we do.

All right. So with that, the show is not investment advice. David and I may have investments in the companies that we discuss, and this show is for informational and entertainment purposes only.

Onto our episode with Howard shalts. Well, I do have to tell you, and I think i've told you this off camera for the last almost ten years, every single day starts with a spiritum federative. I assume there other people like me in the world, but it's always an iced all in milk lote with whip cream and a spital federative. And so thank you for powering approximate a third of cells in my body.

It's a great start. I also .

here's another thing that, David, you've done the math I have done that I exported all of my credit card transactions since twenty eleven. Of course, you and I wish I had more history than that, but that was the oldest I could get. I've spent twenty three thousand dollars at starbucks .

since twenty eleven.

So we want to start with starbuck's one point out, and listeners may know that there were three founders of starbucks, yes, none of which were named powered shots. correct? So take us back. You know, in the starbuck's pre history before you arrived, how did the company start?

Well, since I wasn't there, this is what I know. There were three founders, Jerry baldwin, zv. Segal and gordon bulker. And the story that was told to me is that one or both of them, we're going to school in california in the bear and they became a nmr red with peach coffee company.

uh which altered and p yeah .

alford pete was no more than anyone else in the history of coffee in america, was the true pioneer. He brought specially coffee, a replica coffee, to northern california. And Jerry boldwood and serve became so interested in and tried with what pizz was doing.

And given the fact that they were from seattle, decided they would try and bring starbucks coffee in the form of starbucks to seattle, washington. Now what is not known is that when starbucks s opened in the pike place market in thousand nine hundred and seventy one, they were using feeds coffee. Really no one knows that.

That's no because they were not roast in coffee. So they were bringing coffee from services go to seattle. They were not calling at peace.

They were calling a stomach. So is peace coffee and starbuck back?

Yeah again, I wasn't there, but that's kind of the folklore after the three founders built that store, open that store. Um I I get the sense that there was some kind of fallout between the three of them and single eventually left the company that brings us to nineteen, seventy nine, one thousand hundred and eighty around that time when I came to see out of washington for the first time.

So I was working for a swedish housing words company based in sweden called hammers plate. That company had a beautiful non electric coffee maker kind of a dermal unit. And we had a big customer in masses in all in california.

And I was in california on a sales call, and I had heard that there was a small company in seattle, washington was buying a lot of this product. So given, in fact, they never been a seattle, I was already in the west coast. I figured i'd come to see adl and see what was .

going on with starbuck buying IT for use in.

They were selling IT in their store now.

But here's this was a .

consumer device. Yeah yeah. But have to remember, starbuck coffee company, from one thousand and seventy one until around eighty five, eighty six, only sold pounds of coffee. There was no beverage that, you know, we going to get into the epiphany of.

of course.

And so I walked into the pipeline store for the first time on a beautiful day, just like this. The sun was out. There was no one mountains, the clean, fresh air.

And I walked into the pipe place market, and I walked into the starbuck store, and I was blown away by the experience, the the romance of coffee, the education and IT just spoke to me. I had never met every bowlin, the founder who was the CEO at a time. And I became interested in a tree with what starbucks was doing and asked if I can meet Jerry.

One thing that to another eventually ball, when we really hit off and we established kind of a vender customer relationship over the course of a year or so, starbucks had three stores at a time, only three. And over the course of the next year or so, I became more and more interested and intrigued with the possibility of leaving york city. Sharing, I were dating, were not married, and I kind of manuvred my way into a job working for starbucks. And so sharing, I drove to seattle, washington on labor day weekend in our old oui car with our golders driver. And we came here because I was offered the job as they head of marketing for starbucks when they were getting ready to open their fourth store in one nine hundred and eighty two.

Still to selling beans.

Only beans, that's the host, is still beans. The interests of the company had in me at the time, I think, was they were really interested in expanding. But their dream or or the plane at the time was, could we expand, support an organ? Remember, this was a tiny .

company as a grand ambition.

yeah. And I never had any idea, of course, that what was about to happen and unfold of the subsequent years. But that was arrived in thousand nine hundred and and two is a head of marketing.

So when you in shary arrive here, like, what was the coffee landscape? I mean, there were these three seemed to be four starbucks bean store here in seattle. Alfred at was down in the bay area. But what was coffee culture? And I was I was like, fodders in maxim .

health yeah he was IT was to minimize there was another coffee company, which was seattle best coffee, which was another retailer that was kind of at the same size and scale starbucks, both equal at the same time. But you can even get a nearer times in seattle in one thousand and eighty two, eighty three, IT was not no good food to speak up.

And starbucks was a true pioneer where they were educating customer after customer about what good coffee taste e like. And the pipe place market gave them an interesting vehicle because of of the turks. And so stuff exactly started establishing a male water business as a result of all the people were coming into seattle. And I think if I remember, there was so many points that I can remember where people were talking about starbucks way outside of seattle as if there was some kind of, I connect big company, I think people OK in the seattle is this that this is, you know, the eight hundred, nine hundred square foot store in seattle, washington, in pike place market.

This is the meca. And so tourists would come, they would buy a bag, and then they would fell out some kind of information i'd like.

i'd like to have .

this mailed to me in my city. Yeah.

that's what happened. And because coffee has a shelf life of basically a week to ten days and we didn't have a vacuum bag at that time. We were shipping small amounts because to Jerry baldwin's credit, he had such a fastidious point of view about quality and freshness. And I think that had a huge impact on me.

But this couldn't have been like a great business. Your shipping small amount? No, IT was the logistics cost. You know, the scale like this .

was a small business, but the equity of the brand even back then was much larger than the size of the business. And the opportunity that I saw even when we had four, five stores, was well be on portal in origin. And I was always kind of pushing we could do so much more. And then the whole thing blew up for me when I went to eight and eighty three.

okay. So before the italy trip, I just want to really contextualize coffee in america. I think coffee had been declining since like one thousand forty is still part of the american culture. But it's not that it's on the way out, but there's nothing new or interesting except for this .

little segment of a tiny. And I think what you've just described, the reason for that is that coffee was terrible. IT was instant coffee, stale coffee and primarily robust. The beans, which is the low grade coffee that starbuck was never involved in.

yeah, walk us through. The two types of beans .

is mainly two types of agricultural coffee grown for commercial use, robust es, low and coffee primarily, and instant coffee and high grade a replica coffee. But even within the a replica coffee, there's significant segments of quality and integrity. And starbuck has always played from one thousand nine hundred and seventy one to today at the highest level.

And my understanding from our research is that the rost market really developed, as you say, with the instant coffee market. And that was kind of a product of world war two, right? That was like, k, we got to get the troops this product to survive. And so we just need a lot of beans and we need to ground them up and create this. Since m product, I believe maxwell well house was involved .

in inventing yeah, you're exactly right. I mean, IT was just fuel and bitter acetic. And yeah and that's I think where we're two in the G S. Were kind of the input is for that kind of quality coffee or not quality coffee to exist and have any kind of run after the war.

So you show up at starbucks, you you know a little bit about the market because you've been a supplier of theirs, but you happen to be a pretty talented salesmen from your time at iraq. yeah. And I want to make a tie here.

Our previous episode was the microsoft episode, at least microsoft volume one. You were selling word processors made by iraq. Tell me what word processors were in the middle.

So my territory was forty second to forty eight street from fifth avenue to the river. And I had to make fifty coal calls, physical coal calls, a day. That was a job.

The zero axe job taught me incredible amounts about not only selling, but humility. Humility, because the rejection everyday was so significant. And you put on your suit tie and you go in an office building, there is no security at that time.

Just go in and you go from the top floor to the bottom and then other people selling other products. We're doing the exact same thing, and you had to get by the receptionist. I was making a thousand dollars a month and living at home when I started. Okay, the word processor was a big machine in which you are editing on that machine to basically create a letter and does IT .

have a screen .

or has A A type right? no. Is a type .

writer no screen? It's like a typewriter with, like with a little bit of cash.

right? Yes, yes.

yes.

Mistakes for one line. Yeah, the job is zero x that that was like working for google me, zero ax and IBM with the two pillars of technology and high tech companies. You tell somebody you work in as iraq, you had a whole different peta that you are well as working as zero x well.

And so you quitting while hammer plus s but you know, quitting what seemed like A I hate stable of pretty good jobs to drive across the country to provincial little seattle. And that's that's nuts.

I knew after a couple of years, if I stated jiao for a longer period, china was going be locked in there. But i'll tell you the story that got me to realize. I've got to get out here at the end of the year, the performance surprisal algeria x was basically a score card from one to five.

So you'd have a quality of discussion with your manager and then he will give you a number. And when I got a three, I said, I know, I just say one. So I worked all year. I just had an a performance of place for my manager.

and i'm a three. This is amazing how IT shells got a three. I A.

anything for a launch, I got to three. And as soon as I got the three, I swear, at that moment I knew i've got ta get here. And that's when I started putting myself in a position of meet other opportunities. And by and large, I was able to get the hammer class job, which was the general manager of the company, which was based in sweden in the us. But I was a tree.

Do you think having .

that background is IOS? Did I give you a piece of perspective that helped build direct what IT is today?

When I hear the question, I I have to go back to my childhood and think everything that have experienced growing up in the projects in more or less a disfunctional family because of the the pressure of money, getting the error opportunity and having some levels success, but realizing I wanted more the humility which came with rejection, the shame I had as a poor kid living in the projects, all of that, I think Christal zed in me.

And I give sharing you so much credit in realizing that together we wanted build a different kind of life and gave me the courage, the conviction and um the drive to try and do something that I felt I was destined to do. I didn't know what I was. I certainly didn't know moving in seattle was going to create the opportunity of a lifetime, but I always felt I had to get out of that station in life where I was positioned not to get to the level that I thought I I deserve to be.

I don't think IT is common with someone for your background. Poor kid in the projects coming from nothing to get a great job, too great jobs and be wildly dissatisfied and not feel like i've made IT, but rather know there's gotta be something more than this. There's something deep inside you that caused you to be willing to .

take a risk. I was really insecure about not succeeding, and I didn't view what I was doing as the success that I was not destined for that that sounds wrong, that I had the appetite for.

All right. So we're getting to the big risk. So the year ticks over one thousand nine hundred eighty three. Yeah, you are sent or maybe you asked to go to an international housewares conference in milan. Yeah.

what do you discover? So I went to a trade job call much cheh with big convention center and is a giant household show with equipment and all kinds of stuff. And I I was staying at at a relatively cheap hotel in walking distant to the convention center.

I get out of the hotel. I've never been italy before, and I am always sudden being intercepted with the physical manifestation of one coffee bar after another in the business that i'm supposed to be in. But IT wasn't the business step starbuck ism.

And I walk in like a Normal person's never seen this before. I am just like, I mean, a black and White movie and always said everything was color. And I was so rich I couldn't get enough of you.

And I just want from one to the other, to the other, to the other. And I I was just blown away and more or less respect to amErica SAT down with geria and gordon and said, holly, shit happening in italy is the business and starbuck has to be in. And they had seen IT.

They've gin italy and they said, no, that's not what we wanted do and I just said seriously, and I banged on the door for two years, and in two years, they finally let me open up a coffee bar on the corner of fourth and spring and settlement. And IT was the sixth starbuck store, and out of about twelve square feet, I got a hundred feet, and I designed and open the coffee bar, work behind the counter as a breeza. And stomachs probably had two to three hundred customers a day selling hoving coffee. We were at five hundred and a week with introducing latest in cache o to the in espresso.

So and there is nowhere else. No had well .

to was son. And after a few months or six months or so, Jerry said, I don't want to repeat this. I don't want to IT. I don't want to be in the restaurant.

This is yeah what was the objective was that he just to take the restaurant business.

I mean, I don't want to think for Jerry have so much respect for him, but he didn't think he was clean. He didn't like IT now between eighty three and eighty five, Jerry ball went because of his love of peace and his relation with alf. Pete had an opportunity for starbuck to acquire peace coffee company, and they did. Unfortunately, starbucks buys peace and they get into financial trouble.

And so really at this point, I was like their mentor was retiring. This person, who was a story of the industry, Robert, six points of retail distribution in seattle for orbans. One we just buy you're effectively the same business but in north n california, keep them separate for now. what?

And to know that between the opening of the fourth and spring coffee bar inside the starbucks, starbuck.

number six, yeah.

And Jerry and gordon saying, we don't want to repeat this. I was so frustrated I said, i'm in, leave starbucks and what I do. I had no money to open up a coffee store, so Jerry says starbucks does not want to open up coffee bars, but we will invest in l gently.

which was the company you started.

So before they get into financial trouble, starbucks is an investor. I've always thought he did that. So I would sell in market starbuck coffee in the coffee bar, which I would have done anyway.

So starbucks makes an investment. A couple of people that we know make an investment, but I don't have enough money. So I go to see two italian companies i've never told this. One is the oppressive company fia, and one is the large italian coffee company will ata.

Oh yeah.

And I asked them both. To invest in my idea and both then turn me down.

So at this point, you're initially you're trying to get ideas and investors for .

what would become ill.

Only starbucks and a couple of people committed.

but they have enough money. I still I needed more money.

And amazing.

One point six million, about one point. Yeah, one point is six one point of million. And they said, you know, no one is going to buy italian express that in seattle or america.

What is stupid? Because you watched IT happen. I ran the store for six months.

and like this final know, so think of a and find a this kip t on the record turned me, yeah, you'll deny IT, that's a fact. So then, you know, go back to the U. S.

And trying to raise money. And I I hit the three titles in seattle, jack nera, herman sarcastic and sam strong, three of the leading citizens of seattle washing at the time. And the three of them have a little bit of an investment together in other things.

And they say, we're onna believe in you. And they take me over the the hump, wow. okay.

And we open three elegant alist, two in seattle, one in vancouver, B. C. And all three are doing well.

All three. But I didn't have enough money to to expand. And needing the money .

to expand is the puzzle. Them for minute business is obviously coffee bars are a much Better business long term that yeah coffee beans, but probably more capital intense for eating.

more staff yeah more labor, yes. But the stores weren't dead expensive open because they were small, less than a one thousand square y and we we understand how to do. And I was working as a buris a would dave, both and and other people keep the cost down. We were behind the counter, and I had no salary, had no salary from most two years. All shit was working in pregnant, our first trial.

So looking increasingly worse from a traditional perspective of leaving a high quality job, moving across the country, then just a couple years later, here you are not making any money again, well, raising millions of dollars to try to start your own business.

The kids worse. Sherry is six, seven months pregnant. She's working her parents visit to you there from ohio. Father asked me.

take a walk. Oh, no.

I was god as my friend's tree story, take a walk and he says. Whatever you're doing, I respect IT, but it's not a job. It's a hobby.

You need to get a job. My daughter pregnant, she's working. You're not. I start crying. I so burst and um I come home with three, four o'clock in the afternoon. Whatever is, I don't say a word, completely shaken by the whole conversation.

