Starbucks (with Howard Schultz)

all right we rolling we're rolling we get to see how you guys do this it's kind of interesting we usually have pump up music but I feel pumped up we can do that we got a turntable here oh I I saw your turntable that's beautiful what do you want to hear no we're starting Ben's keeping us on track who got the truth is it you is it you is it who got the truth now is it you is it you is it you sit me down say stra another story on the way got the TR

welcome to season 14 episode 5 of acquired the podcast about great companies and the stories and playbooks behind them I'm Ben Gilbert I'm David renthal and we are your hosts 7 years ago David and I did an episode on the Starbucks IPO just the IPO that episode was a mere 1 hour and 24 minutes and Starbucks is a 90 billion institution in our world that deserves the full acquired treatment what were we thinking well it actually was Amateur hour back then David got to start somewhere well today we have a very special third co-host to

discuss this third place Howard Schultz Howard started working at the small chain of three Starbucks stores in 1982 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 Starbucks fan in this tumultuous 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 stock price plummeted as a result this is on top of a tumultuous pandemic era and some of their stores unionized 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 did 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 it really is incredible one of the very very small number of food and beverage establishments that has 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 they're in over 80 countries with 39,000 stores across the world they're even huge in China a country that didn't consume very much coffee until Starbucks arrived they are a bank scale financial institution as well at any given time Starbucks holds $1.7 billion doar that customers have loaded onto gift cards

but not yet spent so how did they go from one store selling beans not even drinks and cups Just beans 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 Schultz family foundation and you can watch it on YouTube all right well listeners we have a gigantic 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 10th 2024 and we

can't say much you know about every detail of it just yet but it will be the biggest thing that acquired has ever done it'll be in partnership with our good friends at JP 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. fmsf or click the link in the show notes speaking of JP Morgan payments just like how we say every company has a story every company's story is powered by payments and J Morgan payments is a part of so

many companies Journeys from seed to IPO and Beyond and if you want more from David and I you should check out our second show aq2 where we interview Founders investors and experts often as deeper dives into topics that we covered on the main show recent episodes have been awesome with the CEO and the founder of synopsis of starfish space further exploring the space industry and we've got some great stuff in payments coming up next too we do all right so with that this 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 Schultz well I do have to tell you and I think I've told you this off camera for the last almost 10 years every single day starts with a spinach and feder app I assume there are other people like me in the world but it's always an iced almond milk latte with whipped cream and a spinach and feter wrap and so thank you for uh powering approximately third of the cells in my body that's a great start I

also here's another stat that David you've done the math on I have done the math I exported all of my credit card transactions since 2011 of course you did and I wish I had more history than that but that was the oldest I could get I've spent $23,000 at Starbucks since 2011 oh God okay so we want to start with Starbucks 1.0 and listeners May know that there were three founders of Starbucks yes none of which were named Howard Schultz correct so take us back you know in the Starbucks prehistory 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 Zev seagull and Gordon balker and the story that was told to me is that one or both of them were going to school in California in the B area and they became enamored with Pete's Coffee Company uh which Alfred Pete Alfred Pete was you know more than anyone else in the history of coffee in America was the true Pioneer he brought specialy coffee a Raba coffee to Northern California and Jerry Baldwin and Zev became so interested and

intrigued with what pets was doing and given the fact that they were from seatt attle 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 opened in the Pike Place Market in 1971 they were using Pete's Coffee really no one knows that that's new WoW because they they were not roasting coffee so they were bringing coffee from s Francisco to Seattle they were not calling it Pete's they were calling it Starbucks so it was Pete's Coffee and Starbucks yeah yeah again

I wasn't there but that's kind of the folklore after the three founders built that store open that store uh I I get the sense that there was some kind of Fallout between the three of them and Zev seagull eventually left the company that brings us to 1979 1980 around that time when I came to Seattle Washington for the first time so I was working for a Swedish housewares company based in Sweden called Hammer plast that company had a beautiful non-electric coffee maker kind of a thermal unit and we had a big customer in Macy's in

Northern 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 the fact I'd never been to Seattle I was already on the west coast I figured I'd come to Seattle and see what was going on was Starbucks buying it for use in they were selling it in their store now but here's the thing this was a consumer device yeah yeah but you have to remember Starbucks Coffee Company from 1971 until around 8586 only sold

pounds of coffee there was no beverage that's you know we're going to get into the epiphany of that of course and so I walked into the Pike Place store for the first time on a beautiful day just like this the sun was out there was snow on the mountains the clean fresh air and I walked into the Pik Place Market and I walked into the Starbucks 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 Jerry Baldin the founder who

was the CEO at the time and I became interested and intrigued with with what Starbucks was doing and asked if I could meet Jerry one thing led to another I met Jerry Baldwin we really hit it off and we established kind of a vendor customer relationship over a course of a year or so Starbucks had three stores at the 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 New York City Sher and I were dating we not married and

I kind of maneuvered my way into a job working for Starbucks and so Sherry and I drove to Seattle Washington on Labor Day weekend in our old Audi car with a golden retriever and we came here because I was offered the job as the head of marketing for Starbucks when they were getting ready to open their fourth store in 1982 still just selling beans only beans that's the whole yeah still the interest that the company had in me at the time I think was they were really interested in expanding but their their dream or or

the plan at the time was could we expand to Portland Oregon remember so it was a tiny company was 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 I arrived in 1982 as a head of marketing so when you and Sherry arrived drive here like what was the coffee landscape I mean there were these three soon to be four Starbucks Bean stores here in Seattle Alfred Pete was down in the Bay Area but what was Coffee Culture I mean

it was it was like folders in Maxwell House right yeah it was uh it was di minimist it was another coffee company which was Seattle's Best Coffee which was another retailer that was kind of at the same size and scale at Starbucks both equal at the same time but you couldn't get a New York Times in Seattle in 1982 83 it was not no good food to speak of and Starbucks was a true Pioneer where they were educating customer after customer about what good coffee tastes like and the pipe Place Market gave them an interesting

vehicle because of of the tur and so Starbucks actually started establishing a mail order business as a result of all the people who 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 it was some kind of iconic big company I think people came to Seattle is this it this is you know the 8900 Foot Store in Seattle Washington in Pike Place Market this is the Mecca and so tourists would come they would buy a

bag and then they would fill out some kind of information so I'd like to I'd like to have this mailed to me gr mail bus in my city yeah that's what happened and because coffee has a shelf life of basically a week to 10 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 you're shipping

small amounts the logistics costs 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 or five stores was well beyond Portland Oregon and I was always kind of pushing we can do so much more and then the whole thing blew up for me when I went to Italy in 83 okay so before the Italy trip I just want to really contextualize coffee and America I think coffee had

been declining since like 1940 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 specially coffee which was Tiny and I think what you've just described the reason for that is the coffee was terrible it was instant coffee stale coffee and primarily robusta beans which is the lowgrade coffee that Starbucks was never never involved in yeah walk us through the two types of beans there's mainly two types of agricultural coffee grown for commercial use robusta beans low-end coffee primarily

and instant coffee and high-grade arabica coffee but even within the arabica coffee there's significant segments of quality and integrity and Starbucks was has always played from 1971 to today at the highest level and my understanding from our research is that the a market really developed as you say with the instant coffee market and that was kind of a product of World War II right it was like Hey 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

instant product I believe Maxwell House was involved in inventing yeah you're exactly right I mean it was just Fuel and bitter acidic and yeah and that's I think World War II and the gis were kind of the impetus 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 know you know a little bit about the market because you've been a A supplier of theirs but you happen to be a pretty talented salesman from your your time at Xerox

and I want to make a tie here our previous episode was the Microsoft episode or at least Microsoft volume one you were selling word processors made by Xerox tell me what word processors were in the mid 70s so my territory was 42nd to 48th Street from Fifth Avenue to the river and I had to make 50 cold calls physical cold calls a day that was a job the Xerox job taught me incredible amounts about not only selling but humility humility because the rejection every day was so sign significant and you put on your suit and

tie and you go in an office building there's no security at that time just go in and you go from the top floor to the bottom and then there were other people selling other products who are doing the exact same thing and you had to get by the receptionist I was making ,000 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 is like a typewriter no it's a typewriter

no screen it's like a typewriter with like a with a little bit of cash right so you could like exctly fix mistakes for one line right yeah the job at Xerox at the time was like working for Google I mean Xerox and IBM were the two pillars of technology and high-tech companies you told somebody you working at Xerox you had a whole different patina that you were wow that's working for zerox Wow and so you quitting well Hammer plast but you know quitting what seemed like a I hated it stable of pretty good jobs to

drive across the country to provincial little Seattle I mean that's that's nuts I knew after a couple of years if I stayed at Xerox for a a longer period of time I was going to be locked in there but I'll tell you the story that got me to realize I've got to get out of here at the end of the year the performance appraisal at Xerox was basically a scorecard from 1 to five so you'd have a qualitative discussion with your manager and then he would give you a number and when I got a three