Her parents go to bed after dinner and sitting with sharing, I said, I got to takes something to happen that was so angry at her dad and so upset. And he said, there is no way we're turning around where we are going. So SHE is the glue to everything that happened. And I don't know if you ever had a conversation when her father, i'm sure SHE did I know, but the whole thing has been .

over and that would have been a very understandable, responsible, he said. I'm right. I wasn't going to say anything. But, you know, look at our the objective .

ly for selves in your father in last shoes. How could you not feel that way for your daughter at her impending family?

Yeah, and her father was a great guy and I understood, but I was embarrassed and humiliated. How can I not be only because .

that's another dimension here too. This was not twenty twenty four. It's not like be an an entrepreneur was a glorified profession here in a .

business that he clearly did not understand, know a coffee store.

The other interesting thing to point out around this time is for the people who were seeking high risk business investments. You know, this is the late eighties. It's time to look at tech like we're now twelve years in the microsoft apples, four years pass the back in touch .

and trader rates money .

for a coffee house chain with .

names that people couldn't pronounce and serving in a paper cup to go that does not sound .

innovative to me. I don't know why i'm putting my risk capital into .

your yeah you know I would bring investors to the two or three stores and I would make sure there was a fairmont of people in the space. And that's when I started talking about the language of community in the third place. And that's what I saw, italy, the unlock in the epiphany. Of course, he was the romance of a spressly, but IT was the sense of community. And that is what was happening very early on in the two stores in seattle and the one in ancoar.

You can see IT. What would people do after they bought the coffee living? You said.

these are very small places. They would stand up. The two stores didn't have sitting right away. They would stand up at the coffee bar, the window on colombia center and IT was at at eight, nine, a clock in the morning they were hanging and out there.

And then they often late morning, they were coming back and you could just feel the relationship that people were having with one another around human connection. I know that sounds trite, but I I could see IT back then. And as I was talking to people about the investment opportunity, I was pointing out, look, what's happening here is something happening as some magic going on here, not just the coffee. The coffee was to can do IT.

alright. So we're at the pivotal moment starbucks .

and peach gets into the financial travel. And the debt to equity was north of six to one for a company was tiny. Jerry comes to me and says, jay and I, his wife are going to move california and we're going to keep pets and i'm in a sell.

Starbuck and I my heart is pounding as okay. And then he finished. He is, I think you are the person to buy starbucks.

I said, that's fantastic by I. Any money going? IT, I know money.

How much is IT? Three point eight million dollars. Now, in eighty six, eighty seven. Now begin into a story I have told, but not a hundred percent, because I protected the guy, but i'm going to tell IT. I go out to raise money and having a hard time.

So Jerry, game about, I think he gave me ninety days to raise three point eight nine doors around the second month. He is kind to me and said, where are you with all this? And I I think I had about half of IT raised.

I might have received a bit and said I had little more, but I I didn't. I had about half and he lays obama and says how we listen. We're in a tight situation here. And one of your investors has put a cash, all cash offer on the table with no due dilly gent and wants to close right away .

for him to take IT over.

Not you. Yeah, yeah, i'm out. I be out. And I said, who is IT? And he told me, i've said that, and i'm absolutely annales crushed because I didn't have to wear with all.

And I could just envision, as soon as I heard that name I knew is over. I was in a basketball league at the seattle club. I'm playing basketball that night.

My good friend, scotland berg, who's an attorney at a prestige firm in seattle, the gates from, i'm basically crying to him after the game and telling him the story and he says, you've got ta come to the office tomorrow and meet our senior partner and tell the story. Bill gates, see. You, I said, well, tighten.

And the other time this.

there were three titles there, but here is the type.

And there was six, four, seven.

six, four, seven, a mountain of a man, and very imposing. So now I got the morning, put a suit on. I must have been sweating through my shirt.

I was just so anxious, so nervous at the same time, so scared about what's going to happen. I go in there, and I, I, I must been traveling. I was so nervous.

I tell me exactly what I just told them and he enerve man says, how sancto you two questions? Is everything you told me true? I said, mr. Gates, yes. Have you left anything out? no.

And he says, come back in an hour I said, okay ah, to do what he said, i'll see you an hour and so we walk out and walk around. I think we probably went, went to, went to climb the senate, get a coffee and come back and go back with Scott and mr. Gates says, Scott, i'm going to see how alone and sky is now alone. His office, I hardly sit down and he says we're going for a walk and I said where we're going and he says we're going to see the man who was sam strong, 嗯。

one of your investors, one of the .

investors we walk car stress of the rainier tower, the old veneer tower. I think sam had one of the biggest offices we walk in there. And I swear, even though so many years later, I have a perfect vivid account for what took place, sam is sitting behind his desk, and this is what happened because he was five minutes.

Bill gates, remember, he's a huge guy, leans over to the desk with his hands and sands desk and says, I don't know what you are planning, but whatever IT is, it's not gonna happen. wow. And he says, how our child is going to acquire starless coffee company.

And he's never gonna hear from you again. That was in and. We walk out, it's IT. It's the whole thing.

And so did you hear from Jerry that the bid .

had been dropped? We walk out and I say to this problem.

still the money. Yes.

I say, this is h what just happened and he said, you're gonna a starbuck coffee company and my son and I can help you. wow. Hm, and we raise the money.

And that's the story. I never spoke the same strong again. I've never mentioned his name publicly. I never mentioned his name in this book. And I say, IT, respectfully, i'm not trying to.

but that's the story. And then I mean, for anyone who doesn't live in the seattle area, his name is on buildings and community centers. I mean, this revered philanthropist, I actually don't know his business background. How did he become the tighten that he was?

He was involved in real estate and also in those other stores.

How did you get him off the l or al, a capable? I.

wasn't he an investor? Was he investors to the end? Until they get wow, till they get out wow.

Looking back now, what do you think happened? Did he have any legitimate criticisms of you as .

running the company? He, he had a henchman who was his money guy, who figured out we could just take this company. And what do we need our child for? Who is this Young kid? And he and sam had experienced with retail with those auto stores.

I see so we could install some profession management from some other venture.

Yeah, run the playback. But the thing about bill gates is I saw him socially a hundred plus times. He never ever said anything public about what he did. He never took credit for IT so for listeners .

um how was told this elsewhere but you spoke at the microsoft CEO samet. You've recounted the story to the four and five hundred and bill gates, the third you know microsoft founder, comes up to you afterward s and says, um yeah, who was the .

guy but bill did not know the whole story. He didn't know any of that. He did know what his father had done for me. He's hearing IT for the first time.

And this is, you know, twenty fifteen or something. So starbucks.

like you would think .

no someone would wanted, tell their family, I played some significant role in this, but that's not the type guy.

He never ld so different. Me again, unity. incredible. Lesson about humility.

amazing. And so were bill gates senior. And bill gates, the third investors in that three point eight .

million dollars but I don't know if was part .

of but ico soft interesting um so I asked sharing about this when I was preparing for the episode, her recollection was IT was something like one to two weeks before the three months exclusivity for you was gonna up. And so you're basically like this event happens, but now you need to come up with the money and you have this unbelievably short period of time to do so. And so he said that you were calling everybody. You knew he was calling her clients because she's a designer calling her clients, trying to just, you know, find pockets of fifty k here, one hundred k there, anywhere you could yeah to make that happen.

But I had another Angel who helped me by the name of jack Rogers, who became a lifetime friend who passed away couple years ago. He was part of an investor group, and he brought them along.

So the exception goes through.

yeah, August eighty seven yeah, we bought to six starbuck stores. We had the three old elegant ales, and there were two stores under construction at the end of the calendar a year. We had eleven stores and one hundred employees in one hundred and eighty seven .

on the northwest. Yeah, meanwhile, the original starbuck folks, they've now .

gone alive.

When did people open coffee?

Uh, many, many years later so that .

you weren't competing? No way. no. But this is .

one of the great observation. David l. Jon buys the starbuck stores, rebrand ilona CoOperated as the starbucks CoOperation.

yeah. And the original starbucks buys, you know, had owned pets and now needs a new name. So IT rebranding the company pizz.

So pez was actually starbuck. Starbuck was actually build ally. Yes, amazing. Some stats just for listening ers to understand the gravity of the situation. For the initial one point six million that you raise for ill janala, you talk to two hundred and forty two investors, two hundred and seventeen of which said, no. So anybody who's great thing about their fundraising journey, and you know, those are .

rookie numbers, could be a question earlier about what is the years of zero oxe teaching. So the rejection I was going through, the italians turned me down. People in the U.

S. Turn me down. Nobody would believe in the idea. IT was like I was cold calling again at zia's.

The other thing that is worth pointing out is the starbucks company with the six stores when they bought pets, with that six to one debt to equity ratio, basically book themselves into a corner where now they had these big debt service payments to make, there was really no risk they could take or innovation that they could do because the whole business needed to spit out a certain amount of cash every month so they could pay down the debt. And so when you're in that situation, starbucks, in the forty years ahead from this point in the story, has tried all sorts of crazy things to become the business that IT is today. And when you first created this combined company, you were pretty religious about no debt.

no debt. I don't I want any debt again because of my child. Hod.

I was going to ask you, what was that informed by the what you had seen .

with the starving situation? And my parents were always in debt. Bill collectors were always calling.

And h, no, there was. We never had any debt the entire time, never. This is .

pretty good point in time to talk about the business model a little OK. You have related to kind of a stigma, least among potential investors in the original starbucks founders of like the restaurant business. What did the economics of the business of the coffee bar business look like? Yeah, when you bought the starbuck stores.

So what did we buy? We had the stores, we had the brand name and we had a role facility on airport way in piano, the ability to source and rose coffee and put that through the supply chain of a beverage gave us probably at the time, and eighty percent growth merger. Wow.

yeah, that is not the the quote and quote restaurant people imagining.

And I could begin to see, even early on, the a creative nature of frequency where I can see what was going on here is people were not coming for coffee in the morning anymore. They were starting in the morning rush, was getting bigger, the need for more labor. And I could sense that the business that starbuck was in was going to be significantly in the back and the beverage and the romance of the theater. And the third place was the hero. Then take us long to realize we had the beginning of lightning in the bottle.

Even the best, most successful restaurant. You could possibly imagine how many times of their most loyal customers going to come there in a week? Yes.

there. I think there was a time in the northwest when we were really at our peak where the average customers coming eighteen times a month. But SHE rephrase, maybe the most loyal is coming .

eighteen times in one. There's some magic to this idea that it's not a terribly expensive. I think I saw some researchers that said that it's you know sub one percent of someone s house household income and often far less than that. But IT is repeat and IT is hygrometer gin. And so when you say lightning in a bottle, there's a cultural lightning in the bottle. But there's also this like ridiculous business model where the way that shows up as your stores, basically from this point forward for all of starbuck es life, you build a new store and the profits from that store would totally cover the costs within two years and often a year and a half.

But i'll take the economic model that we we applied to every single store we were opening. You know, by the way, I chose the first five hundred locations myself, self. So I was in IT in so many ways, but the the economic model, and worst when we went public, and I need to, and just when when they heard the models, will we never seen a model like that. And the model basically was a sales to investment ratio of two to one and a Operating profit of twenty percent.

So what does that mean? sales.

So of the sales were a million dollars. The investment was five hundred thousand men. Just the sales to and had to be a two to one in year of Operand. The Operating profit north twenty well for cash on cash return was so yeah.

you get that two years or less paper. The retail world had never seen a model. There was no physical store front. They could have this business before this early on.

IT became cleared. Wester customers was also starting to customize the beverage on their own. So we were just greater, was behind the counter.

And somebody would say, can I can you put something else there? Yeah, what do you want? And then so just started the know the average ticket started growing as a result of the customers personalizing and customizing their beverage.

And to be clearly like the era of starbucks in right now, you produce drip coffee and you produce presso and you can put that espresso in froth milk. And that's basically your option. yes. yeah. Like none of this know .

exactly what can take on mistake.

And please see, please.

when l generally was getting ready to open the standard cup in the world, was that terrible, dire form cup that is used in dinner in york city?

Remember that cup? Yeah.

I put boiling water into that cup. Five minutes later, the cup is starting to turn, turn like a golden color because of the .

chemical can, happy, good for your insides .

or the taste of the car. And so we had to find, we had to change the cup. This is such a smart move in retrospect.

But we were just trying to figure out, now no one in amErica that isn't a paper business had any kind of cup or lid that was comparable with what I was trying to do. In fact, they can understand that when I use use the cup that exists. Is that not because IT doesn't taste good and IT doesn't feel right?

right? Why go to the trouble of this perfected roast of these beautiful ly source to replica beans from all these farmers? If you're .

going to put in this .

tyre phone? Yeah, OK feel happy, like when you .

are still with me. So we want to chicago, to the international paper company. And they had a cup, but the cup didn't have a lid, a compare of a lid. And so we found, they found a lid, that beautiful sip lid, which is now ubiquitous noral. How our child should have said to them, I wanted exclusive .

on that way.

Because that lid became the standard for the world. If I would have just understood that the other thing I didn't do is we introduced cafe last day to to america. We didn't trade market. We trade market rapino later on, but we didn't trade market later. This, you know.

wasn't thinking, yeah, you got enough right?

Don't now. I I just I missed .

IT when a the sizing granda. vt. H, I was .

the hidden inter.

Yeah we when did that start?

There was a brilliant, brilliant guy who was the architect of the name starbucks named Terry hecker in seattle. And he's a fantastic design guy. And we just sitting one day and I just talking about the importance of language.

We can get the language right, and we get the cup. We can to get the language. And we just start talking about changing IT from the pedestrian words of small, medium, large, to what IT became, which was short, tall and grand day. He had made fun of IT, but they loved IT.

Was vente not an original vente wouldn't have that .

size when we started. I was later on who who is that?

Somebody wants us.

This is america. Yeah, this is so my one one question on this writing in the customer's name on the cup that .

didn't come from me as the stores got busier and busier, the braces having a hard time with whose cup is that? What are we going to do? And someone to starbucks, I don't know who I was, started writing names on the cup, writing names, and that just became standard. So much of starbucks success came from customers asking for things we weren't doing and starbuck's employees who became partners and ninety one understanding the business Better than me.

And this is all, like to my mind, just starting to create this incredible fly wheel right of you've got this eighty percent gross margin business where the key lever is repeat loyal customer visits. You've got customization that is making customers more loyal and increasing your margin at the same time because you can charge more for IT. You've got the interpersonal relationship with the breast is sure. But also even as you scale in the name on the cup, that's something that scales even as thousands and thousands of people come into the store.

The intimacy with the customer and breast became a very powerful component of the equity of the experience. And i've always thought in so many ways, starbucks became the first experiential brand at scale. We just spend any money on marketing the zero.

There was no money for marking in the cup. The iconic cup became a badge of honor because people were doing something that was new and novel and walking in the street with IT and people, you know, what is that? I was a lot of that kind of stuff. It's a free bilbow.