I said I you know I just saying to myself I worked all year I just had an performance appr for my manager and I'm a three this is amazing Howard Schultz got a three I got a three I got a three inspiration for all entrepreneur I got a three and as soon as I got the three I swear at that moment I knew I've got to get out of 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 plast job

which was the general manager of the company which was based in Sweden in the US but I was a three do you think having that background at Xerox did that give you a piece of perspective that helped build Starbucks to 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 dysfunctional family because of the the pressure of Money Getting the Xerox opportunity and having some level of 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 crystallized in me and I give Sher so much credit in realizing that together we wanted to 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 it was I certainly didn't know moving to 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 two great jobs and be wildly dissatisfied and not feel like I've made it but rather no there's got to be something more than this there's something deep inside you that caused you to be willing to take 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's that sounds wrong that that I had the appetite for all right so we're getting to the big risk so the year takes over to 1983 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 show called machf uh it's big convention center and a it's a giant houseware show with equipment and all kinds of stuff and I I was staying at a a relatively cheap

hotel in walking distant to the convention center I get out of the hotel I'd never been to Italy before and I am all of a sudden being intercepted with the physical manifestation of one coffee bar after after another in the business that I'm supposed to be in but it wasn't the business that Starbucks was in and I walk in like a normal person that's never seen this before and I am just like I'm in a black and white movie and all of a sudden everything was color and it was so rich I couldn't get enough

of it and I just went from one to the other to the other to the other and I I was just blown away and more or less raced back to America sat down with Jerry and Gordon and said holy we got happening in in Italy is the business that Starbucks has to be in and they had seen it they've been Italy and they said no that's not what we want to 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 in Seattle and it was the sixth Starbucks store and out of about 1,200 square fet I got 100 feet and I designed and opened the coffee bar worked behind the counter as a barista and Starbucks probably had two to 300 customers a day selling hobing coffee we were at 500 in a week with introducing lattes and cappuccino to the an espresso and there's nowhere else no one in Seattle had it well get had it and that was Dave olon and after a few months or six months

or so Jerry said I don't want to repeat this I don't want to do it I don't want to be in the restaurant business yeah what was the objection was it the he he just he stigma of the restaurant business I mean I don't want to speak for Jerry I have so much respect for him but he didn't think it was clean he didn't like it now between 83 and 885 Jerry Baldwin because of his love of pets and his relation with Alfred Pete had an opportunity for Starbucks to acquire Pete's Coffee company and they

did unfortunately Starbucks buys pets and they get into financial trouble and so really at this point it was like their Mentor was retiring this person who was a steward of the industry we operating six points of retail distribution in Seattle for our beans why don't we just buy your effectively the same business but in Northern California keep them SE well it's important to know that between the opening of the fourth and spring coffee bar inside of Starbucks Starbucks number six yeah and Jerry and Gordon saying we don't want to repeat this I was so frustrated

I said I'm going to leave Starbucks and what did 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 in invest in il jali which was the company you started too yeah so before they get into financial trouble Starbucks is an investor I've always thought he did that so I would sell and Market Starbucks 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 didn't have enough money so I go to see two Italian companies I've never told this one is the espresso company FMA and one is the large Italian Coffee Company lavat oh yeah and I asked them both to invest in my idea and both of them turned me down so at this point you're in Italy you're trying to get ideas and investors for what would become IL Al for the first Al and only Starbucks and a couple other people have committed but I didn't have enough money I still I needed more money huh and

you were raising 1.6 million about 1 Point yeah 1.6 1.7 million and they said you know no one is going to buy Italian espresso in Seattle or In America which is stupid because you watched it happen like I ran this store for six months and like it was flying you know yeah they didn't want to do it so they they lva and FMA just get that on the record turned me down okay they'll deny it that's a fact so then I you know go back to the US I'm trying to raise money and I I

hit the three Titans in Seattle Jack beroya Herman sharkowski and Sam strong three of the leading citizens of Seattle Washington at the time and the three of them have a little bit of an investment together and other things and they say we're going to believe in you and they take me over the the hump wow okay and we opened three ill jali's two in Seattle one in Vancouver BC and all three are doing well all three but I didn't have enough money to expand and needing the money to expand just to pause on that for

a minute business-wise obviously coffee bars are a much better business long term than coffee beans but probably more Capital intensive right you need more staff yeah more labor yes but the stores weren't that expensive to open because they were small less than a th000 square fet and we we understood how to do it and I was working as a barista with Dave Olson and other people keep the cost down we were behind the counter and I had no salary I had no salary for almost two years wow while Sher was working and pregnant with our

first child so looking increasingly worse from a traditional perspective of leaving a high quality job moving across the country then just a couple years later you are not making any money again well raising millions of dollars to try to start your own business it gets worse Sherry is sick seven months pregnant she's working her parents visits y they're from Ohio father asked me to take a walk oh no as godess my way is true story take a walk and he says uh 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's pregnant she's working you're not I start crying I bet so embarrassed and uh I come home at 3 4:00 in the afternoon whatever it is I don't say a word completely shaken by the whole conversation her parents go to bed after dinner I'm sitting with Sherry and I said I got to tell you something to happen she was so angry at her dad and so upset and she said there's no way we're turning around we're we are going so she is the glue to everything that's happened and

I don't know if she've ever had a conversation with her father I'm sure she did I don't but the whole thing could have been over and that would have been a very understandable response of Sher said I'm you know I wasn't going to say anything but you know look at our situation objectively here putting ourselves in your father in-law's shoes how could you not feel that way for your daughter and her impending family yeah and and her father was a great guy and uh I understood but I was embarrassed and humiliated How can I not

be mean I guess that's another dimension here too this was not 2024 it's not like being an entrepreneur was a you know glorified profession here in a business that he clearly did not understand you know 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 80s it's time to look at Tech like we're now 12 years into Microsoft apples four years past the Macintosh and I'm I'm trying you're trying to raise money for a coffee house chain with

names that people couldn't pronounce and serving it 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 fair amount 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 in Italy the unlock and the epiphany of course it was the romance of espresso 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 Vancouver you could see it what would people do after they bought the coffee you said these are very small places they would stand up because the two stores didn't have seating right away they would stand up at the coffee bar at the window on Columbia Center and it was at at 8 9:00 in the morning they were hanging out there and then they after 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 it 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 like look what's happening here there's something happening there's some magic going on here it's not just the Cofe coffee the coffee was the conduit all right so we're at the pivotal moment Starbucks and petza gets into financial trouble and the debt to equity was north of 6 to1 for a company was Tiny Jerry comes to me and says

Jane and I his wife are going to move to California and we're gonna keep Pete's and I'm going to sell Starbucks and my heart is pounding I said okay and then he finish it and he says I think you're the person to buy Starbucks I said that's fantastic but I don't have any money you get to give it to me no money how much is it $3.8 million now we're in 86 87 now we get into a story I have told but not 100% because I protected the guy but I'm going to tell it I

go out to raise money I'm having a hard time so Jerry gave me about I think he gave me 99 days to raise $3.8 million around the second month he just came to me and said where are you with all this and I I think I had about half of it raised I might have fibd a bit and said I had a little bit more but I I didn't I had about half and he lays a bomb on me and says Howard listen we're in a tight situation here and one of your investors has put

a cash all cash offer on the table with with no due diligence and wants to close right away for him to take it over not you yeah yeah I'm out I'd be out and I said who is it and he told me I'll save that and I'm absolutely annihilated crushed because I didn't have the wherewithal and I could just Envision as soon as I heard that name I knew was over I was in a basketball league at the Seattle Club I'm playing basketball that night my good friend Scott Greenberg who's an attorney at uh a