Yeah well.

listeners this entire episode so far, we have broadly been talking about the concept of customer experience with Howard, and we want to talk about another business that has been innovating on the customer experience, and that's J. P. Morgan payments. When IT comes to digital commerce, J P. Morgan payments is all about personalization and convenience, both for consumers and businesses.

right? So on the consumer side, technology has completely changed expectations for shopping and commerce. Whether it's a sneaker drop or coffee order, customers expect functionality like ordering in an APP but picking up in store, getting real time updates and having our preferences and past orders sink and remembered.

yep. And importantly, we expect our payments to be simple no matter where or how we want to pay, which creates real chAllenges for the business. On the other side of that, to create the magic even with super complex transactions like a marketplace website where you aren't just buying from one single retailer, but I merchant on the other side of that platform, you can imagine there are plenty of technical and regulatory complexities to make that frictionally list across different countries and currencies. But with great embedded finance and innovative commer solutions, you can delight customers without really taking that all on yourself.

Yep, no matter how bigger, smaller company is, you have to enter a complex technology ecosystem that now includes online payments in APP payments, social payments, install payments, digital wallets and much more .

in the future. Oh yes. Like biometric payments, which remarkably, research shows that will reach three billion users and five point eight trillion dollars in value globally by twenty twenty six.

That isn't same. yeah. And just like Howard pioneer many firsts in his industry, J. P. Morgan is doing the same with biometric payments. It's essentially a paid by face solution that allows you to complete transactions seamlessly and securely, removing the need for Carrying a wallet or digging into your bag to pull out your phone.

Yeah if any of you were at the formula one race in miami last month, you may have even seen jp organs biometric payments powering the fast lane checkouts in the merge store. In last year's pilot, literally every single payment was processed in under one second. crazy.

And for businesses, speed of payments is obviously great to shorten lines. To quantify that, biometric payment solutions have shown to decrease check out times by up to thirty five seconds per transaction and increase purchase value by four percent, driving incremental revenue and maximum profitability.

I can totally attest to this. As a customer, I basically only used tap to pay with my watch or phone everywhere I go now, which, you know, just felt like size I A few years ago. But unsurprisingly, that capability for merchants to accept contact less payments is now also being powered by jp. More n infects.

yep. So whether you want a full stack only channel service with biometric payments or streamlined online payments with the latest P. S, jp Morgan commerce solutions work to drive your business forward with the foundation and security of a leading global bank and the innovation of authentick.

the very best of both worlds, that is why we here IT acquired work with J. P. Morgan. You can check them out. J P Morgan dot com slash acquired to learn more and discover more payment solutions powering growth for your business across every industry, from startups to the fortune five hundred.

So in this error, I am, you must just be getting more .

and more excited every day I was out of my mind.

So David Howard sent me there's a ninety eighty eight I can't believe this was filmed, but a one thousand nine eighty eight shareholder and employee meeting where it's great, the whole things like an hour a half, it's all there. And you are using all the same language that you use today back in one thousand nine hundred eighty eight. We focus on our people.

Those people delight the customer. The customer, you know delayed the shareholder that satisfies the shareholder and the conviction that you have. It's like watching a preacher.

You've up there. You've got, I think, eleven stores or something. And you're like you have no idea what we have here. We are on top of something that is going to change. And you don't say the world, amErica and this thing can become america's coffee house.

And IT was interesting because I think the whole room was already scared of your ambition of, you know, going nationwide with this thing that there did not exist. Another example of a national coffee house chain, everything was just these little cities, these these small markets. And there's just a great quote that you have at the end of the meeting that says the company since one thousand nine hundred and seventy one has been growing at a very, very slow pace.

As a result of that, you combine elegantly and starbucks together. We're going to take your six stores that you've built in seventeen years, and we're going to go to twenty six in one year and we're going to go to over one hundred and five years. And that was just sounded bunkers. But that is literally what happened. yes.

What happened .

like th Epace o f g rowth, approximately, you just doubled stores year over year over year. Was there some moment in eighty eight, eighty nine, ninety? Or you just like looking around, realizing we must expand as fast as we possibly can because this concept is the concept the world needs now. And if we don't pull out all the stops, someone else going to do IT.

There were regional competitors who were making noise about doing what we were aspiring to do. And I was very mindful because one of them was franchise, saying that was Gloria jeans at chicago. And at one point, I think they had more stores than we did because of the franchise opportunity. And that's one of reasons why I went to chicago as well in eighty seven.

eighty eight because chicago was the first market outside of seattle and vancouver, right?

Even before I, I didn't.

ha.

how do hour should be credited with so much of the cultural texture and the tapestry of the humanity of the company? Said, I will go to chicago and fix IT. He went chicago and stayed in chicago through the winter.

And we calibrated the mistakes we're making. And of course, he and orn were so instrumental into the loneliness that exists as an entrepreneur and their ability to help me build the company that you know today. Yes, I haven't .

my script here. This is literally labelled the h 2o era。 And for ny, when he was a partner at starbuck, sort of knows I don't talking about on anybody else outside is no idea but there's two Howard, there's hoard shorts.

And Howard, how will we had joined in one thousand nine hundred and eighty nine, or in Smith joined in one thousand ninety? And the way that IT looks to me from the outside, and you tell me if this is right, you were sort of the vision and ambition that would almost like take any ambition that anybody else had and forced them to think bigger and faster. K, and then how would be hard was, in many ways, the soul.

Like he brought the idea of servant leadership. He brought the idea of nothing else matters if we aren't people first. And obviously, that became a huge tenant of starbucks, as we know, IT through the nineties and two thousands. But that seems like I really arrived with him. And then oran is like a numbers god.

No, he was the adult in the room more than the numbers. He had the style. He was quiet. He was a gentlemen. He was the only MBA in the company.

But he was the wise man who, behind the doors, could say to me and how you both fully shit. We're not doing that. 嗯， and we listened more or less.

And is IT true that the three of you had, uh, dinner every monday night .

for a decade. More or less that is true sometimes more than once if we had a crisis or two, which gently we did all we had a disagreement. There is a lot of creative conflict, especially between how and nine um because he had Operate what we were trying to do and at times he thought we were going too fast or head of the resources because he .

was basically training all these Operators that the the sort of management fleet of the company he was building .

the Operating system for us to be able to open the store, design the stores, which. More or less I had done, build them, Operate them, train them and create the system to handle the flow of customers. So he, his job was much harder than mine speaking system.

What did your technology look like at this point?

Don't embarrassing.

I know there no there was no technology. No.

we're running like a oracle system.

We're talking paper was mostly manual.

I mean that eventually when they did get point of sale terminals, they were the space all the way, like two thousand and eight. Yes, yes, like the iphone was out and you guys had the space pointers sale systems sounds right, but obviously .

technology gy not create shadow here .

of the future of the company. yeah.

So let's take IT forward from this eighty, eighty, eighty, the first market after chicago, after you want to write that ship that you decide to enter on the west coast is L. A.

That's the big fight between four and nine.

And only I realized this big fight.

I just felt in my bones. We had to go to I and he said, we're not ready, failed. We're going to send ago, Sandy ago, who's in Sandy eager? No, we're not going to send a one way.

And i've got the location you want to .

play in the majors yeah. So we had a meeting about IT. And IT erupted, erupted into a bad, a bad scene. And one thing let to another, we we did .

got a way i'm shot.

we did to go to and IT was fine.

And we are conviction of.

we have to do, was that the equity of the brain? I could see, I can envision the warm weather and everyone walking around with our cups and the media and the celebrities and just the iconic way. And there was nothing in the market, nothing at all that even appeared to be in the business that we were in.

And anyone who was doing IT was not doing that. Well, we had to go. And even though we maybe were not ready, we just had to do IT and we did.

And I think how I would agree today that that ended up to in a the right decision, N. L. A. The halo on starbucks from seattle, the vancouver and chicago was nothing when we had to L A IT just exploded because celebrities embrace starbucks.

Was there an intentional strategy to um create sort of a luxury brand out of starbucks that like the cool people were Carrying the starbucks that might be a little little expensive, but you can afford IT.

Now there was no I can never remember a discussion about segmentation of the brand. And because we we wanted starbucks to be accessible to all, you'd have a CEO of a company. And the person behind him was a blue color truck driver because everyone could afford the affordable luxury of starts at the time.

When you say affordable luxury, what about IT was luxury.

the quality of coffee, the experience? And what I felt like to walk around with that cup at the time, IT was a badge. IT was like you were in the know.

yeah, what's on a .

badge of luxury was just like something new. So IT became .

a trope for decades now that you know it's oh, it's a six dollar tair and eight dollar a later. Where does that come from in your mind? Is starbuck's premium Prices? Is there actually a starbucks gets to charge a little bit more because the brand has more cash? Or is that just completely a farce or myth?

I think the pricing of starbucks was directly link to the economic model that I eluded to earlier in the rising cost of labor, rent and the festival responsibility that we all felt to achieving the promise we had to our shareholders. And now we're talking about as a public company. There certainly was a fair amount of discussion all the time of the sensitivity of the Price points.

And I think in later years, maybe in last couple years, given the consumer inflationary time, I think it's become a bit of a of a problem. And certainly, i've always said, as starbucks was growing, that the ubiquity of starbucks was an enemy to the company. And the chAllenge was we have to figure out a way to ensure the fact that we are getting smaller as we're getting bigger. And specifically, how do we maintain intimacy and the currency of trust with our customers and our people. That unto itself is kind of the capsule of making sure that the growth doesn't become so in toxic and so seductive that we lose sight of the really secret of the company, which was the internal culture and values, which built a brand and built a religion with the customer.

Here I can tell us about the people. This is such a huge a pillar, their minds of building starbucks.

Again, we started this conversation time about childhood. I really want to build a different kind of company. And and how do I do that in a way that provides respect and dignity? Because I was so in printed with how my my father felt disrespect, the devalued and kind of vilified as a uneducated blue color veteran, working in a series of jobs that he just never made IT and living through the dis function of of a poor family, always under pressure with money.

And so I I wanted to kind of crack the code on how do we create benefits that would, in a way, take the company in direction, knowing ce that had been in before. And so early on, we started talking about exceeding the expectations of our people so they can exceed the expections of the customer. And the first time we actually be able to manifest that was a year before the IPO.

And and that was an incredible struggle because I had on my board to venture capitals, and I was proposing something that had never been done before. And that was I wanted to give equity in a formal, dark option. Every single employee in the company and they decided, what what are you talking about when I doing that? And so the fight became ultimately, we gave fourteen percent of everyone's based pay in the form stock options at the end of the year based on the strike Price.

And I had to do at the year before the IPO had to. So everyone would miss IT. And I think the the the turning point of the cultural company was the day we announce that and we became partners.

And to the credit of craig folli, who was the VC, and Jimmy shannon, they believe that performance would be enhanced, nutricia would be lowered and that the brand would just elevate as a result of that. And that was true, completely true. That was that, that changed starbucks for decades. And along with some other events based on doing the right thing.

I mean, the the health care for part time.

So then, you know, health care, I think twenty five years before the affordable care act, what we did with company health, cheers that also, I grew up in a family with no health insurance, and I saw what happened. So all of that is that origin story of mine of uh and a tragedies is my father passed away and never saw what we're able to do.

Do you want the stats on that initial employee stock grant? So the program was called bean stock listers. That great name however, I was looting to amazing name. So in one thousand nine hundred and eighty eight, the uh, health benefits roll out even to part time employees, including gay couples in domestic partnerships.

I believe the first of its kind that was a thirty three store company at that point a few years later, you would grow to fifty five stars as you did the l panning. And then in one thousand, nine and ninety one, which is the year before the IPO being stock happens, equity in the form of stock options goes out to everyone working twenty plus hours a week. There were thirteen hundred employees at the time and um I believe is the first time in history that part time employees were offered a program like this.

So those initial grants, the strike Price was six dollars per share. Today, as we speak, the share Price is seventy seven dollars. There have been six splits z since then, which comes out to a sixty four x so that initial grant has eight hundred x since even the part time employees and breasts, as were offered the opportunity to by starbuck stock.

You know, a lawyer, I think Scott Greenberg at the time kandel and said, we can do this unless we get approval from the S. C. C, because we're over five .

hundred shareholder. So now we've studied a lots of amazing companies on the show who have lots of of different business models. But one thing just kept striking us as we are preparing for starbucks are the similarities to your neighbor here in the northwestern costco coast, right, and how you treat your people specifically.

That's not by accident.

both from a uh, it's the right thing to do perspective and the amazing business model benefit of the retaining employees, so expensive to train the new employee is not expensive to keep an existing employee. And so you can just pay people more if you keep them for a longer. No, you just basically have extra money lying around is what costco discovered. There are so much about starbucks today with this point that similar to costco, did you ever speak with jeff rotman or jm a gallery, those guys about this concept.

do you?

The answer, I just asked the answer to this.

but I don't know IT.

First, jeff Brown invested in starbucks in the round to buy starbucks. Yeah, in that eighty seven round. That's when I met ched up for the first time.

Jeff became a board member of the early in printing of stomach ks. And clearly a mentor, mentor of mine. And then he introduced me. And cynical.

And so there are many moments of me sitting with jeff and gym, including the huge decision to put starbuck coffee in costco, which there was a revolt inside the halls of stomach, saying, no F N way. wow. And we did IT.

And Jason, jim took me to a parking lot in current lt. When I said, I know what if we can do this? I don't know if I can sell IT inside.

Okay, meet us on a sunday morning, whatever IT was. Look at the cars. These, your customers. In fact, putting starbucks in costco, we were able to measure directly the increase in volume in the stores on the east side as a result of the proximity to the costco store.

You saw being we saw beans in costco. yes. And that brand warehouse of I buy starbuck beans at home meant that that group of people went to .

the stores .

because we introduced thousands of beverage customers, two costco, through the beans. wow. So jeff and jam were instrumental and so many things, and and were so kind to me as a Young kid. Then we went, nation. Why would costa?

So this is a thing that I think many people don't realize now that starbucks is ubiquitous. We sort of forget about this time when IT wasn't and where people had to find some way to. Experience starbucks, you know you only get a few stories in each of these cities.

You are only in a few cities, but there are ways to scale brand awareness and so you can do things like become the official coffee of united airlines or you know, be in, uh, costa s all over for the U. S. You did this a number of times and I feel like the restful world did not catch on to what you were doing was just finding little billboards everywhere where you could put the starbucks logo and and sort of create that ubiquity yeah.

if you thought the costco revolt was high, you can imagine when I said we have an opportunity, united airlines people thought that was absolutely blast me. Don't do that. And again, the exposure and the opportunity to surprise and delights ers in places that they never had anything close to good coffee.

All these things when you consider we didn't spend a dollar, a dollar of marketing dollars effort. And so the the the reputation the company was built basically what amount both inside our stores and exactly right in places that we could surprise the customer. And then we also started putting starbuck coffee in grocery stores, which was the other thing because, remember, we were building a beverage business, right? And we were then going back to our core business in new channels of distribution.