Prestige firm in Seattle the gates firm I'm basically crying to him after the game and telling him the story and he says you got to come to the office tomorrow and meet our senior partner and tell him the story Bill Gates Senior I said well a Titan incredible the other we foreshadowed this m episode there were there were three Titans there but here is the Titan and Bill was 6'7 he's 6' s a mountain of a man and very imposing so 9:00 in the morning I put a suit on I must have been sweating through

my shirt I was just so anxious so nervous and at the same time so scared about what's going to happen I go in there and I I I must have been trembling I I I I was is so nervous I tell him exactly what I just told him and he interrupts me and says Howard I'm just going to ask 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 and I said okay to do what he says I'll

see you in an hour and so we walk out and walking around I think we probably went to went to Columbia Center to get a coffee and come back and go back with Scott and Mr Gat says Scott I'm going to see how we're alone and Scott Le now I'm alone in his office I hardly sit down and he says we're going for a walk and I said where are we going and he says we're going to see the man who was Sam strum one of your investors one of the investors we walk across the

street to the reineer tower the Old rineer Tower I think Sam had one of the biggest offices we walk in there and I swear even though it's 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 it was 5 minutes Bill Gates remember remember he's a huge guy leans over to the desk with his hands on Sam's desk and says I don't know what you are planning but whatever it is it's not going to happen wow and he says Howard

Schultz is going to acquire Starbucks coffee company and he's never going to hear from you again that was it and we walk out out that's it that's the whole thing and so did you hear from Jerry that the bid had been dropped we walk out and I say to Mr one little problem you still need the money right yes I say to Mr G what what what just happened and he said you're going to buy Starbucks Coffee Company and my son and I are going to help you wow H and we raised the money and

that's the story I never spoke to Sam strum again I've never mentioned his name publicly I never mentioned his name in his book and I say it respectfully I'm not trying to but that's the story and Sam I mean for 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 Titan that he was he was involved in real estate and also in those auto stores how did you get him off the ill

joural cap table like wasn't he an investor still he he was he and his family were investors to the end until they got out oh wow wow till they got out wow Looking Back Now what do you think happened did he have any legitimate criticisms of you as running the company no he had he had a henchman who was his money guy who figured out we we could just take this company and what do we need Howard Schultz for who is this young kid and he and Sam had experience with retail with those auto stores

I see so he could install some Professional Management from Venture run the Playbook yeah it would have been over but the thing about Bill Gates is I saw him socially a 100 plus times he never ever said anything public about what he did he never took credit for it so for listeners uh Howard's told this elsewhere but you spoke at the Microsoft CEO Summit you recounted the story to you know the Fortune 500 CEOs and um Bill Gates III you know Microsoft founder comes up to you afterwards and says um yeah who was the guy

but Bill did not know the whole story he didn't know any of it he didn't know what his father had done for me he's hearing it for the first time and this is you know 2015 or something so Starbucks like you would think no he didn't know someone would want to tell their family I played some significant role in this but that's not the type of guy he was Bill Gates Senor never told us Soul what he did for me wow again humility incredible lesson about humility it's amazing yeah and so were Bill Gates Senior

and Bill Gates II investors in that 3.8 Million Dollar Round Bill senior was but I don't know if it was part of Bill or yeah Microsoft in interesting um so I asked Sherry about this When I Was preparing for the episode and her recollection was it was something like one to two weeks before the 3month exclusivity for you was going to be 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 she said

that you were calling everybody you knew she was calling her clients cuz she's a designer calling her clients trying to just you know find pockets of 50k here 100K there anywhere you could to make it happen but I had another Angel who helped me by the name of Jack Rogers who became a lifelong friend who passed away a couple years ago he was part of an investor group and he brought them along so the acquisition goes through yeah August of ' 87 yeah we bought the six Starbucks stores we had the three old ill jali

and there were two stores under construction so at the end of the calendar year we had 11 stores and 100 employees in 1987 all in the Northwest yeah meanwhile the original Starbucks folks they've now gone down to cnia went to California when did Pete's open coffee bars uh many many years later ah so they you weren't competing away no but this is one of the great observations David ill joural buys the Starbucks stores rebrands ill joural incorporated as the Starbucks Corporation yeah and the original Starbucks buys you know had owned pets and now needs a

new name so it rebrands the company pets so pets was actually Starbucks Starbucks was actually ilj yes it's amazing some stats just for listeners to understand the gravity of the situation uh for the initial 1.6 million that you raised for ill joural you talked to 242 investors 2117 of which said no so anybody who's griping about their fundraising journey and you know those are rookie numbers get but you asked me a question earlier about what did the years at Xerox teach me so the rejection I was going through the Italians turned me down people the

US turn me down nobody would believe in the idea it was like I was Co calling again at Xerox the other thing that is worth pointing out is the Starbucks company with the six stores when they bought pets with that six to1 debt to equity ratio basically backed 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 40 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 I want any debt again because of my childood I was going to ask you was that informed by the the what you had seen with the Starbucks situation your child no it it's total my childhood my parents were always in debt bill collectors were always

calling and uh no there was we never had any debt the entire time never this is probably a good point in time to talk about the business model a little bit you've alluded to kind of a stigma at least among potential investors and the original Starbucks founders of like the restaurant business what did the economics of the business of the coffee bar business look like when you bought the Starbucks stores so what did we buy we had the stores we had the brand name and we had a roasting facility on Airport Way in Seattle the

ability to source and roast coffee and put that through the supply chain of a beverage gave us probably at the time an 80% gross margin wow yeah that is not the the quote unquote restaurant business that people are imagining and I could begin to see even early on the 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 the morning Rush was getting bigger the need for more labor and I could sense that the business that Starbucks 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 didn't 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 are their most loyal customers going to come there in a week yeah well there were I think there was a time in the Northwest when we were really at our Peak where the average customer was coming 18 times a month I should rephrase it maybe the

most loyal was coming 18 times a month there's some magic to this idea that it's not a terribly expensive item I think I saw some research that said that it's you know sub 1% of someone's house household income and often far less than that but it is repeat and it is high gross margin and so when you say lightning in a bottle there's a cultural lightning in a bottle but there's also this like ridiculous business model where the way it shows up is your stores basically from this point forward for all of Starbucks's life you'd

build a new store and the profits from that store would totally cover the cost within 2 years years and often a year and a half but I'll tell you the economic model that we we applied to every single store we were opening you know by the way I chose the first 500 locations myself so I was in it in so many ways but the the economic model in Wall Street when we went public in '92 now I'm just when they when they heard the model said well we never seen a model like that and the

model basically was a sales to investment ratio of 2:1 and a operating profit of 20% so what does that mean sales to investment ratio so if the sales were a million dollars the investment was 500,000 met just the sales to invest had to be a two to one wow in year one of operation yes and the and and the the operating profit was was north of 20% wow but cash on cast return was so yeah you get that two years or last payback the retail world had never seen a model like this before there was

no physical storefront that could had this business model before this early on it became clear to that customers were also starting to customize the beverage on their own so we were just Bria was behind a counter and somebody would say can I can you put something else in there yeah what do you want and then so that just started you know the average ticket started growing as a result of the customers personalizing and customizing their beverage and to be clear like the era of Starbucks we are in right now you produce drip coffee and you

produce es espresso you can put that espresso in frothed milk and those that's basically your options yeah like none of this you know yeah exactly but can I tell you a mistake I made please please when ilali was getting ready to open the standard cup in the world was that terrible Styrofoam cup that is used in diners in New York City remember that cup yeah I put boiling water into that cup five minutes later the cup is starting to turn like a golden color because of the chemical that can't be good for your insides or

the taste of the cough and so we had to find we had to change the cup this was such a smart move in retrospect but we were just trying to figure out now no one in America that is in the paper business had any kind of cup or lid that was compatible with what I was trying to do in fact they didn't understand it why not just use the cup that exist is no because it doesn't taste good and it doesn't feel right right why go to the trouble of you know this perfected roast of

these beautifully source to rabika beans from all these Farmers if you're going to pour it into styrofoam yeah okay people think you were a hippie like when you were tell these like are you this dismiss me so we went to Chicago to the International Paper company and they had a cup but the cup didn't have a lid a compatible lid and so we found they found a lid that beautiful sip lid which is now ubiquitous in the world Howard SCH should have said to them I want an exclusive on that lid 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 latte to the to America we didn't trademark it you know we trademarked Frappuccino later on but we didn't trademark cafe latte this you know wasn't thinking yeah you got enough right you don't need to get them all right no I I just I missed it when uh the sizing Grande ventti oh that was a the hidden Traina yeah right when did that start there was a brilliant brilliant guy who was the architect of the

name Starbucks named Terry Heckler in Seattle and he's a fantastic design guy and we're just sitting one day and I just talking about the importance of language we got to get the language right we got the cup got to get the language and we just started talking about changing it from The Pedestrian words of small medium large to what it became which was short tall and Grande people made fun of it but they loved it was ventti not an original ventti we didn't have that size when we started that was later on Wow who who

would have thought somebody wanted to this is America yeah this is America so my one more question on this writing the customer's name on the cup that didn't come from me as the stores got busier and busier the bries were having a hard time with whose cup is it what are we going to do and someone at Starbucks I don't know who was started writing names on the cup writing names and it just became standard so much of Starbucks success came from customers asking for things we weren't doing and Starbucks employees who became Partners in

' 91 understanding the business better than me and this is all like you know to my mind just starting to create this incredible flywheel right if you've got this 80% 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 interpers relationship with the Baristas sure but also even as you scale I mean 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 the Bree 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 spend any money on marketing zero there was no money for marketing and 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 there a lot of that kind of stuff it's your free billboard yeah

that people are proud of perfect wow 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 JP Morgan payments when it comes to digital Commerce JP 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 a 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 synced 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 a merchant on the other side of that platform you can imagine there are plenty of Technical and Regulatory complexities to make that frictionless across different countries

and currencies but with with great embedded finance and Innovative Commerce Solutions you can Delight customers without really taking that all on yourself yep no matter how big or small your company is you have to manage a complex technology ecosystem that now includes online payments inapp payments social payments inore payments digital wallets and much more in the future oh yes like biometric payments which remarkably research shows that will reach 3 billion users and $ 5.8 trillion in value globally by 2026 that is insane yep and just like Howard pioneered many firsts in his industry JP Morgan

is doing the same with biometric payments it's essentially a pay byf 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 1 race in Miami last month you may have even seen JP Morgan's biometric payments powering the fast lane checkouts in the merch store in last Year's pilot literally every single payment was processed in under 1 second crazy and for businesses speed of payments is obviously great to shorten lines

to quantify that biometric Payment Solutions have shown to decrease checkout times by up to 35 seconds per transaction and increase purchase value by 4% driving incremental revenue and maximizing profitability I can totally attest to this as a customer I basically only use tap to pay with my watch or phone everywhere I go now which you know just felt like sci-fi a few years ago but unsurprisingly that capability for merchants to accept contactless payments is now also being powered by JP Morgan payments yep so whether you want a full stack Omni Channel service with biometric payments

or streamlined online payments with the latest apis JP Morgans Commerce Solutions work to drive your business forward with the foundation and security of a leading global bank and the innovation of a fintech The Very Best of Both Worlds that is why we here at acquired work with JP Morgan you can check them out JP Morgan / acquired to learn more and discover more Payment Solutions powering growth for your business across every industry from startups to the Fortune 500 so in this era I mean you must just be getting more and more excited every day oh

I was out of my mind so David Howard sent me there's a 1988 I can't believe this was filmed but a 1988 shareholder and employee meeting where it's great the whole thing is like an hour and a half it's it's it's it's all there and you are using all the same language that you use today back in 1988 we focus on our people those people Delight the customer the customer you know Delights the shareholder or then satisfies the shareholder and the conviction that you have it's like watching a preacher you're up there you've got I

think 11 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 MH 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 small markets and there's this great quote that you have at the end

of the meeting that says the company since 1971 has been growing at a very very slow pace as a result of that you combine ilal and Starbucks together we're going to take your six stores that you've built in 17 years and we're going to go to 26 in one year and we're going to go to over a hundred in five years and that must have just sounded Bonkers but that is literally what happened that's what happened like the pace of growth approximately you just doubled stores year over year over year was there some moment in

88 ' 89 90 where you're 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 is 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 franchising and that was Gloria Jeans out of Chicago and at one point I think they had more stores than we did because of the franch Fring opportunity

and that's one of the reasons why I went to Chicago as well in ' 8788 cuz Chicago was the first Market outside of Seattle and Vancouver right even before LA and it didn't work right away huh Howard bear 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 to Chicago and stayed in Chicago through the winter and re-calibrated the mistakes we were making and of course he and Orin were so instrumental into the loneliness that exists

as a entrepreneur and their ability to help me build the company that you know today yeah so I have in my script here this is literally labeled the uh H2O era and yeah for anyone who was a partner at Starbucks sort of knows what I'm talking about and anybody else outside has no idea but there's two Howards there's Howard Schultz and Howard bear and Howard beard joined in 1989 Orin Smith joined in 1990 and the way that it looks to me from the outside and you can 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 okay and then Howard bear 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 knew it through the '90s and 2000s but that seems like it really arrived with him and then Orin 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 gentleman he was the only MBA in the company but he was the wise man who behind a doors could say to me and Howard you're both full of we're not doing that H 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 generally we did or we had a disagreement there's a lot

of creative conflict especially between Howard and I because he had a operate what we were trying to do and at times he thought we were growing too fast or head of the resources H because he was basically training all these operators the the the sort of management Fleet of the company yeah 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 had his job

was much harder than mine speaking of system what did your technology look like at this point oh don't embarrass him no we had was no there was no technology no were you running like a Oracle system not at that time no wow no we're talking paper yeah it was mostly manual wow yeah I mean the eventually when they did get point of sale terminals they were dos based all the way through like 2008 right yes yes like the iPhone was out and you guys had dos based Point of Sales Systems sounds right but obviously technology

was not the secret I'm foreshadowing here of the future of the company yeah so let's take it forward from this 88 89 90 the first market after Chicago after you sort of wred that ship that you decide to enter on the west coast is La that's the big fight between Howard and I I don't think I realize it was a big fight I just felt in my bones we had to go to to LA and and he said we're not ready for La we're going to San Diego I said San Diego Tri who's in San

Diego no we're not going to San Diego we're going to La and I've got the location you want to play in the MJ yeah so we had a meeting about it and it it it erupted erupted into a bad a bad scene and uh one thing led to another we we did go to La I'm shocked we did go to La it was fine and your conviction of we have to go to La was that for I the equity of the brand I could see I could 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 it 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 Howard would agree today that that ended up being a the right decision and La the Halo on Starbucks from Seattle the Vancouver and Chicago was nothing when we went

to LA it just exploded because celebrities Embrace Starbucks was there an intentional strategy to uh create sort of a luxury brand out of Starbucks that like the cool people were carrying the Starbucks cup it might be a little bit expensive but you can afford it no there was no I can never remember a discussion about segmentation of the brand because we we wanted Starbucks to be accessible to all you'd have a CEO of a company and the person behind them was a bluecollar truck driver because everyone could afford the affordable luxury of Starbucks at the

time when you say affordable luxury what about it was luxury the quality of the coffee MH The Experience MH and what it felt like to walk around with that cup at the time it was a badge it was like you were in the know yeah it wasn't a badge of luxury it was just like something new so it became a Trope for decades now that you know it's oh it's a $6 latte or an $8 latte or 10 where does that come from in your mind is Starbucks premium priced is there actually a Starbucks gets

to charge a little bit more because the brand has more cache or is that just completely a farce or myth I think the pricing of Starbucks was directly linked to the economic model that I alluded to earlier and the rising cost of Labor rent and the fiduciary 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 about the sensitiv ity of the price points and I think in later years maybe in the