Take the ultimate goal is to capture those margin dollars from selling cups of coffees in the stores that you Operate. But there's all these other things you can do that actually might spend off some profit dollars. But at the very least, it's a break even way to do customer acquisition and brand building in the rest of the world.

I don't know what our cost of customer acquisition was back then, but IT was .

low spend marketing. So united .

airlines was paying you for coffee. I assume I don't know exactly. Yeah, they were down. But yeah, I have to assume the burdens and noble, basically the same thing.

barns and ows a different deal. I met when visio, the founder, Barnes and nobel, very interesting guy, very smart guy, great merchant. And we just started talking. He was from brooklin. I was from brook in, we had a natural kind of relationship. And I said, what do you think about us opening starbuck inside bronze and noble, given you are the ultimate third places, what we are? And IT, just again, became a natural extension of our stores.

We have a fun, a piece of terrier that you may know related to costco. Do you know where jeff baths and jim sana goal met for the first time?

Sounds like in a costco.

not in costco. In the starbucks, in the Barnes and noble in value.

Do not know that .

and that you know, let to so many things have some .

prime among them yeah you know that and I still am friendly with .

jim cinna today. I mean, your company's ryme in so many ways, it's uh, that's not surprising at all. I want to talk a little bit before we get to the IPO here about what the strategy was when you expanded market by market. Did you try to sprinkle a few stores in and see did you try to move into a market with force and be the dominant coffee house chain in that city? Uh, and in particular, IT IT could be worth .

talking about. boston. No, boston are Normally because of the acquisition, but B, R was so strident and not expanding to multiple markets at once.

And he was hundred percent right. And so we didn't. We want to chicago. We want to L. A. And we stayed there for quite a while, went the portland, uh, we weren't ready for new york city in terms of the issues there, but we were very dillion.

gent.

You went to D. C. First to D. C. We were not expanding to multiple markets until we had enough evidence in the existing market that we had success. And we weren't going to compound the growth in another market with problems that we are having in the existing one. And I think that all be her because he was he was that managing all the Operations, boston was very different.

We had a very strong, high quality competitor called the coffee connection in boston with a owner Operator in George hall, who was not unlike alford pete, kind of a gospel of coffee cultural coast. And we knew boston was gonna tough for starbucks to enter. We also, duncan donate there.

But a lot of the good real estate was taken by the coffee function.

right? yes. And so georgia and I never saw I D eye. And but there was clear that if we came to boston in a significant way, we're going impact his business and I think to his credit and he was going to sell.

So coffee connection was the first acquisition, and we had to tread very lightly after the acquisition because of the loyalty. And be careful with the name and and um you solicit Georgeous help and advice. And also we needed him to kind of validate for us what we are trying to do. And ultimately, IT ended up being a very good strategy.

Well, seemed like I think the numbers are as a little bit after IPO, in ninety four, twenty three million dollars, they had twenty three locations and they were doing sixteen million year in revenue. So if you just look at like the purchase.

I think one time sales.

I maybe a little over one time sales. And the original of starbucks, ironically enough, was exactly at one time cells, right, that you bought IT from the the founders for if they had a lock on all the best real estate and they had burned all the capital figuring out, you know, what stores we should be in, what stores we shouldn't be in, and then you just get to like, move into that market for one time sales. You know, one point five, whatever is with all that already figured out that that's pretty amazing.

IT probably seemed high at the time.

Now i'm sure IT well, isn't that the thing about valuations? And they always IT always seemed like in the good old days, you know, everything was under valued. And yeah, okay, let's talk about the IPO.

So IT seems like you knew the moment that you bought starbucks from the founders. Uh, this can be a public company. I thought there was.

No, I I think that there was. I was so much about being a public company that meant something to me personally, that IT validated the company, evaluated me. My own shame and security is a kid.

So that was A, I was, I was a driving force along, certainly the the year before ward. Bean stock is an indication what I was planning. If being stuck was turned down, I, I, I would waited IT. I just I had I had to be done. I think we only had a couple of quarters of profitability, and I think we had about one hundred and thirty stores.

And what was the revenue at the time?

I don't remember exactly. I know what the market cat was. The day went public.

I think you ended up doing ninety three million that year. But here the year before, you was fifty million or something like that. The companies went public when they were smaller back then.

Be you a small cap? I B, O, O.

we and when we got turned down my government sex, you know that he did not know that I couldn't believe that. I mean, I I wanted common to access as a just you, they were there, the peta on the perspectives to have going on sex .

IT would be a very starbuck thing for gold's active. Be the little bit left. Well.

blank. fine. I had a good friend who, who was a senior partner there, who since passed away, I thought I had IT locked. I mean, I was so many things about the new york, everything, and they said, no, you're choose more. Well.

the thing that dan levin told us years ago when we did episode on the starbuck IPO was that you are really only considering smaller banks because I was going to be a smaller I, P. I was considering.

I told you, I no choice, I no choice. And Brown, at the time was not a big fan worth time shorter, which was danley ant thing. And so alex Brown became the lead.

But I also know I had my own eagle attached to this. I had so much fun on the, on the road show. I I was just in my element.

know I was looking up, I was trying to figure out, you know, your public comes at the time, I think there were zero publicly traded coffee companies, not being companies, not retailers, not coffee house chains. I mean, truly unheard of. So when you're going on this road show, I think people, of course, are missed fied. There's like there's literally .

no public companies problem.

Yeah, I think we had to taken through everything. We had the product there. You know we we serve coffee.

I you know, gave the whole show. We had a shot video that was probably in black and White. The cop always was a restaurant, and I was always fighting.

We're not a restaurant or a hybrid retailer. I never referred was as a cafe. IT was always a store. We are a store. We are merchants.

fascinating. I mean, I go there and any many meals sitting in your store.

Yeah, but as we've talking.

that mean the economics.

You are a store. We are a store in retail store.

So how would I going to take us through the IPO? Uh, you know you're the first publicly traded coffee company. You do end up doing ninety three million in revenue that year. Do you? Member the exact Price? Yes.

we were. We went out of seventeen dars and the Price was twenty one. The market up, I think, was two hundred and fifty million dollars.

Can you imagine today, two hundred and fifty million dollars amErica cap company going public. And people consider that a success. I mean, a great for .

your .

employees. How crazy is that? what? Twelve, eighteen months before the next twelve months before six box to share, triple their money. Fantastic first. But and that was when you started calling them partners, right?

When they became nine one. As soon as being stuck with instituted IT was iron's a partner?

Did the lower case title all became .

lower case from inning and respect the listeners you .

when you look up a starbuck employee on linked in always looks like that type when then you realized as a pattern that all employees always yeah put lower case titles. So another interesting thing about the issuing the s one last night. The management team inclusive of you owned eighteen percent, but only nine to ten percent of that was you personally. So the rest of the management team owned just as much as you did as the wonder that doesn't unusually high. Do you think that, that played a role in sort of .

getting people's buying .

and getting them to .

bleed .

starbucks as much as no?

Okay.

interesting. So then from there you opened in washington dc on the east coast. I think that the reason you picked dc was because. Your male older business was strong there. So he sort of had proprietary data to know that was going to be a good coffee city.

I don't know you found that up, but that's accurate.

In one thousand hundred and ninety five, you cross five hundred stores. You had just bought the coffee connection as we talked about in boston, and they had one asset that was perhaps much more valuable than any of the real estate or any of the sales that you would generate from there. They owned the trademark on the word rape ago.

and i'm so smart that I looked at that rapino with the stain. really. I didn't like the name.

I didn't like the beverage. I didn't think IT was appropriate for starbucks. And because I, you know, this saw starbuck as such a purity with with regard to coffee. And I was wrong, dead wrong, obviously putting .

myself in your shoes back then. Now starbuck in franti like it's like a cinner. It's like you can't disentangle them. But yeah, it's very different than completely different.

A blended cold drink. I was the first cold drink we've ever introduced. IT was not a coffee forward beverage when we introduced in in southern california was just IT went crazy.

So what changed your mind? Green, like IT.

I didn't have a choice. I mean, you IT was coffee. You can headed then we had in boston people wanted um and I just went along and .

you ended up like reformulating IT right IT wasn't .

exactly store manager and sanom ica reformatted and SHE was on IT I think Howard be hard loved that people california love that is a fantastic story about rapino because of what we did with IT, not in its existing form of retail, but what we ended up doing with IT in terms of leveraging the brand and distribution. That's a another great story.

Was that your first bottle drink in retail?

yes. So I went to atlantic and pepsi in the same day I went .

to be in coke.

I went to coke. I want to pepsi in the same day. The coke meeting I was.

A meeting lasted less than thirty minutes. I can, I can't remember who I met with. They dismiss me. Uh, didn't view starbuck, didn't understand what I was trying to do and didn't give me much time to even explain IT um and then I went to pipsy and .

this is ninety five fish, did ninety five hundred stories.

your public company but no one but the east coast. Starbuck wasn't really well known so I went to pepsi and purchase new york, met Roger, recall the iconic C. E.

O. And cragg weather up the present of of pepsi. They love the idea. And we started talking about this. Subsequently, crag weather are I and I on a nap in, I swear, show cans, and created a multibillion dollar business for pepsi and starbucks and fifty fifty J V and bottle and crag weather. I deserves all the credit for that. And then crag became a board member of starbucks of, and Roger and I were friends until his death, and serves on the dreamer sport together.

How do you find yourself at coconut si pitching a bottle beverage?

And was there an internal revolt? Because I could imagine people saying this is a bridge too far.

I don't think people knew what I was even doing. I think maybe a few people. I know I I just had the thought we got to put this in a ball. We have to put this in a ball.

And this product, if i'm remembering right, was so successful the instant that IT hit shorts sourced ves, where you had to pull IT all off because you needed to, like, create new manufacturing processes and spend up new factories in order to make enough to .

actually satisfy demand. basically. correct. And we also, early on had a recall where they found glass in the bottle. And pepsi, to its credit, took all the blame for that and fixed IT. But yeah he was from minute one the the power of starbucks and bottle of rapid o and doing something we had never known IT was no bottle of coffee, let alone and um again, just like the cases story and the united airline story, the fly wheel of the awareness and people drinking something they can enjoy at home or at work. Again, I just created another level of velocity on the brand.

I mean that I just talking about between the cups. But then united airlines and costco and the cpg products is going to have been like fifty billion starbucks logos printed.

I'm sure that was maybe more.

I am sure I could estimate IT Better.

So you can see where the, the, the, the the size of the equity of the brand was much bigger than the size of the company. Much bigger, right?

Because at this point you are .

like a hundred store. Yes, then something else happened. And that is we wake up one day and someone says starbucks in a movie, we see what movie you've got. Mail that .

wasn't in coordinated first.

or services never paid for placement. Someone must have approved IT. I I knew nothing about IT and then someone said, you got to see this movie, starbuck, all over what movie time hangs.

You've got mail with migraine. I know nothing about IT. IT was just another thing where was just like a little ferry does on the brand.

Did you know that I was like the good old days where you like this is .

just like we were so in the mud, we were so in IT that we didn't have a we have time to look up and we were just running so fast, so hard when you're growing at this pace, it's almost virtually impossible to catch the growth in terms of the infrastructure.

And so you're constantly back and forth trying to create that fragile baLance between the seductive nature and the toxicity of growth and success and the foundation necessary to support IT and not falling too far behind where you lose IT. But you never are in least we were never a position. We were we were ahead of IT, never.

And so there was a constant push. I think this is we're orange was the wise man in the room to see how we just can't do that now because we don't have the infrastructure of the people, one of the systems. And I be screaming gonna do IT if we don't do, if someone else going to, we got to do IT. And that takes us the international.

We weren't ready for that. Yes, I want pretty a bow on rapper o yes, the year after IT launched in one thousand nine ninety six, faber atos were seven percent of revenue, which I can test to maybe fresh man.

I had my first with whole .

mock rapidly with whip cream and a little chocolate reson top and and now here I am drinking, what are we drinking .

here they are drinking coffee from india.

Yeah and no, no cream. And so, uh, you know, the rapid chino began my journey to the good stuff. Uh, so that's the rapid story.

Uh, ninety six, ninety seven and ninety eight. I mean, this is this is the international story. So I love the japan story. You you've told this to me before, but i'd love you. okay.

And is a couple of things about this. I started taking a couple of trips uh, to europe and asia just to get a sense of what the opportunity would be and how would we do IT. I quickly wrote off europe because coffee was there. I didn't think we could possibly enter an american company. And so we just took.

you feel like a american luxury little goods company coming in and competing with their mess.

Yeah, not gna happen. And so we say we just took IT off the map. And then um we we narrows our focus very quickly on japan.

Japan had a couple of thousand coffee stores named to tour. You walk in there, and I was smoke filled, mostly men, dark, but they were successful. And so I said to the board, we want to go to japan.

The board was incredibly resistant to the idea why you've got all this White space in america. There's no need to do this at the time. And I just said, okay, well, well, and so one thing LED to another. And the board members said, if you're going to if you're considering this higher and outside resource to do a study up, I was live IT about that. You know, are there some consultants .

you could possibly pay to help you know this?

And so we we hired a consult who came back with the, you know, big book presented to the board. I had a preview, and IT basically was, this is a non starter. You can't possibly succeed there.

And in the meeting I was, I could feel my blood gest boiling because with every statement was getting worse, like the economics won't work. No one in japan will ever walk in the story with a cup of coffee. They would lose face. You're no smoking policy, which we had from beginning is a nine starter and you can't afford the economics to rent. Don't go well, that only made me more furious.

like theyve never .

met you and more more intentional. And so we were we kept thinking about this. And then one day we get a hand written letter from a japanese company and the founder, the company, huge sn had A L A restaurant and he was enamored with starbucks.

We sit down with them. We fall in love with them. And um we weren't ready, but we decided we're going to give IT a shot. We go to tokyo, we meet him. We ended up forming A J V.

And you know, the folk law, starbucks, which is not that unrealistic, is the reason we went to japan as an international market is because I had direct flight to see out. That was the extent of our understanding. Now we open up in August.

If you've been to tokyo in August, it's hot, so like ninety five degree temperature and one hundred percent humidity. So like getting out of a new york city subway in the mill of August. As soon as you walk out, you need a shower.

It's going to be a tough opening because of the hot weather. I'm very concerned about us. I get back to my hotel room. I have a message that CNN is covering the opening life, or they got cameras.

Highs are.

I'm so nervous at six am, we get in the car. My time on my neck feels like a nose with driving up to the store in the ginza and is like two hundred people online. And I turned to the translator and I said, did he hire extra? I cut the river.

And a Young man who slept over the night before to be the first person as a cowd student speaks no english. He rushes to the front line and I follow him. No english.

And he says, double tall water, as god is my witness, just like that. And I said, said. How did they know? And japan was a extraordinary success from minute one.

We got two thousand stores. So I was there a lot two months ago. incredible. We have a rosty there.