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 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 intoxicating

and so seductive that we lose sight of the really secret of the company which was the internal culture and values which built the brand and built a relationship with the customer yeah can you tell us about the people this is such a huge yeah pillar to our minds of building Starbucks again we started this conversation talking 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 imprinted with how my my father felt disrespected valued and

kind of vilified as a uneducated Blue Collar veteran working in a series of jobs that he just never made it and living through the dysfunction 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 uh take the company in Direction no one's ever been in before and so early on we started talking about exceeding the expectations of our people so they can exceed the expectations of the customer and the first time we actually were

able to manifest that was a year before the IPO and and that was an incredible struggle because I had on my board two Venture capitalists and I was proposing something that had never been done before and that was I wanted to give equity in a form of stock options to every single employee in the company and they just said what what are you talking about we're not doing that and so the fight became ultimately we gave 14% of everyone's base pay in the form of stock options at the end of the year based on the

strike price and I had to do it the year before the IPO had to so everyone wouldn't miss it and I think the the the turning point of the culture of the company was the day we announced that and we became partners and to the credit of Craig Foley who was the VC and Jamie Shannon they believed that performance would be enhanced attrition would be lowered and that the brand would just Elevate as a result of that and it 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 healthcare for parttime workers so then you know Healthcare I think 25 years before the Affordable Care Act what we did with company for health insurance and that also I grew up in a family with no health insurance and I saw what happened so all of that is that Argin story of mine of uh and the tragedy 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 I love to hear it so

the program was called beanock listeners that uh great name Howard was alluding to amazing name so in 1988 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 33 store company at that point a few years later you had grown to 55 stores you did the LA expansion and then in 1991 which is the year before the IPO bean stock happens equity in the form of stock options goes out to everyone working 20 plus hours a week there were 1,300

employees at the time and uh I believe it was the first time in history that part-time employees were offered a program like this so those initial grants the strike price was $6 per share today as we speak the share price is $77 but there have been six splits since then which comes out to a 64x so that initial Grant has 800x since even the part-time employees and Bree were offered the opportunity to buy Starbucks stock yeah a lawyer I think Scott Greenberg at the time came to me and said we can't do this unless we

get approval from the SEC because we were over 500 shareholders so you know we've studied um lots of amazing companies on this show who have lots and lots of different business models but one thing that just kept striking us as we were preparing for Starbucks are the similarities to your neighbor here in the Northwest in Costco Costco 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 I mean it's so expensive to train

a new employee it's not expensive to keep an existing employee and so you can just pay people more if you keep them for longer yeah you know you just basically have extra money lying around is what what uh Costco discovered there's so much about Starbucks to David's Point that's similar to Costco did you ever speak with Jeff propman or Jim senagal or any of those guys about this concept do you know the answer to that we don't know assume the answer to this but I don't know it first Jeff Brockman invested in Starbucks in the

round to buy Starbucks no way yeah he in that 87 round that's when I met Jeff for the first time Jeff became a board member of the early imprinting of starucks andle clearly a mentor mentor of mine and then he introduced me to Jim synagog and so there were many moments of me sitting with Jeff and Jim including the huge decision to put Starbucks Coffee in Costco which there was a Revolt inside the halls of starucks saying no effing way wow and we did it and Jeff and Jim took me to a par paring lot

in Kirkland when I said I don't know if we can do this I don't know if I can sell it inside I don't know okay meet us on a Sunday morning whatever it was look at the cars these are 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 sold beans we sold beans in Costco and that brand awareness of I buy Starbucks beans at home meant that that group of

people went to the stores because we introduced thousands of Beverage customers to Costco through the beans wow so Jeff and Jim were instrumental in so many things and and were so kind to me as a young kid then we went Nationwide with Costco so this is a thing 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 stores in each of these cities you're 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 Costco all over the US you did this a number of times and I feel like the rest of the 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

for United Airlines people thought that was absolutely blasphemy don't do that and again the exposure and the opportunity to surprise and Delight customers 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 ever and so the the the reputation of the company was built basically Word of Mouth both inside our stores and exactly right in places that we could surprise the customer and then we also started putting Starbucks 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 it's like 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 spit 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

well you also you weren't spending any money on marketing but United Airlines was paying you for coffee I assume I don't know exactly how went down but yeah they're um I have to assume the Barnes & Noble bar basically the same thing Barnes & Noble is a different deal I met Len Rio the founder of Barnes & Noble very interesting guy very smart guy great Merchant and we just started talking he was from Brooklyn I was from Brooklyn we had a natural kind of relationship and I said what do you think about us opening Starbucks

inside Barnes & Noble given you are the ultimate third place is what we are and it just again became a natural extension of our stores we have a fun uh piece of trivia that you may know uh related to Costco do you know where Jeff Bezos and Jim Sagal met for the first time sounds like in a Costco not in a Costco in the Starbucks in the Barnes & Noble in bellw did not know that and that you know led to so many things Amazon Prime among them yeah not know that and I still am

friendly with Jim Sagal today I mean your companies rhyme in so many ways it's it's uh that's not surprising at all I want to talk a little bit um 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 well Boston's an anomaly because of the acquisition but

bear was so strident in not expanding to multiple markets at once and he was 100% right and so we didn't we went to Chicago went to LA and we stayed there for quite a while went to Portland uh we weren't ready for New York City in terms of the issues there and but we were very diligent you went to DC First Years 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're

having in the existing one and I think that's all be her because he was he was the managing all the operations Boston was very different we had a very strong highquality competitor called The Coffee Connection in Boston with a owner operator in George how who was not unlike Alfred Pete kind of a gospel of Coffee Culture on the east coast and we knew Boston was going to be tough for Starbucks to enter we also had Dunkin Donuts there like a lot of the good real estate was taken by the coffee prodction right yeah and so

George and I never saw eye to eye and but it was clear that if we came to Boston in a sign ific way we were going to impact his business and uh I think to his credit he was willing to sell so Coffee Connection was the first acquisition and we we had to tread very lightly after the acquisition because of the loyalty and be careful with the name and and uh you know solicit George's help and advice and also we needed him to kind of validate for us what we were trying to do and ultimately

it ended up being a very good strategy well it seemed like I think the numbers are it was uh it's a little bit after IPO in 94 $23 million they had 23 locations and they were doing 16 million a year in Revenue so if you just look at like the purchase I think it was onetime sales I think or maybe a little over one time sales and the original Starbucks ironically enough was exactly at onetime sales right that's what you bought it from the the founders for if they had the 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 onetime sales you know 1.5 whatever it is uh with all that already figured out that's that's pretty amazing it probably seemed high at the time though I'm sure it did well isn't that the thing about valuations and uh they they always it always seemed like in the good old days you know everything was undervalued 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 is going to be a public company I thought so there was no I I think it there was so much about being a public company that meant something to me personally that it validated the company it validated me my own shame insecurity as a kid so that was a I was I was a driving force all along certainly the the year before with beanock is an indication what I was planning if beanock was turned down I I

would have I I would have waited m I just had to that had to be done I think we only had a couple of quarters of profitability and I think we had about 130 stores and what was the revenue at the time oh I don't remember exactly I know what the market cap was the day we went public I think it you you ended up doing 93 million that year but the the year before you know was 50 million or something like that like you companies went public when they were smaller back then but well

you were a small cap IPO yeah we were and you know we got turned down by Goldman Sachs you know that I did not know that I couldn't believe it I mean I just I wanted Goldman Sachs as as the I just you know they were the the patina on the prospectus to have Goldman Sachs it would be a very Starbucks thing for Goldman Sachs to be the the lead left well uh 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 it was just so many things about it New York everything thing and they said no you're too small well the thing that Dan Levitan told us years ago when we did a an episode on the Starbucks IPO was that uh you were really only considering smaller Banks because it was going to be a smaller IPO well I was considering it because gold they told you had no choice had no choice and Brockman at the time was not a big fan of wor time schroer which was Dan levitan's thing and so Alex Brown became

the lead but I also you know I had my own ego attached to this I had so much fun on the you know on the road show I I was just in my element you know I was looking up I was trying to figure out you know your public comps at the time I think there were zero publicly traded coffee companies not Bean 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 mystified there's like there's literally no public companies

like yours you know investor education problem right yeah I think we had to take them through everything we had the product there you know we we served coffee I you know gave him the whole show we had a short video that was probably in black and white the comp always was a restaurant and I was always fighting we're not a restaurant we're a hybrid retailer I never referred to us as a cafe it was always a store we are a store we are Merchants fascinating I mean I go there and eat many many meals sitting

in your store yeah but as we've been talking about the economics you were a store we were a store we were a retail store so Howard I'm going to take us through the IPO uh you know you're the first publicly traded Coffee Company uh you do end up doing 93 million in in Revenue that year do you remember the the exact price IP at yes I me we were we went out at $17 and the price was 21 the market cap I think was $250 million can you imagine today a $250 million market cap company

going public and people considering that a success I mean this is a great at the time for your employees how crazy is that what 12 18 months before I guess 12 months before six bucks a share they tripled their money yeah fantastic For What and that was when you started calling them Partners right when they became 91 as soon as be was instituted it was everyone was a partner and is that when you did the lowercase when titles all became low everyone was lower case from the beginning oh out of respect everyone's lower case listeners

when you um when you look up a Starbucks employee on LinkedIn it always looks like is that is that a typo and then you realize there's a pattern all employees always put lowercase titles so another interesting thing about the uh I was reading the S1 last night the management team inclusive of you owned 18% but only 9 to 10% of that was you personally so the rest of the management team owned just as much as you did as the founder yeah that does feel unusually high do you think that that played a role in sort

of getting people's buyin and getting them to bleed Starbucks as much as you did not intentionally no okay not a strategy no that was not not a strategy interesting so then from there you open in Washington DC on the East Coast I think that the reason you picked DC was because your mail order business was strong there so you sort of had proprietary data to know that that was going to be a good coffee City I don't know how you found that out but that's accurate in 1995 you cross 500 stores uh you had just

bought the Coffee Connection as we talked about in Boston and uh they had one asset that was perhaps much more valuable than any of the real estate or any of the uh sales that you would generate from there they owned the trademark on the word Frappuccino and I'm so smart that I looked at that for frapuccino with disdain really I didn't like the name I didn't like the beverage I I didn't think it was appropriate for Starbucks and because I just you know I just saw Starbucks as such a purity with with regard to coffee

and uh I was wrong dead wrong obviously putting myself in your shoes back then now Starbucks and frappucino are like a it's like a synonym it's like you can't disentangle them but yeah it's very different than completely different a blended cold drink that was the first cold drink we've ever introduced it was not a coffee forward beverage when we introduced it in Southern California was just it went crazy so what changed your mind to Greenlight it I didn't have a choice I mean it it was Coffee Connection had it then we had it in Boston

people wanted it uh and I just went along and you you ended up like reformulating it right it wasn't exactly the store manager in Santa Monica reformatted it and she was on it I think Howard bear loved it people in California loved it there's a fantastic story about Frappuccino because of what we did with it not in its existing form and 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 bottled drink in retail yeah so I went to Atlanta

and Pepsi in the same day Atlanta being Coke I went to Coke I went to Pepsi the same day the coke meeting uh was a meeting lasted less than 30 minutes I can't can't remember who I met with they dismissed me uh didn't view Starbucks at didn't understand what I was trying to do and didn't give me much time to even explain it uh and then I went to Pepsi and this is 95 is mid 90s 500 stores your public company yeah but no one but in East Coast Starbucks wasn't really well known so I

went to Pepsi and purchased New York Met Roger enrio the iconic CEO and Craig weatherup the president of of Pepsi they love the idea and we started talking about this subsequently Craig weatherup and I on a napkin I swear shook hands and created a multi-billion doll business for Pepsi and Starbucks and a 50-50 jv on bottle Frappuccino and Craig weup deserves all the credit for that and then Craig became a board member of Starbucks oh and Roger and I were friends until his death and served on the DreamWorks board together how did you find yourself

at Coke and Pepsi pitching a bottled beverage and was there an internal Revolt cuz I could imagine people saying this is a bridge too far I don't think people knew what I was even doing I mean I think maybe a few people you know I just had the thought we got to put this in a bottle we have to put this in a bottle and this product if I'm remembering right was so successful the instant that it hit sh sore shelves you had to pull it all off because you needed to like create new manufacturing

processes and spin 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 it was from minute one the the power of Starbucks and bottle Frappuccino and doing something we had never no one it was no bottle of coffee let alone and uh again just like the Costco story and the United Airlines Story the flywheel of the awareness and people drinking something they

could enjoy at home or at work again it just created another level of velocity on the brand I mean that I'm just thinking about between the cups but then United Airlines and Costco and the cpg products there's got to have been like 50 billion Starbucks logos printed I'm sure that was maybe more maybe more I'm just I'm sure I could 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 like 800 stores yeah

then something else happened and that is we wake up one day and someone says Starbucks is in a movie we said what movie You've Got Mail that wasn't coordinated first of all Starbucks never paid for place someone must have approved it I I knew nothing about it and then someone said you got to see this movie Starbucks all over it what movie Tom Hanks You've Got Mail with Meg Ryan I I didn't know nothing about it it was just another thing where it was just like a little fairy dust on the brand did you know

that it was like the good old days where you're like this is just like we were so in the mud it was so in it that we didn't have a we didn't 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 intoxication 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 a position at least we were never in a position we were we were ahead of it never and so there was a constant push and I think this is where Orin was the wise man in the room to say how that's we just can't do that now just we don't have the infrastructure we don't have the people don't have the systems and you know I'd be screaming we we we got to do it if we don't do it someone else going to do we

got to do it and that takes us International we weren't ready for that yeah so I want to putting a bow on Frappuccino the year after it launched in 1996 Frappuccinos were 7% of Revenue which I can attest to maybe freshman is I had my first with that Frappuccino tall mocha Frappuccino with whipped cream and a little chocolate drizzle on top and and like now here I am drinking what are we drinking here you're drinking coffee from India yeah and no cream no sug and so uh know the the Frappuccino began my journey to the

good stuff uh so that's the Frappuccino story uh 96 97 98 I mean this is this is the international story so I love the Japan Story You've me you've told this to me before but um I'd love to okay I there's 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 as an American company and so

we just took Europe coffe be like a uh American luxury leather goods company coming in and competing with their Mees yeah not going to happen and so we said we just took it off the map and then uh we we narrowed our Focus very quickly on Japan Japan had a couple of thousand coffee stores named doour you'd walk in there and it 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 and so one thing led to another and my board memb said if you're gonna if you're considering this hire an outside resource to do a study oh boy I was livid about that you know aren't there some Consultants you could possibly pay to help you know this uh and so we we hired a consultant who came back with a you know big book presented it 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 just I could feel my blood just boiling because with every statement it was getting worse like the economics won't work no one in Japan will ever walk in the street with a cup of coffee they would lose face your no smoking policy which we had from the beginning is a non-starter and you can't afford the economics to rent don't go well that only made me more Furious it's like they've never met you and more intentional and so we were we kept thinking

about this and then one day we get a handwritten letter from a Japanese company and the founder of the company Eugis son had a la restaurant and he was enamored with Starbucks we sit down with him we fall in love with him and uh 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 JV and you know the folk law at Starbucks which is not that unrealistic is the reason we went to Japan as an international market is because it had