Why are there people lined up around the block? Why did IT work so well instantly? Was IT a strong the coffee culture .

or the coffee? No IT. Was the iconic reputation and anticipation of something that they had convinced themselves was unique, proprietary, not in tokyo, not in japan that they wanted to have. And that cup, but, by the way, the research that cup was all over tokyo in months, everyone was walking around that come.

And this is nine years after you bought the six stores. IT has turned into this icon in all the events we just covered. Starbucks has already become starbuck that is already this like globally desirable brand, thereby one thousand and ninety six.

I honest, haven't thought about IT that way.

but that's so fast. I mean, to build something .

seem fast to us.

I bet the parallel to the microsoft story are just like, so after that, japan was microsoft s first international market, and I was half their business, and I started in the same way. Bill and paul got a cold call from k. Nic, who is a kind japan who had somehow gone to hold of the basic interpreter, loved IT, and that i'm so passionate about this. I want to bring IT to japan fifty percent of microsoft revenue for the first .

at least five years, and they stayed fifty percent or national .

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Yep, the Operations are mind depending I was looking into IT. They move a huge part of the company and set up a new base of Operations in a new city every week. The whole thing is like a roving circus that needs to build a festival from scratch while keeping consistent infrastructure to ensure that fans and teams have a seamless experience from race to race.

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so japan's ninety six. In ninety seven you cross a thousand stories globally. You're getting your feet under you. You say, okay, international is going to be a thing, uh, in ninety ninety nine, two thousand stores.

two thousand stories. So we had a golf of two thousand and two thousand. We beat IT by year .

ninety ninety. You also open in beijing. What's the calculus on entering china? And did you realize IT could become such a pillar of the company .

like IT is today? I honestly don't think we had any real understanding of we were getting into and we went there with a partner that didn't work out. I should say that we had a theory of the case that any international market that we opened that didn't speak english, we needed a partner.

And so the pan was a partner successful. We entered in a partnership in china early on that was not successful, did not share our values, and we got out and ended up being closed all stores. No, we got out of the partnership bottom M T, and became company oned.

And the we that we legal to do that american owned struggle.

But we struggled in china for almost a decade, lost money. There was tremendous pressure inside the company. Close china until berlin. The wang g maybe the most value person in the company, from my view, really.

yeah, when did blender get involved with .

IT was working SHE start with starbuck in singapore, but he was working in hung on. We were open and hang. And I I saw something in her, was just extraordinary Operator and had a touch with people and I said, and we were dying in china was really in trouble. Would you come to china and run IT and he said, I would do I would consider doing that um but you've got to centralized IT and we couldn't do that right away. This is too much but SHE changed the course of history for strivings in china.

What year was that that he said that he took over the role. I think it's .

about a decade after we open OK.

Well.

I I still there. I asked .

because I want to come back to IT. There's a whole inner, you know between two thousand and and two thousand and eight where you are not the C E. O of the company, right? So in two thousand, I mean, if if if you've been listening this episode, the theme that should be occurring to is, oh my god, basically everything worked.

And I know I didn't feel like that on the inside, but like you read all those investment banking reports and it's like, hey, starbucks, here's all these Price targets for starbucks and here's we think they're going to do and earnings and up they beat IT again. And like, I don't know, thirty forty quarters in a row. It's just like this. Uh, I would say perfectly predictable except you actually kept succeeding the expectations that wasn't predictable.

I did one hundred quarterly conference calls. I see you one hundred ah a lot .

that by that it's a lot of earnings prep because each one of those has two weeks before .

IT of the truth is the majority those were no script which became the league. The layers took over after that many years but no .

script which is your preferred communication style. IT seems like wonder ver, I see you up speaking there. There's no prompters from the heart. So at this point, I don't want to say IT would be incorrect to say starbucks running itself, but like it's in a great place, right? And you step into the role of .

as an executive erman active horn in two thousand yeah, what was your .

I was I .

was I think I was physically and emotional exhausted. Um kids, we're getting older. I'd missed a lot. Just think about all the things we are doing and had so much confidence in warm, so is no problem. And so that's what I did, but I was still engaged, but I was, you know not running IT IT today.

And at this point, its thirty five hundred stores. The company is doing two point two billion in revenue. I kind of feels like, okay, I can I can get some distance. I can do other things in life. It's it's no it's onna work out at some point or in transitions the CEO role to jim Donald, which I assume you are also very involved yeah in working with him um what was that transition .

about or never wanted to be to see you. He's not a front guy um uh in fact, he shy and did never wanted to be on the stage as a CEO so he said i'll do IT for a couple of years but it's always kind of knocking on my doors saying we need to see you and we didn't have anyone internally be heard didn't want IT um and so we did a search.

We met jm Donald, great great guy had all this Operation experience and then certain things started appearing that we would just more hitting our stride, way we usually do. The economic environment was getting tougher, and a things just kind of unveiled itself that we IT wasn't going to work out, by the way. But jim is a great guy like a really good person, but it's just wasn't rich fit. And so how .

long has he been in that role at a CEO? I say .

less than three years, two years you but .

basically the um two thousand and eight happens and so .

the clisson c financial crisis is unfolding and that plus the cracks that we were experiencing. Board meeting, and I don't think the board meeting was set up for me to return, but I just kind of happened in the meeting about, okay, we got all these problems. What are we going to do? Do you want to come back? And yeah.

I want to come back and that never you're intent .

when you step away back in the problems. And so in the Christian vacation of two thousand and seven, I knew I was going to return to genuine. So I was on holiday and I was starting to think through what I was going to do on that, how they, a friend of mine, not, I didn't know he was there, but I was Michael dell ser.

And I must to talk to him almost every day about the transformation of startups. And he was going through a similar thing, a deal almost at the same time. So we had so many things talk about, 嗯， and we were comparing notes in everything. And so, and early two thousand and eight, I spoke to jim, and I came back in two thousand and eight.

And when you came back in two thousand and eight, I mean, this is the whole crux of your book onward. There's an entire books worth of material here. So we're not going to do at all.

But a surface to say just put some numbers on IT. Um the market cap had dropped from thirty billion dollars to less than seven billion dollars. Same source stales the the comparables number.

When you compare the store this quarter last year to this quarter this year to last year, um had dropped growth began to slow. Um and so you come and you have to make these really horrible decisions. You are faced with two terrible options, and you ve got to make the right decisions .

for the business. I first of every rock I turned out was worse than I thought. There were a lot of unperformed ing stores that should have never been opened that we need to close. I think we close a thousand stores and I had a company wide meeting I remember vividly because I start crying and apologized everybody, and we got to close doors.

We got to lay people off and mean, just think about, you know, we were on our a trajectory for all this time and all this certain way only hit a speed bum, but the world, the music was just stopping. A stock Price, I think, broke six dollars. I was so afraid that we were going to get acquired.

But the the only cover we had is that the world was coming and dance and no one had any resources. But I was terrified. I just stood up and apologize and said, we've let you down and promise and do my best but trying to save the company and literally we were trying to save star. Thanks for that bad.

You say that we are trying to save starbucks. And in my head I always thought, what kind of in that bad? This is big, successful company, is fast growing, is profitable. And then I read you were seven months from being insolent.

So we had we have love cash comfort we never had neglected ve comes in the history of starbucks.

So negative I did every single quarter was we never yeah .

never had never had a negative come month in my history of of the company. And I didn't understand how we I understand that such an anomaly.

So um we close all those stores and um then you got to decide, okay, how do we how do we turn IT? What what do we do? And I think going back to your line of questions in the past about the people is of all the things that I could point to that demonstrates what starbucks is, has been and needs to be is the humanity and the people, the company.

The company was built on being a performance driven company through the lens of humanity. That's how was built. And whenever we've lost our way, we've lost our way because people in power didn't understand that equation.

And so I said, we, I need to be in front of every storm manager. I need a meeting with ten thousand people, the big, comfortable. And so in two thousand eight, no american company was traveling.

And so the municipalities were hungry for starbucks to potentially have a meeting at a discount. And so we got, we had detroit come in. We had used to come in, and the north ance came in.

What they presented to us was the need for starbuck to come as a result of country in. And when we heard that, we realized we've got to go to orleans. And in fact, what we're going to do in roland.

So we're onna have one full day of fifty thousand hours of community service in the ninth ward. Next day, we we walk through and we built basically a tutorial on how to restore the business and how people walk through IT. And we had classes, and we had all these things going on.

In the third day was my speech in the basketball kala, seen to ten thousand people about an hour before as really feeling the burden of how important what I was going to say is. In the CFO at the time, who subsequently resigned a week later, wasn't my guy asked me what i'm going, na said, and I said, i'm going to tell the truth. And he says, you can't possibly do that.

You're gonna care the sheet out of them. I went up there and I laid IT out chapter and verse. I think we have seven months left. We are going to be in soba.

I can see what he was very doud about this like you work, got out to wall street.

yeah, what social median exist at that time? But I displaying out, what if that store was the difference between the food on your table and its success? And then I had this economic formula of how many customers IT would take pr store to turn comes around and the number was low.

So like less than ten per day, eleven per day. 嗯。 And so I said, let's just talk about norland. You know, when is new incremental customers it'll take in your store and that was manageable. And tengiz 嗯 哼 anyway break because you could .

actually imagine OK if ten more people walk in the door today and I delight them in a particular way that brings them back tomorrow。 Like we're turning the thing around. We're turning this one store around. And if everybody does that.

the problem when you get this big is you start thinking about large numbers. But if you reduce IT to the lost lowest common dome's, one store, one cup of coffee, one customer, one partner. And what if all of that works? well? We rushed at an orleans like an f title wave, and we never looked back. And less than a year was turned. And you you did crazy.

I think that the tactics involved in the turnaround .

close the stores for what?

Neon onward right for entire afternoon and evening.

because the previous administration had done things that polluted the integrity of coffee to maximum yield. Ld.

what like? what? What does that mean?

Well, let's say you're making a batch of blue coffee. What if that blue coffee was based on a number of answers of coffee? What if you just reduced this a little bit? No one is going to enough um this little things.

little little ten thousand .

little scratches .

of efficiency, then delete the experience.

But that does .

seem like a reflects a misunderstanding of the fundamental business that this is a business about a store with hydras margins based on customer loyalty.

But we were beginning to face headwinds.

And what are the headwinds?

Headwinds were the level of attrition of customers as the financial .

climate spending that six dollars on the late daily habit yeah get harder .

to justify. And we worn .

as good as we were small.

What I said, all the growth covers mistakes, and success breeds uber. And I did.

How could I not? I mean, how could you? Starbuck today is so freaking ubiquitous, which again is one of the things I love about IT.

It's consistent. Anywhere I travel on the world, I can count on that. I can mobile order and pay. There's all these onderstand.

But when you become like government level scale in the world, people assume it's a piece of public infrastructure. I assume employees even must feel that way during some periods of time. I've like we're so big.

you're just but the worst thing that starbucks could have become and the worst thing that starbuck could become is a utility scale. And ubiquity creates complexity. Complexity demands efficiency. But we are in a business where that touch point between the customer and breast has to be protected and has to be elevated. Now then you get stores that are so busy with the breasts candidate, look up, can look up, and then you get mobile order and pay.

which we haven't going to talk about, which is, is a thing I love and do everyday. Andy, personalized is the experience by definition. Yes.

starbucks demands and nurturing. It's it's A A company that has to be nurtured like a Young child. That is an anomaly inconsistent with scale. And you get people coming into the company with different experience, different language. The emerge doesn't quite hit them in the heart or the soul or the conscience of the company.

They they feel like they are doing good job, but it's not the job that's consistent with the integrity and heritage of what the company has been. Metaphorically, let's say that's a giant reservoir. If you're taking a deposit on a consistent basis out of the reservoir and it's getting dry, you Better to stop.

You Better to make sure you're making a deposit. So they're equal and it's baLanced when you get this, that's when the company loses the plot. And if you get this and you're making a lot of money and the stock Price is high, people say it's okay, we're fine and that's falls gold. It's it's a camfed ge because eventually it's going to bite you and ask.

have you ever figured out a way to measure these things in a way that like as long as these numbers that that the numbers are a direct de, our values are good, we can actually put a KPI against them. We know that the core is solid. I haven't been .

smart enough to figure that out. But I mean, I think the interesting thing to me today is that the asian business is Operating at a much higher level of the soft side of starbucks. Then we are in the us. And I can understand your bullin to long .

comment that doesn't answer .

you a question about quantifying IT. But when I am in asia, I see things that are very elevated to the brand, that speak to the financial performance of those markets, which are very high.

Okay, before we get to today, I want to talk about some other things that happened in two thousand and eight. Two thousand and eight was a big year, so two thousand and two thousand and eight, two thousand, there's no way to put the other than a wildly successful turnaround year. Low point in two thousand and eight, profits were three hundred and fifteen million, and by twenty ten, there were nine hundred and forty five million.

I mean, I know how we did that. Well, we just went through a lot of the ways how you did that. There's a couple other things here, one of which is technology. But i'm told there's A A story you have about Steve jobs yeah around this point no.

this story another. And so in why when it's on vacation, i'm talking to Michael dell and .

beny off ycl CD everyday .

and i'm talking about any Michael l introduced me to beni. Didn't know and so hetty good .

why you crew eh?

So get back. And adam Brown was a key person in all this terms of mobile order and pay. Yeah here in .

digital first starbuck .

ah here in digital. I'm trying to make sure I get the sequencing of this right. I think there was a future meeting scheduled for starbucks and apple uh around mobile order pay in other things.

And I next Steve on a phone call. I never met him, was talking to on the phone, and I am telling him what's going on. You should come down and he had a whole thing about walking. He would go out. We can walk around the building.

Heard this is infinite, but the yeah, yeah, yeah.

And so I went down there, basically went down. We took a war, and I just told all my problems, everything has gone on and just stop me. He said, this way you need to do this looks me.

He said, you go back to seattle and you fire everyone on your leadership thing I thought is joking. What do you mean fire? What do you tell him about fire body?

He said, I just told you, if in fire, all those people is extreamly, I mean, my face virals people, so I would do. I said, Steve, I can't fie all people who's going to do the work. He said, I promise you, in six months, maybe nine, they'll all be gone. He was right, except for one, the general council.

They are all gone. Your whole leadership team turned over there.

They are all gone. Wow, that started to study.

Wow, did you talk back and .

tell him I torture? And then, and we were on stage together at an event, and I told them there, there all god as well. You're six months, nine months lameter. Think about all things you .

could have done course.

that's a story.

So well, we're in technology land then. I think today, thirty three percent of starbucks orders are done with mobile order in pace. So obviously this, you know, a huge pillar of of starbucks as IT exist in our world. How did that start?

Yeah, yeah, you've been on pending paper, then you move to dos and now you have the most sensitised ted technology platform of probably .

retailer at the time. So you're talking to a non tech person. So i'm not i'm not focused on anything other than the customer experience.