a direct flight to Seattle that was the extent of our understanding now we open up in August if you've been to Tokyo in August it's hot it's like 95 degree temperature and 100% humidity it's like getting out of a New York City subway in the middle 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 it I get back to my hotel room and I have a message that CNN is covering the opening life or they got cameras

highrisk High reward wow I'm so nervous at 6:00 a.m. we get in the car so hot my the tie around my neck it feels like a a noose we're driving up to the store in the Ginza and there's like 200 people online and I turned to the translator and I said did he hire extras I cut the ribbon and a young man who slept over the night before to be the first person as a college student speaks no English He rushes to the front of the line and I follow him no English and he says

double tall latte as God as my witness just like that and I said holy how did they know and Japan was a extraordinary success from minute one we got 2,000 stores there I was there like two months ago incredible we have a roas right there why were there people lined up around the block why did it work so well instantly was it a strong Co 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 with that cup and this is 9 years after you bought the six stores it has turned into this icon in all the events we just covered Starbucks has already become Starbucks it is already this like globally desirable brand there by 1996 I honestly I haven't thought about it in that way but that's so fast I mean to build something seem fast to us I bet the parallels to the Microsoft story are just like

so you know Japan was Microsoft's First International Market did not know that it was half their business and it started in the same way Bill and Paul got a cold call from K Nishi who was a guy in Japan who had somehow gotten a hold of the basic interpreter loved it and said I'm so passionate about this I want to bring it to Japan 50% of Microsoft's revenue for the first at least 5 years and they stayed 50% International permanently and that's what took them right you know from this Albuquerque to like Hey we're International

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uh in 1999 you 2,000 stores 2,000 stores because we had a goal of 2,000 by 2000 We Beat It by Year ah 99 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 I honestly don't think we had any real understanding of what we were getting into and we went there with a partner that didn't work out we we I should tell you that we 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 Japan 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 you closed all the stores no no we got we got out of the partnership bought them out and became company-owned and so you the that that was legal to do that to be an American-owned company in China yeah but we struggled in China for almost a decade lost money there was tremendous pressure inside the company of

clothes China until Belinda Wang maybe the most valuable person in the company from my view really yeah when did Belinda get involved with Belinda was working she started with Starbucks in Singapore but she was working in Hong Kong we were open in Hong Kong and uh I I saw something in her who was just an extraordinary operator and had a touch with people and I said and we were dying in China we're really in trouble would you come to China and run it and she said I would do I would consider doing that uh but

you've got to decentralize it and we couldn't do that right away it was just too much but she changed the course of history for Starbucks in China what year was that that she came that she took over the role I think it's about a decade after we opened okay well I I there today I ask because I want to come back to it there's a whole interim you know between 2000 and 2008 where you are not the CEO of the company right so in 2000 I mean if if if you if you've been listening to

this episode the theme that should be occurring to you is oh my God basically everything worked and I know it didn't feel like that on the inside but like you read all those Investment Banking reports and it's like hey Starbucks uh here's all these price targets for Starbucks and here's what we think they're going to do in earnings and oh they beat it again like I don't know 30 40 quarters in a row it's just like this uh I would say perfectly predictable except you actually kept exceeding the expectations so it wasn't predictable I did

a 100 quarterly conference calls as CEO 100 yeah that's a lot I bet that's a lot of earnings prep because each one of those has what two weeks before it of the truth is the majority of those were no script which became the Le the lawyers took over after that many years no script which is your preferred communication style I mean it seems like whenever I see you up speaking there's there's no teleprompters there's it's from the heart so at this point I don't want to say it it would be incorrect to say Starbucks is

running itself but like it's in a great place right and you step into the role of is it executive chairman chairman yes executive chair with Orin as a CEO in 2000 yeah what was your I was I was I think I was physically and emotionally exhausted um kids were getting older I had missed a lot just think about all the things we were doing and I had so much confidence in or so it was no problem and so that's what I did but I was still engaged but I was you know not running it day-to-day

and at this point it's 3500 stores the company's doing 2.2 billion in Revenue it kind of feels like okay I can I can get some distance I can do other things in life it's it's you know it's going to work out at some point Orin transitions the CEO Ro to Jim Donald which I assume you also very involved in in working with him um what was that transition about Orin never wanted to be the CEO he's not a front guy uh in fact he's shy and uh did never wanted to be on the stage as

a CEO so he said I'll do it for a couple of years but he's always kind of knocking on my door saying we we need a new SE H and we didn't have anyone internally be didn't want it um and so we did a search we met Jim Donald great great guy had all this operational experience um and then certain things started appearing and we were just weren't hitting our stride the way we usually do the economic environment was getting tougher and uh 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 just wasn't in the right fit and so how long had he been in that role of CEO I'd say less than three years two years maybe but basically the um 2008 happens and so the cataclysmic financial crisis is unfolding and uh that plus the cracks that we were experiencing uh board meeting and I don't think the board meeting was set up for me to return but it 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'm going to come back and that wasn't that was never your intent when you stepped away you thought you were it was not my intent to come back it was certainly not my intent to we're going to run into problems and so in the Christmas Vacation of 2007 I knew I was going to return in January so I was on holiday and I was starting to think through what I was going to do on that holiday a friend of mine not

I didn't know he was there but it was Michael del was there and I must have talked to him almost every day about the transformation of Starbucks and he was going through a similar thing at Dell almost at the same time so we had so many things to talk about and we were comparing notes and everything and so in early 2008 I spoke to Jim and I came back in 8 and when you came back in 2008 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 it all but uh suffice to say just to put some numbers on it um the market cap had dropped from $30 billion to less than $7 billion same Source sales the the comparables number when you compare the store this quarter last year to this quarter you know or this year to last year um had dropped growth began to slow uh and so you come in and you have to make these really horrible decisions you're faced with two terrible options and you got to make the right decisions for the business

I uh first of every Rock I turned over was worse than I thought there were a lot of unperformed stores that should have never been opened that we need to close I think we closed a thousand stores and I had a companywide meeting I remember it vividly because I started crying and and apologize to everybody that we got to close stores we got to lay people off and I mean just think about you know we were on a a trajectory for all this time and all of a sudden we not only hit a speed bump

but the world the music was just stopping the stock price I think broke $6 I was so afraid that we were going to get acquired but the only cover we had is that the world was coming undone so no one had any resources but I was terrified I just stood up and apologized and said we we we've let you down I promise I'm do my best but we're trying to save the company and literally we were trying to save Starbucks things were that bad you say that we were trying to save Starbucks and in my

head I always thought well it couldn't have been that bad this is big successful company it's fast growing it's profitable and then I read you were seven months from being insolvent so we had uh we didn't have enough cash comps had we never had negative comps in the history of Starbucks so negative I didn't single quarter was better than 12 mon never had never had a negative comp month in my history of of the company I didn't even understand how it I understand it such an anomaly so um we 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 things that I could point to that demonstrates what Starbucks is has been and needs to be it's the humanity and the people of the company the company was built on being a performance-driven company through the lens of humanity that's how it was built and whenever we've lost our way we've lost our way because people in power

didn't understand understand that equation and so I I just said we need I I need to be in front of every store manager I need a meeting with 10,000 people it's the big conference room and so in 2008 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 Houston come in and then New Orleans came in what they presented to us was the need for Starbucks to come as a result of Katrina and when

we heard that we realized we've got to go to New Orleans and in fact what we're going to do in New Orleans is we're going to have one full day of 50,000 hours of community service in the ninth ward next day we we walked through and we built basically a tutorial on how to restore the business and have people walk through it and we had classes and we had all these things going on and the third day was my speech in the basketball Coliseum to 10,000 people I'm about an hour before I was really feeling

the burden of how important what I was going to say is and the CFO at the time who subsequently resigned a week later wasn't my guy asked me what I'm going to say and I said I'm going to tell him the truth and he says you can't possibly do that you're going to scare the 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 insolvent I can see why he was freaked out about this like if word got out

to Wall Street that yeah well social media didn't exist that time but I just laid it 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 per store to turn comps around and the number was low it's like less than 10 per day or 11 per day H and so I said let's just talk about New Orleans you know how many new incremental customers it'll take in your store and it's ma was manageable and tangible

mhm anyway right because you could actually imagine okay if 10 more people walk in the door today and I Delight them in a particular way that brings them back tomorrow like we're turning this thing around or we're turning this one store around and if everybody does that yeah and and the problem when you get this big is you start thinking about large numbers but if you reduce it to the lowest lowest common denominator one store one cup of coffee One customer one partner and what if all of that works well we rushed out of New