Ana rotman, to his credit, along with Stephen jelled tz, who was that starts very shortly, came to us with the idea of building a mobile APP. I didn't know what I was. What do you? Honestly, we're in the meeting. I'm trying to figure out what and what do you actually talking, how they going to do that they created an .

apps at this point. I mean, if IT came out in two thousand and nine, which was the first version, the I O S S D K came out in two thousand eight. So it's like you you're one of the very if they are this bring IT to you, it's like months .

after apps exist, well, that they get complete credit for assembling the pieces of all this convincing us to fund IT. And we were often running I don't think any of us, honestly, for myself, really new what they were actually going to create. They explained IT to us.

But I didn't really, I didn't get IT until I saw. And the holy shit overnight, IT was just an unbelievable new vehicle. Now if we fast forward and if you want to do that here and what has become, yeah, IT is the biggest accused heel of .

stomach s really.

and is not even a cold second. And so the mobile APP created unbelievable convenience for our customers. But remember, we are an experiential brand. And so as this thing was growing, there was never an opportunity because IT IT, IT, IT became so seductive for the company. IT also .

created a even Better business model for you ready. IT is more efficient and you get the float. Yeah, we all that .

is true. But but IT was beginning to at a rapid rate, the the third place experience in the sense of community. And then I became IT overflowed to the point where IT disproportionate created an environment in our stores where the mobile APP became the primary vehicle as well as the primary vehicle for the satisfaction.

Because people couldn't get their drink on time, people were confused whether that was their drink, a lot of anxiety. And the thing I remember the most is that we were in chicago at ATM because people wanted to show me the problem. And so everyone is getting off the loop, the train and A A M.

And everyone who ordered on their APP IT says the same thing, your dreams going to be ready in seven minutes and everyone shows up. And of a sudden we've got a mosh pit. And that's not starbucks.

And so the company did not do a good job of anticipating the technological refinements that needed to be put in place to avoid what was happening. And I want to be fair to everyone who managed the company for about a five year period. Remember, I haven't I wasn't involved in the company from basically twenty eighteen to twenty twenty two. Yes, I not, I wasn't not involved.

You stayed C E. O. From two thousand and until twenty seventeen.

Then I left. And um there were no bad people and no one had bad intentions. But the heart in tradition of what i've described, which is so vital to the nurturing, was lost.

But IT must be there is so seductive .

yeah the time we are the stock was that record high. And the company was not investing ahead of the curve and not paying attention to the velocity of the mobile APP. And what IT was becoming until was too late. And the company has that problem today, which they will solve. But it's it's late and also everyone has caught up to we we were the only game in town and in the novelty of that in the unique and especially for our product and everyone pretty much copy to IT is interesting to David keep .

saying a so seductive to put some numbers for listeners wondering, know why is the mobile apps such as an interesting thing, David point out the float. So of course, if you look at starbuck h financial statements right now at any given time, there's about one point eight billion dollars of cash that starbucks has gotten in the form effectively of as an advance from customers that starbucks can use to Operate. It's like this .

amazing grow store expansion, right?

So is the only one. I mean.

everyone you the amazon has the the apple .

insurance actively interest .

free loan from customers and alone, that's not all going to get called at once .

and I will never get called.

right. The breakage. And so there's this benefit of like it's a reasonably predictable amount of cash that comes in that you get to use um you know for your advantage. Uh in terms of velocity, about fourteen billion dollars a year gets loaded on to gift cards. It's unbelievable.

I think that if you actually like look at all of the banks in america, if starbucks wear a bank and you treated the gift cards as deposits, IT would be in the top ten percent by deposits of banks in the united states. That's this like unbelievable business model that happens to exist inside of this experiential business. The powers is this experiential business. But to your point.

you have to keep IT from eating yeah well, cause yeah let's let's just go back not to the economics but the the idea itself. And I think whether we talked about battle for APP, cino the cup, just thread all these things there is there is a common through line. And that is we took a commodity business and we transformed IT into a premium product brand and experience. But when you are disrupting the market, there has to be some governor on the on the disruptive innovation to monitor how was IT being used, how was IT being abused and the era of judgment in the period where this was really kind of, uh, we're really took cold this five year period between two thousand eighteen and two thousand two, the government that exist.

Oh, you feel like IT wasn't really taking hole in that hole.

IT was taking all before. You know i'm not criticising anyone because you know we're all everyone is trying to do a good job. But the the the result is the run, the unbeliever success. He disrupted the experience here.

And now you have stores that are entirely built to just pick up mobile orders.

And so and my view is we should not to come to the mobile APP looking back now and not when you're .

in the moment and you and others in the management team things happen but knowing .

what you .

know now yeah, are there a couple key design decisions? Are things that you would rearchitects differently about the mobile APP experience.

I don't think I would have allowed the mobile APP to be on demand twenty five years day.

I I would .

have slow rolled the the availability of IT and then understood how IT was being used and whether and I was going to disrupt the experience。 But now it's, you know, on demand, whatever you want IT right? And now you can't.

you can't shut IT off, right? I get message every time, but available ninety nine percent of the time.

It's available now.

And because the story, I don't even with the storm that breaks my work, I hate here .

that well, I I went to the procedure store yesterday is go and I would I only agree .

with you in airports. In airports i'm so time constant that i'm like if mobile ders is and working the lines too long have .

been plenty of times where like i'm looking at stores in the radius, i'm i'm traveling, i'm in a new city and it's like, well, i'm only gonna the one that's open for mobile order and pay. I'm not even gonna.

I've got to hit one other, Howard. I know you hate IT, but one other like amazing business model benefit of mobile or in pay if i'm buying six dollar latest over and over again with my VISA card and our box is getting hit with thirty cents every time instead of i'm buying twenty five dollar gift cards, well, that's now three at a four times i'm going to buy my coffee and arbute doesn't have to pay VISA thirty cents or the bank thirty. That's a pretty amazing business unlock. Like you know, i'm aware IT degrades the experience so you have to find ways to deal with that.

But I be more than willing to sacrifice economics to go back to ways to enhancing experience myself. I'm and George all right, listener.

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Yeah, well, we're in beverage land. Starbucks is actually a great example of this. There are so many things that are not proprietary to starbucks.

For the most part, they don't own the real estate that the stores are in. They don't manufactured the bottle beverages like frapper geno s that you see in grocery stores. They use pepsi for that. And they don't make their own cups, nations silver, wear any of that from scratch. They focus on what makes their coffee .

taste Better. Ha, I love that for startups and growth stage companies, accounting is example number one of this idea. Every company needs IT.

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Thanks, pilot.

Moving on from technology of mobile order and pay. There's one more, to my mind, key pillar of the starbucks tapestry, and that's real estate. And maybe this is a good time because I feel like around this area as when people started looking at starbucks and scratching their heads and being like these two starbucks across the corner from one another, these guys must be insane uh talk to us about .

yeah real state um. The the basic idea early on, given the beverages velocity in A M, was to find a corner location in an urban setting where we could physically see pedestrian traffic in a significant way. And so we would go to cities and count this physically, count how many people are walking by, what hours they are walking by. And once we had a model of success, IT became clear to us what we needed. And also once we became aware of code tendencies of certain tenants, that would be interesting to us. Um we also were very in tree with being next to a grocery store early on because of the frequency of which people were buying food anytime we're in an office building where there were three to four thousand people on a building that was a home run and then IT became very clear that there were locations that we never imagine we could be that became wildly successful and just opened up an APP ataturk to us that basically we had opportunities to do things that we're not traditional for a retailer. Now the other thing which we haven't talked about is a decision I made early on, not the franchise, which you haven't surprised.

You have mentioned that, oh, there were franchisees.

but i'll let me explain that if I can, which is all part of the real state strategy. I I never believed that we could build, maintain an elevate the culture of the company, which I viewed as tough thing in a franchise system where we had individual franchises who had their own so culture. And so even though there was pressure early on because of the cost of capital and we didn't have a lot of money to franchise with, we would have no capecchi said no, we resisted that. And I don't think we be having this conversation if starbucks was a french ise system because mcDonald's extraordinary company, but there are a community based product.

What is even saying it's from the beginning he was about elevating yeah mcDonald's great company but yeah, nobody would ever accuse them available.

And that's why I don't want starbucks to become transactional. Coffee is personal, the biggest magic. And what you know, the lightning and the bottles, when you go to japan or shanghai for malaysia and you see the culture. In a way that you just can't believe, like how did that happen that we were able to transfer this to another country? Different language, different culture, different power.

How do we do IT? That's actually quite the fuddy to me because so many food and beverages concepts do not .

transfer geography. I think it's transfer because. Young people around the world, we all want the same thing. They want opportunity, they want to be respected, they want to be there, they want dignity, they want to make their parents proud, they want to work for a company that they believe in. And when I see what we've done around the world unmoved emotionally, because the humanity I speak up is universal, as why when I came back from china, but I said, I just want to say something about china and the us. I know all the rhetorical c and the propaganda about our two countries, but what I see is that we have so much more in common than we have differences and actually be the theme of the world right now.

I want to pick up the thread on china now that we're sort of into the twenty tens, O K. This decades saw a huge ridiculous growth in chin's store opening. So there were five hundred stories in twenty eleven when you are still coming out of that.

The right by twenty seventeen, there were three thousand. Today, there's almost seven thousand. And there was a start that was reported that a new store open in china every fifteen hours in twenty seventeen.

true. Now bring us to that. See that you planted earlier with beLinda being the single most important employee.

china presented the enormity of opportunity with a significant chAllenge of pioneering.

And it's a tea drinking .

and culture and tea and culture. No morning business, people leading rice in the morning. We got real stay wrong.

We got breakfast wrong. But IT was all coming from the control of sea. Did you go in with .

essentially thus, starbucks concept was .

exactly what you see right now. There's no, no different, but they didn't know. The chinese people have hardly knew where coffee was.

There was no mourning traffic. And in the early days of our partner, we didn't see I to ice. We cut them out.

When beLinda came along, we had a world class Operator. Hood succeeded in singapore and honk. She's a strong person who believed that seattle, the way we were organized, was not a formula for success. You can let people in starbucks in seattle designing the breakfast menu, who've never been to china, who think we're going to any flippy muffins.

And so when he said to me, I will do IT if i'm in control of everything so I wanted to centralize china, I report to you it's you and me and john cover who runs international. Take seattle out of the equation. We were fAiling. What choice do they have? Um SHE turned IT SHE single handily built the china business today.

eighteen percent of starbucks revenue with china.

Yeah SHE deserves all the credit, gina. I have been to china almost every quarter during the building years of turning IT with her and all the government meetings to tell the starbuck story. And and then we did things in china disruptively.

A bena decided that he could go to the government and go to an insurance company and come back to stomachs and get government approval for starbucks to do the first, do something had never been done before, and invite health insurance to the parents and grandparents of our partners. cool. So my chinese government was so intriguing, ting down with them, think, can you explain, what do you want to do this?

right? You don't have to.

Yeah right yeah. Because it's the culture of our company. We want to do everything we can to benefit our people, humanity and its universal. But if so, I think important to just um create some guard rails.

So one day in the early stages of starbucks, how our beer comes to my office one day, and that we're small this stage, and he says, we we ve got a terrible situation, said the manager of the yellow trust store on second menus channel. Tom Carry has IT now. AIDS at that time was like leprosy, leprosy.

So he, tom, comes in and he says, I need to resign from starbucks. And he's crying, we have any health insurance? no. And so we covered tom, Carry on from that point on. But IT was those kinds of in printing moments, and there are many like that.

right? I think it's funny. So I have heard that story probably five times because i've consumed an incredible amount of starbuck content over the last couple months.

And i've heard a story about starbucks employees wanting to buy a cow for A B in africa, and stories about flint, michigan, and stories about get the initiative to bring the country together, to try to bring the country together when the government was shut down in twenty thirteen, whatever that was. And I I was getting frustrated watching all these stories because I kept thinking, this is not the answer to why starbucks worked. These are these one of anecdo dotes that are sure they're emblem matic of some broader theme.

But at the end of the day, like the answer to why starbucks works has to be something about the business model. And every time you walk into the store, X, Y, Z happens and here's the economics. But IT turns out there are thousands of these stories and it's the humanity seeing through.

And it's hard for the company to tell the story because everyone just feels like a random one of example. But they're happening in every community, in every part of the country. And I think that is the for me as like a business history. And that's been the thing that jumps out is there's no other company that we've studied that has this sort of obsession with people in humanity the way that, that starbuck says.

and we're not perfect. And so we do make mistakes. And when you when the brand is being shed so brightly.

it's a high standard to be held .

to live in an environment where if you do make a mistake and we are human and we're going to make mistakes, unfortunate, that becomes the thing yeah and it's tough to fight that. Are you open?

I'd love the kind of flash forward. Uh, you were CEO through twenty seventeen and Kevin Johnson took over twenty seventeen to twenty two. You came back for one year as inform CEO and now laxman is the the CEO and has been in the seat for about a year.

Um u came in after a tumut ous covet era and and tried to basically figure out who the successor was going to be. No, patch the ship. Meantime, a lot of stuff has has happened in that last five years, notably with labor unions. I don't want to make this podcast about labor unions, but I do want to ask you, what if you learned from the experience of, you know, having to do a deep dive and that how we got here?

That's a very tough, complex question. I think my personal relationship with the company and how personal IT is to me and the things that we not I but we have tried to do to build a different kind of company. Uh, when the county started moving in a postcode era to a direction that I didn't recognize, very, very hard to understand why starbucks would be under assault or or just being chAllenged this way.

particularly when you had built a reputation on A A very first pattern in the history of being unbelievably kind .

of your people.

Yes, yes. I entered starbucks as the interm C E O when this was already going on, and I think the company made some early mistakes, some of which were covered, related, began no textbook, had to deal with covered issues, health issues, safety issues.

And then I think of underestimated the ground swell of public sentiment and for this movement in amErica and then became vilified for trying to defend the company in a way that I thought was appropriate. Um I think what's lost in all this is the percentage of stores that have been petitioned and the number of people is very small and relationship to the to the whole. And then all of the people in starbucks were depending on me to defend the company.

And trying to do that in a world of this information is very difficult at the time when I was trying to restore the company back to health, clearly mistakes were made, the story is still unfolding, and my hearts with the company in, but I think that I think was lost in the stories. The shareholder is not the primary person is the starbuck partner in the Green April, which is the cloth of the company. And if we exceed the expectations of the cloth of the company in our people share of those and customers are going to win. That's been my whole lives.

and that basically worked for decades and decades IT also seems like when you starbucks has becomes such an institution in our society that leading a small disruptive organization, everyone gives you the credit for all the positives and all the exciting things you're doing and you sort of get a pass on anything that .

didn't work great.

When you're at this scale, everyone expects you to be wildly successful all the time because you always have been. But anything that's misaligned that is where a hundred percent of the focuses.

Well, I think if you take a step back, not from starbucks, but if you say to yourself what company has gotten big in the food business and stayed true to its core purpose and reserve being and and stayed positively inclined to its customers. So I, what are you going to name? And so the odds are getting this big and still being revealed for who you once words very, very difficult.

And I would argue in so many ways, we are Better today than we wear when was smaller that is expected of us. Um but I don't think we get much credit. Maybe we shouldn't maybe this is a our responsibility.

The elements to characteristics that built the starbucks business to culture is compassion, empathy and love. These are not just words, is like real things that are not they're not being taught in business schools and people on the outside view. IT is not true. I'm telling you, the reason we've succeeded is because the underpinning of the company's purpose has been just that. And it's much harder today to to execute that because you you're dealing with cynical m as the first order of defense that you have to overcome, but the responsibility as leaders is to do just that.

All right. I'm going to take us to starbuck today. I'll map that out and give you the stats and then we're going to go into playbook where we basically try to take all the lessons we just learned over the last few hours and figure out wide and starbuck work um and that's such a grand scale that I did so to catch listeners up on the business today, starbucks does thirty six billion dollars in revenue, four point one billion in net income. There are three hundred and eighty thousand employees.

You gave me A I think over and fifty thousand.

four hundred and fifty thousand. I'm just using an old number um and over the lifetime the company has employed over five million yes, five million on that a scale right there. Thirty nine thousand stores globally in eighty six countries, almost half of which are in north america, eighteen percent in china and um about half of those are licensed franchise and half our company Operated. And so well, we're not you you mentioned we don't franchise in the traditional mcDonald's sense. You do these joint ventures and you do this ah this way of entering countries where you don't need to own and Operate the entire story yourself.

then that franchise is in the typical sense. yes. So tell us about when I think we should talk about the yeah the joint venture relationships that we've established and some those back almost thirty years in the middle east, in latin n central america, now in italy, in the eu, in india.

And what does that mean to be your partner?

So every country is different depending on the economics of our country, the political issues. Um some countries have been and eighty twenty starbucks owns eighty. They own twenty summer, fifty fifty summer. Some of the eighty twenty started out as eighty for us, and I bought IT in over the way. IT depends. So but the the key thing is whether it's Alberta torto and land and central amErica mahamane shy in the middle east, the totta group in india, the parasite family and in in italy, they understand the cultural values of starbucks.

And so tactically, what you know you said, it's not a franchise in the traditional way. What are starbucks responsible for and what is the partner responsible for?

Starbucks is responsible for rosing the coffee for all the recipes, which are consistent with starbuck worldwide, a code design of the store where we're designing the store with the J, V. Or the license partner and they control all the Operations.

Hm, and so all of starbucks franchise or licence stores are done in this way where there is a partner in a country. Yes.

there are not no individual license franchises of any kind unless it's certain real state that we can't get um that we want access to like a roadway on a highway in switzerland in something an airports .

are this way right?

Airports are master license with the with the master license a like whoever has IT and like marry out or whoever has IT. I got IT or target that has two thousand starbuck stores .

and those are target Operated. Yes.

I see. And a great partner and brand cornell.

great guy. And it's interesting the basically you know, half of starbucks stores look like the platte onic ideal of coming out of the starbucks H Q. Here is how we imagine the store to be, and half of them are. There are some reason why we alone can do this and need a partner. And you you know about a lifetime.

And I mean, ideally want the customer experience to be the same worldwide regardless of the shape side. The store words located makes sense, which is not always the case.

I admit that. So one market that we haven't talked about that I I want ask you about over in this no, with the playbook is italy. Yeah, yeah.

The whole thing came at him alone, right? And yet for decades, fifty years? No star. Fifty years? No, no star 吧， accidently.

And the belief, at least as I see IT, is they've perfected the coffee house concept. Don't bring a limit in here. Yeah but it's worked. It's working phenomenally well. Why is starts being so well received?

So I know i'm going to be justified what i'm about to say, but it's true the by and large coffee in italy is not as good as IT once was. There are certain coffee companies that have maintained the standard, but by and large, the coffee is not as good i'm going to be killed for. But that's my truth.

If you don't believe you have a Better product.

who does? Yes, but I didn't think we earned the right to go to italy until we were really ready to present ourselves in the best possible way because I knew the knives would be out for us in ways that we could couldn't even possibly imagine, given the the history in the cultural relevance of the space. So in the coffee bar. And so we waited, waited, waited and toll the rosty. And so before we get to italy to explain the rosty for please.

having the first time I went in there, can can I store White eyes?

So there are six rosty starting in seattle, chicago, new york, tokyo, shanghai and malone. The rosty itself is probably the most entrepreneurs ative project that I could recall in my historic troubles. What is the experience we could create? And just absolutely blows people away.

So what do I do as a kid? I've love this movie, and so I invited the most creative people in the company to my house, and I said, was going to watch a movie. Of course, they thought I was nuts, and I turned on really wana.

I was going to say that .

really well with in wilder. And we went to work, starting to design a space now we realized early on.

and this was what, twenty.

thirty seven, fourteen, eight years ago now we realized, economically, this is a tough business model. So what are we trying to do? We're trying to create an experience that is a creative to the brand and significantly elevate starbucks, which is fighting ubiquity all the time, every day.

And so we created the thirty thousand square foot space in seattle, which we opened seven years ago, which is the most dynamic, entertaining vehicle of theater romance, seduction. And we open IT to rave reviews. And we're manufacturing like really want a did. We're manufacturing and roast coffee in the space.

which makes the smell of the amazing .

we opened in. And then over time, we started open a cut more. We get approval from the chinese government to manufacturer in the center of shanghai.

We open up a forty thousand graphs in shanghai. We open up an incredible space in tokyo. We open up in the old crain barl space and north nrg's I have in chicago.

We open up in the me packing business in new york. But the shrine has to be, well, this is the way to go back, and this is the way we open on italy. Now our partner, italy, is the proactive family, fantastic people who are in the real status.

And they are showing me, i'm going back and forth to alone, like all the time, because they ve got real thing. I gotta see IT. I gotto touch IT.

I can smell IT. I keep going back and back and back. No, not the right side. Not the right side. And i'm standing on the corner of of cardio al square.

And I look at this space and I said, what about that? And he says, it's the post office. I can get the post as supports empty.

It's empty. You can get IT. So I said, can I meet the landward? So how is the government. Who's responsible for.

So they arrange a meeting for me and I meet the broker who's involved in this, but it's it's empty space and find out the story is that these government buildings during the financial crisis were sold to private equity. So I said, who's the landlord? I'm not. I can tell you.

You have to tell me, lord private, at the flooding real state said, empty anywhere.

This is going okay IT.

Turns out I know i'm going to get kill the story. You you going have to fix this. Turns out the owner of the space is blackstone.

I do .

IT I .

dal IT.

of .

course. Of course.

Why am I?

I, john, do you realize you own this space? And Carter square used to be a post office? I don't know.

Let me check. no. So john, i'm coming to see you tomorrow. The next we do the deal with john gray.

believable. We OK.

of course, being the .

number two person that so and john, to big fan starbucks, he had previously been in seal for a wedding or baths for something, and he saw the rosters. So you know exactly what I was talking. And so that is how we entered in milan.

Now we have thirty stores. We have thirty traditional stores. Italy.

did they art exist before open?

First, first, the ten thirty stores. We're in the long way in romance. We're in FLorence, adam.

Two, three years later, what do you think the number one beverages, it's a spray. So for starbucks, yes, yes, straight to spread. So a spressly the number of beverage.

wow. So where I don't take the success in italy for granted, we've got to continue to earn IT. But what I most proud of is that we ve respected the italian people and coffee culture for fifty years, and they they embraced us.

So the implication of espress, so to be the number one beverages, is not tourists. It's the italians coming to.

This is a lot of tourists coming into the rosty, but yes.

and that they're choosing to get their press at start bux. Yeah.

yeah, yeah. So I know so you know, ita, i'm going italy, I think next week. But just to me, the the the gratification satisfaction of you know complete full circle for one thousand nine hundred and eighty three is just beyond belief for me. I'm wondering .

another backdrop to the rosy and really throughout all the twenty tens must be third wave coffee. And i'm sure I was on your radar screen.

Yes.

at the same time, IT doesn't seem like it's ever made a .

dent in starbucks. There has always been stories that all these competitors were going to steal business from starbucks. But from one thousand nine hundred and eighty three to all away today, the consumption of especially coffee is still a small amount relative to the macro opportunity.

So all those people have expanded the market with and four starbucks. Now we created an industry that didn't exist, and they have followed us and done really good things. But i'm not threatened by that interest.

So you think third wave coffee brought consumers into the click ult market? Yes, that have then also become starbucks consumers and maybe they won't have been coffee cultural consumers at all. yes.

Um how do you to find third wave coffee actually, Howard ds, by the best person.

Now I mean it's a very uh, intentional independent coffee store that is small enough that they are losing their own coffee or getting coffee from a small property roaster and creating a very unique handcrafted experience um that in many way starbucks can do in scale right right? And so I I take my hat to them, but there's no coffin experience in the world that comes close to the rosty, any of them and to those .

rosters break even? Or are they just like marketing show piece?

Some some are making money and some aren't?

Wow, I mean.

I but I don't I don't i've never viewed .

at that way.

No one you can. You couldn't put a Price on the hundreds of thousands of people that come into this rosty and have an experienced a lifetime. And I took, mr, I know to the rusty, really, I did .

you in milan.

Wow, good night of time with them. I've taken a lot of of retail CEO and iconic business people through the history I bet have who wants to see IT?

wow. What was burner doing in seattle?

I don't know what you doing that, but I want to fear about the time with him in the sun. The sun now runs to fini.

no.

wow. And he, his love of curiosity was a very high. I remember he was, he kept looking at the weather rAiling and the stitching. And I just said, spend a lot of time in the weather.

That was, maybe there's a .

partnership to be done.

Ah okay. So now the the question sort of becomes what are the set of circumstances that had to be true in order for starbucks today to exist? And the one thing we haven't talked about or one of the things is how much of what starbucks has accomplished could have happened if IT wasn't an addictive substance, like it's kind of this incredible thing that it's a legal drug that all the research anyone ever done into caffeine is, by and large, is a neutral, the helpful. And like every other drug that you know at at some point people have enjoyed, whether it's smoking or drinking, as research comes out over time, we find out, shoot, that wasn't good for us. That's not the case for coffee or an amazing thing to get to build a business on this delightful thing, we have to consume every every day because we're .

addicted and it's pretty .

good and gives you superpowers ah. I'd like to believe it's not based on what you are characterizing is an addictive average. I'd like to believe it's the experience that has been created around the enjoyment of the coffee in the experience that happens.

I also think and we haven't really spoke that much about IT, is I can't state enough over the last two decades what customization meant to the company and how customers created a personal beverage well beyond what the menu was. And I don't know any other business yeah in which the the incremental ity of the Price has been dictated by the consumer. The base Price is x, but most people are doing something in excess.

Why I have A A very specific drink that I like. And when I go to coffee shops that are not starbucks, I can get IT because IT feels taboo o to order like, I like an ice oin ogla te with whip cream. And when I got to most coffee house, i'm like, I can ask for a way cream on top. That the starbuck still like, of course, is what we do there.

This is something that I think is translated incredibly well to the mobile APP ah and that no other yeah food company has really the level of customers.

And I think the mobile APP actually added velocity to customization. IT powered conversation now and I think the starbuck parted deserves so much credit because they are dealing with so many different variations of beverages, some of which are making for the first time on the fly hard to do the hard work.

IT has to be A A good number because there's any of its haven't done the math, billions, trillions of combinations of possible drinks. And so IT has to be every single day as a first day. You are making something for the first time.

Yes, I think be the number that people use inside the company is one hundred thousand different variations of beverages that are being made consistently, one hundred thousand different beverages.

This is that a really interesting way to lead in the playbook because on the surface, it's like an obvious question and right, like, yes, it's an addictive substance of, of course, on the other hand, you're in a highly competitive .

market yeah highly selling a commodity and .

the market actually is not just coffee. It's let's stick with this team. It's caffeine broadly.

Well.

cola, cola, the steps there is zero.

Well, not only that, but every food company, every retail food business from mcDonald on yeah took a page at the starbucks, went to school on us, put us press machines in their stores and started doing coffee average, right? That also expanded the market.

And I think the real question is for us here, nobody has built starbucks despite decades in a highly competitive market with whether its third wave or competitors in other geography or domestic competitors or mcDonalds getting into the business or boldness. In maxwell house, there is a unique tapestry that we've been weaving throughout this episode that, you know in hamilton. And almost terms has power here.

Yes, coffee. So here's my second one. In addition to the the um it's addictive but delay .

IT is perceived .

to be virtuous to be a resa where IT is not perceived to be virtuous to flip burgers. And I don't know if that something starbucks created, I don't know if that's something inherent to the product. I don't know if that's because IT has this italian linen age, but there's all these incredible benefits that starbucks and any other coffee house chains get to enjoy because it's respected to do that work. And i'm curious, why do you think that's respected when similar ways of spending your hours in restaurant work isn't?

First, i've never heard IT quite like that, and I think that's a very interesting insight. There is craft and art to the expression of making the beverage. I also think the intimacy of the relationship with the customer is so different and very just know the names of their customers.

They know their dog's name. We have a drive through and I saw a video where the berries a knows the name of the dog and knows IT. It's just the whole thing is just like a magical dance that happens when the cars pull in and over sudden, it's not a transaction.

One of the beauties that we have, we have been able to do is elevate the experience of the drive through, not all the time. So I think your question is stepped in. One is a commoditized environment and the other clearly is not. And the chAllenge for starbucks is continuing to innovate for the breast.

And when you in this category to extend that point, you start from a place of this, a good job, and you can sort of improve the experience for that employees so they can improve the experience for your customers. Where is in other things that are commoditized, they start from a position of I have to do this job. And it's a really tough appeal battle to invest in your people where a starbuck kind of has a tail wind.

But this is a hard job, certainly, and we have to honor the people who are doing IT more so today than ever before.

Yeah, another one that I have is it's funny applies in the face of some of the pitfalls of ubiquity that we were discussing before. The fact that IT is everywhere, uh, almost cheap s the experience to me, starbucks is ubiquity is a massive feature.

The fact that I can go anywhere in the world and get basically my same order, or certains anywhere in amErica and get my same order, I can even do IT from the mobile APP in a way that i'm very familiar with ordering ah it's reliable. It's predictable. Like it's the same reason I bank with chase and I buy apple products.

It's this thing that I just know works everywhere and I never have to, you know, take any risk on. And starbucks didn't have that when I was starting. But IT really feels like it's reach the scale that no one else can really compete with the level of ubiquity.

So ubiquity, earlier on in our conversation, I said ubiquity is an enemy of starbucks and it's an enemy because we can't be defined by our ubiquity. We have to be defined by the one store you come into, not based on the thousands, but that experience you have in the store. yes. So if the ubiquity is driving trust and driving convenience, we have to ensure the fact that we are providing that intimacy in the store and not allowing ubiquity to commoditize the experience that that is the framework of the daily chAllenge of the company.

Frustratingly for those of us who are trying to analytically put this puzzle together, humanity is actually the answer. Scaling humanity is actually the yes. You, along with this this year, the obsessive quality of product, the fact that product isn't just product but experienced the product, is all everything you experiences around consuming the beverage itself.

It's A A bunch of things we've already talked about. You invest in your employees. They take up care the customers whose takes care the shareholders but the shareholders are it's the fact that um oh yeah, we talked about the store cash flow dynamics that you can scale in a really cash efficient way when you know you're paying the stores back in in less than two years.

Every time every store is a billboards that you intentionally picking real estate in these places where you're building familiar with people, they're walking by over and over and over. You're extending the brand by doing united airlines, by going into grocery store. Everything is a billboard. Everything is a billboard.

Yeah that's the like why pay for customer acquisition when you can you know part of in people's hands yeah the third place you know very novel idea at first turned out that was something basically the entire country and then the the world wanted to participate in. Not obvious at first. And it's so easy to think about these things that now we take completely for granted, like starbucks is infrastructure in our society. IT is assumed like when I go to add airport or a city and there's not an easy way to get to a start.

like what is .

backwoods place in my in like it's it's expected. And when you live with something, you know most of your life, you forget that IT was once a crazy idea. I think that's the yeah I think the .

other piece that you didn't just list up up there um that we've covered in depth, this is the cost go like investment in your employees and the people and the reduction of turncock and the in in costco s case, I think it's probably much more so. The reduction of turnover in starbucks is case IT really is like that's A A key viki element to building the humanity, right? Like I don't know the employees at my costco store, what's the step that .

you have on um I could say a number of times on employee ten year star bux verses others in the category.

It's a two x is what I believe that .

employed ten years is two x longer. A turnover is half of what IT is industry wide. Yes, IT makes a huge difference. And you've .

talked about being stuck. You've talked about comprehensive health insurance. When I think about the most important thing we're probably have done in the last twenty years, it's been the unique relationship that we established with arizona state university and its president, Michael crow.

Could we create free college tuition, a four year free college tuition through our there on the state for every single partner, starbucks. And we did IT. And thousands of starbucks partners are engaged and going to school and thousands have graduated. The color achievement plan demonstrates going back to the early years of the speeches I was giving, about what is the responsibility for a four profit company in the war we're living in. And it's not just to make money.

Here's one that we have talked as much about. You were part of the secular trend of gore maid coffee. And i'm curious if you that .

to be a true .

statement or if you're saying, no, we created on the entire wave IT wasn't gonna happen IT wasn't.

Think I don't want to sound argon at all, but I think it's so clear that starbuck created an industry that did not exist. And as a result, tens of thousands of stores have follow in our wake and we created an employment industry that did not exist, not to mention is five million, five million alone, right?

Yeah, that's a lot of people who have gone .

on to do other things after. And and I think one thing that's always been missed as that starbucks has always been a great first job.

So in your mind then, let's say there's a parallel universe where how shells doesn't exist. The year is nineteen ninety ninety five. Is there a nationwide chain not called starbucks with gorm mac coffee taking off in the united states because the conditions were perfect for IT.

I would assume that there would have been a national franchised business that would have occupied the coffee space, but would have been more commoditized.

I don't could do that for.

Is that yeah not I don't think anything would have been executed like, but I think some someone would have showed up, right? The opportunity .

was just right. Too much White space. There was clearly demand there. We were coming off this horrible fuld's in maximus era and there was this growing demand. But that doesn't mean that a company like starbucks s would have been created IT means just in some way that consumer demand would have been satisfied.

We just to remember, our intent was not to build a global business. You know, the first business plan, I said as many times when I was raising money was one hundred stores and I I wasn't raising the money and I didn't couldn't afford to reprint the whole document, whatever that was at the time. And I wide out.

No one giving, you know what that means. I wide out. One hundred seventy five .

was the last .

time you just wait out. Yeah, been a while.

Yeah so you yeah why did that seventy five good.

They feel too ambitious. yeah.

People.

we didn't believe think you're crazy.

but we never we you know, japan was the turning point of thinking we could build an international business but never said any international experience. No one in the home entire company. I mean, in many ways you can say this shouldn't happened.

Yeah okay. So this brings us to the absolute magic of founder LED businesses. When you have a founder at the home, you get all this lead way from shareholders, from employees intake crazy when people know because you're you.

But for you, IT won't exist at all. So run with IT. What are the biggest innovations that have happened at starbucks? Not under hour sult?

What a question i'm pausing not because there hasn't bindy because i'm sure they're husband, but i'm hard pressed to kind of think about what I was.

I don't think you were uh, run in the show when the pumpkin spice latte came out.

Yes, I was you. I had one so I didn't like IT yeah IT does feel like you were .

um obsessed with the purity of the italian coffee bar for a long time and then at some point you were like actually what i'm obsessed with is serving customers in whatever they want from us.

Well, the original store only played italian Opera and had no had no chair.

I mean, that would have scaled as well. I'm recalling my time from rome two years ago. That's literally i'm walking around rome and that's everywhere. Yeah completely different than no.

I think I had to see the light. I had to understand we were not a business to please me, please the customers.

I mean, what is the seventy percent of drinks are now most averages? And IT was when you started, zero percent have for the first decade, IT was zero. You know so to me there's this thread of um at some point shaking off your own opinions and saying we're going to do what the customer wants us to .

do to a degree.

Yeah but I was clearly leading there was a leading question around yeah innovations not under yeah so .

what's the point? What's your it's it's not the resume innovation. I think um there's a burden that the organize has an a reliance on the founder that over time can become unhealthy and not that I don't want succession.

I just I wasn't wasn't really on my mind. And the marketing in the merchant mentality of starbucks was always with me and probably did not allow others who were well intended and could have done good things. We're following and leaning on me, which is not the healthiest thing over the langevin of the company. And I think that has covered up mistakes that, that covered up things. And then I was revealed when I left.

I mean, it's the very things that make the business successful. The founder bets that then at some point in the company, the second act kind of hold IT back. You've this muscle memory as a company of relying on founder maverick acts. At some point, you need to figure out how as a company to not well.

the the other thing about that is most founder LED companies are entrepreneur driven. There's not it's not that they're not following the rules. They're making the rules, especially if you're creating an industry that did not exist.

Founder leaves and matching about me is historically, and companies lose not only the extent of the entrepreneur DNA, but they lose the ability to be on offence. And the worst thing that a company can do, like a sports team and start playing defense because you afraid to fail, that is a disease. none.

Unlike another disease, which is happening to starbucks, which is ubs. The worst thing that could happen to the company is believing that you are incapable of doing anything with succeeding, and you deserve the success. But if you start playing defense and don't have the the offense of mind, it's it's not gonna go well. And I think over time that has happened. Its stomachs.

You've transitioned from being the C. E. O to someone else three different times. If you could go back, let's even just say the first time, if you go back the years one thousand and ninety nine or one thousand nine hundred ninety seven he can start working on some intelligent um what would you do differently to make sure that succession I would have believed born when .

he said I only one do this for a couple years and I convince myself I could just get one to do this five years, maybe ten years and so when he kept saying, you know, I I don't want do this anymore. I just so I was stuck because I was not prepared to look around the room and say, god, I think he could do IT. And if I would have spent maybe a year or two in, but I didn't, I was very, I believe that I can convince north to state longer. And so I think, and also, jim, that was a great guy. But I I think the emersion of an outsider at that time, given we were moving into a crisis now the starbright h crisis.

but the .

final financial crisis, very difficult, 像 it's on me。 I think when I look back and I just did not do a very good job of recognizing the internal talent and cultivating IT, but I want to I want to say one more thing about starbucks, and it's the complexity of IT. We're in multiple businesses.

So we're in the agricultural business. We are buying coffee from thirty producing countries around the world. We are subject to weather and the agricultural issues, some of which are, many of which are not in our control, political, all kinds of stuff.

Second, we are manufacturing A A, A, uh, commodity that is very, very chAllenging because it's coming from thirty producing countries in each coffee. Each coffee from every country has its own proprietary taste profile that has to be roasted differently. And when you're blending in like a vinery, it's art.

And so where were an agricultural buyer? We are manufacturer. We are a retailer.

We are a home sailor. We are managing jv relationships in eighty countries. We have j VS with two behemoth companies, nessy and pepsi. And above all else, we are in the people's managing the behavior, the motivation and the opportunity creation for five, almost five hundred thousand people and where public company, in which the expectations based on our success are have been higher than most.

not to mention your qazi financial .

institution too yeah and we ve got yeah all of that. And and lastly, I think the the personal responsibility of a founder, in my case, who loves this company as much as I love my family. And so it's it's it's a chAllenging, fragile thing on a very personal level.

And you can escape IT. You make your point, you want to go somewhere and get coming, you can escape IT. So it's always around you.

So god, you're bringing this up that really resonates. Just hearing you say that like it's the way we feel about acquired in our show and like to imagine like that easy for us. We have no states lers. We never would expect that this would gae of five hundred thousand people if IT did. I can even imagine the complexity of that, but you will .

also have now that you've achieve this level of success, you, you, you have an expectation that you've gotta keep not reinventing, but you've got to make sure that you, as good as you've been.

no Better.

Yeah, you you got to be Better again. And your success is not an entirely like start much, just isn't. And and when you have success, IT gets harder because the bar keeps getting higher.

Yeah that's just human expectations. I I going into this, I was thinking I had some funny thing occurred to me, which was at some point, why does starbucks need to grow anymore authority everywhere. And of course, like it's a public company.

So IT literally has just has to keep growing, but it's just human expectation that things keep getting Better than they were last year. They should people should just figured out and make IT Better. We all think that about every product and experience .

that .

we have and well, listeners, we were thinking about how to lend this episode. And you in our Normal episodes, we land the plane in some way or come up with the one thing you really, you can leave the episode without thinking about. And I feel like we covered a lot of those in playbook. And so rather than drilling into that, again, we were talking with Howard and he threw out this idea. I I really do have one more thing to say.

Yeah, given this moment that starbucks is in right now, here in summer of twenty twenty four, this felt like the right way to address that .

back to the interview will, however, were at the end here. And A I think listener's may be wondering OK, but what about starbucks today? Yeah and the last few years have seen you know you come back as A M CEO for a year transition to a new CEO.

It's been about a year after that um and it's been A A rough couple years. I mean, part of is coming out of the pandemic. Um I think anybody who tuned in the last earnings call is wondering what's up with the future of this company. Um can you give us a little bit of narration on what brought you back the things you did and where the company is today?

Yeah let me try and go back to when I returned as an interm CEO in April of twenty two, um I was asked by the board to come back to the company and I I said, no, my my life has changed. I have I have no desire to come back. I have no intent to come back, but IT was clear to me as the weeks were going on, that the company was heading into A X central crisis.

And if your listeners take anything away from what we've talked about is my love of the company is so significant that I I changed my life and I came back to the company now when I came back, and I want to be fair and I don't want to criticize anyone, but when I came back, I saw things that really surprised me about the lack of investment over a four, five year period. And also I didn't like the way the stock buybacks were were being used to basically, uh, incase C, P, S, and it's not wait to run the company. So the first, first day day I came back and I knew what the market would do is I I announced that we were suspending stuck by backs and stuck went down.

I expected IT. And I announced that we were going to take basically the money we're using to start buybacks for the year. And I think north of two billion dollars, invest back into the people of starbuck, the partners, which I did.

The most important thing I did though, because i'm not a msa, but I have an instinct about the company. And I know the inner working the company Better than any else. I know the people. And so in in a yearly, despite the underinvestment and the chAllenges, we brought the company back to a much healthier place Operational and certainly, stock Price was significant higher. When I left I think when I came back when I when .

I started IT was in the seventies when I left .

IT was you know but that's an output that investors voting on the performance ah um nevertheless um succession and the board LED a succession process. You have to remember I wasn't on the board for five for long for five years and I resigned when I when I decided to leave the company after a year, despite the board asked me to stay another year, I just said i've i've done my duty. We have to fun in to see you.

And they wanted you to be into M, C, E, O.

For a second. Yeah, they wanted was I was up to me. I just we and so the board LED a search um there was a number of candidates um waxman was chosen.

I met him. I approved his hiring uh but the search committee was driving the process. So now were a year later and I think probably this is fast forward. IT hasn't been a great year for starbucks.

In fairness to axman is a lot of external issues that have contributed to the pressure like on every company, but the company has not executed the way that I think I should have. I go into the stores I know like I I know the company and I think where we're, we're not our best right now. What I write a letter. I didn't write the letter because he had a bad interview on camer .

this sound then yeah.

I wrote the letter because I had written a couple of other letters. Probably the iconic letter I wrote was entitled the soul of the brand. And I was writing that letter because I was I don't get financial information, so I don't have any understanding whether the companies making the court or not.

I was as surprised anyone else to see the dramatic drop in revenue and profit, but I wrote to sold the brand because I could smell instinctively that there were things going on that just did not feel right to me that the shine was off the brand, that partners were maybe not as inspired as they had been. The first thing I want to say is i've made IT clear to the starbucks board how our child, and i've made a clear locks. Harry chills has no desire or intent to return as C.

O. Starbucks, if you want. I'll say that again. But I don't, but I can't ignore what we've just discuss for that last few hours.

If the company is a drift towards mediocre and I hold leadership and the board responsible for that. And my letter was not accused ory. My letter was not predatory.

My letter was steeped in council and advice. Based on forty plus years of experience in building this company. That's the advice in counselling.

Giving you if you wanted take the advice is up to you. If you don't, you're responsible for the outcome. And so I, I, I, I have no Operational role.

I'm not on the board and i'm watching from a far in rooting and cheering for starbucks. And I wrote a letter and hope that, that would be a catalyst, a positive interpretation. And what were your recommendations in the letter?

The one thing is we're not a beverage company serving coffee. We are a coffee company serving people, and we need to be much more coffee forward. And we cannot continue to allow the mobile APP to be a runaway train that is going to a consistently delude the integrity of the experience of stomach ks.

We're not in the transaction. This is we have to we have to execute transactions, but that has to go through the winds of being an experience business and experiences place people are longing for human connection even if they're on a mobile APP. Let's provided. But I also recognized this the complex time. It's difficult, uh but that's your job.

Yeah make sense. Well, to finish the epsom, I can definitely say as a una dashed fan the same way open the episode um root for everyone over no few miles away to pull IT off. Thank you very much.

I think starks is so resilient, uh, so works, has had many, many chAllenges. Uh, I have great faith in the company and the equity, the brand and the people who were the cloth of the company, the Green neighbours.

Howard, thanks here.

Thank you. great. Really 说 的 all right。

All listeners, thank you for being in the journey with us. That was super fun to do with Howard. Remember the huge announcement from the top of the show? 3Frances go in september。

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