Orleans like an effing tidal wave and we never looked back and less than a year was turned and you you did crazy I mean the the tactics involved in the turnaround the we close the stores for what noon onward right for an entire afternoon an evening because the previous administration had done things that diluted the Integrity of coffee to maximine yield like what what does that mean well let's say you're making a batch of brw coffee yep well what if that brw coffee was based on a number of ounces of coffee what if you just

reduced it just a little bit no one's going to know just little things little little 10,000 little sounds good in theory scratches of efficiency that dilute The Experience yeah huh but that does seem like a reflects a misunderstanding of the fundamental business that this is a business about a store with high gross margins based on Customer Loyalty but we were beginning to face headwinds MH and what are the headwinds headwinds were the level of attrition of customers as the financial climate deteriorated spending that $6 on the latte daily get hard to justify and we weren't

as good as we we were when we were small yeah then it makes it easier to give up yeah and this goes back to what I said earlier growth covers up mistakes and success breeds yubis and it did how could it not I mean how how could you Starbucks today is so freaking ubiquitous which again is one of the things I love about it it's consistent anywhere I travel in the world I can count on it I can mobile order and pay there's all these wonderful things 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 of like we're so big we're just but the the worst thing that Starbucks could have become and the worst thing that Starbucks 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 the Barista has to be protected and has to be elevated now then you get stores that are so busy where the Barista can't even look up

can't look up and then you get mobile UD and pay which we haven't even talked about which is you know is a thing I love and do every day and depersonalizes the experience by definition yes Starbucks demands nurturance 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 immersion doesn't quite hit them in the heart or the soul or the conscience of the company they they feel like they're doing a 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 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 stop you better 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 Fool's Gold

it's it's a camouflage because eventually it's going to bite you in the ass 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 tie to our values are good we can actually put a kpi against them we know that the core is solid I 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 than we are in the US and I now I understand your Belinda Wong comment that doesn't answer your 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 2008 2008 was a big year so 2008 2009 2010 there's no way to put it other than a wildly successful turnaround your low point in 2008 profits were

315 million and by 2010 they were 945 million I mean I don't know how we did that well we just went through a lot of the ways of 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 around this point in time too funny story another story and so in Hawaii when I was on vacation I'm talking to Michael Dell and Benny off and you're uh cycling with cycling with Dell almost every day and I'm talking to Benny Michael

introduced me to Benny didn't know him and so his a pretty good Hawaii crew okay so I get back and um Adam brotman was a key person in all this in terms of mobile order and pay yeah he ran digital for Starbucks yeah he ran digital I'm trying to make sure I got the sequencing of this right I think there was a future meeting scheduled for Starbucks and apple uh around mobile order and pay and other things and I met Steve on a phone call I never met him talking to him on the phone and

I I'm telling him what's going on he said you should come down and he had a whole thing about walking he would go out we'd walk around the building you heard this before infinite loop at their old campus yeah yeah yeah and so I went down there and and basically went down and we took a walk and I just told him all my problems everything was going on and he just stopped me and he said this is what you need to do this looked me and he said you go back to Seattle and you fire

everyone on your leadership team I thought he was joking I said what do you mean fire what are you talking about fire everybody he said I just told you e and fire all those people he's like screaming at me in my face you know fire all those people that's what I would do I said Steve I can't fire all the 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 Counsel they were all gone your whole leadership

team turned over after they were all gone wow that's story about stew jobs wow did you ever call him back and tell him I talked to him since then and we were on stage together at an event and I told them they're they're all gone well you're 6 months nine months late man think about all the things you could have done of course all right that's that story so while we're in technology land then um I think today 33% of Starbucks orders are done with mobile order and pay so obviously this you know huge pillar

of of Starbucks as it exists in our world how did that start yeah yeah you had been on pen and paper then you moved to dos and now you have the most sophisticated technology platform of probably any retailer in World at the time so you're talking to a non-te person so I'm not I'm not focused on anything other than the customer experience y uh Adam Brockman to his credit along with Steven Gillette who's who was at Starbucks very shortly came to us with the idea of building a mobile app I didn't know what it was

what do you honestly we're in the meeting I'm trying to figure out what what are you actually talking about how are they going to do that they created and apps at this point I mean if it came out in 2009 which was the first version the iOS SDK came out in summer 2008 summer 2008 so it's like you know you're one of the very if they're having this idea and bringing it to you it's like months after exist well they're they get complete credit for assembling the pieces of all this convincing us to fund it

and we were off and running I don't think any of us honestly for myself really knew 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 it and holy overnight it was just an unbelievable new vehicle now if we fast forward I don't know if you want to do that here of what it's become yeah it is the biggest Achilles heel for Starbucks really and it's not even a close 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 right it was more efficient and you get the float with yeah with all that is true but at but it was beginning to deteriorate yeah at a rapid rate the the third place experience in the sense of community and then it became it overflowed to the point where it disproportionately created an environment in our stores where the mobile app

became the primary vehicle as well as the primary vehicle for dissatisfaction 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 8:00 a.m. because people wanted to show me the problem and so everyone is getting off the loop the train at 8:00 a.m. and everyone who ordered on their app it says the same thing your drink's going to be ready in seven minutes and everyone shows up and all of a sudden we

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's managed the company for about a five-year period remember I haven't I wasn't involved in the company from basically 2018 to 2022 yep not I wasn't I was not involved you stayed CEO from 2008 until 2017 then I left and um there were no bad people and no one had bad intentions but the Heritage

and tradition of what I've described which is so vital to the nurturance was lost well it must have been so seductive yeah the stock we the stock was at 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 it was too late and now 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 and the novelty of

that and the uniqueness of it especially for our product MH and everyone pretty much copied it it is interesting to David keeps saying it's so seductive to put some numbers for listeners wondering you know why is the mobile app such an interesting thing David pointed out the float so of course uh if you look at Starbucks uh financial statements right now at any given time there's about $1.8 billion doar 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 growth

Capital you know store expansion etc etc right not the only one I mean everyone right you know the Amazon has this Apple has this brire has this the insurance business but it's effectively interest free loan from customers and a loan that's not all going to get called at once it's uh some of it will never get called right the 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 about4 billion a

year gets loaded onto gift cards that's unbelievable I mean that if you actually like look at all of the banks in America if Starbucks were a bank and you treated the gift cards as deposits it would be in the top 10% by deposits of banks in the United States it's this like unbelievable business model that happens to exist inside of this experiential business that powers this experiential business but to your point you have to keep it from eating the core yeah so let's just go back not to the economics but the the idea itself and

I think whether we talked about bottle Frappuccino the cup you 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 is it being used how is it being abused and the era of judgment in the period where this was really kind of uh where we really took hold this fiveyear period between 2018 and

2022 it's a governor didn't exist oh you feel like it wasn't really taking hold in that whole it was taking before you know and and I'm not criticizing anyone because you know we're all everyone's trying to do a good job but the the the result is the the the runner the The Unbelievable success it disrupted The Experience yeah and now you have stores that are entirely built to just pick up mobile orders and so and and my view is we should not succumb 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 or things that you would re architect differently about the mobile app experience I I don't think I would have allowed the mobile app to be on demand 24 hours a day h i I would have slowed rolled the the availability of it and then understood how it was being used and whe and whether or not it was going to disrupt the experience but now it's it's you know on demand whenever you

want it right and now you can't you can't shut it off from 8 whenever I get that that message um you know mobile Order ahead is not available at this time I'm like H but it's available 99% of the time it's not available now and because the store I won't even go to a store if it doesn't have the store's overun you wouldn't go yeah that breaks my heart I hate that hate to hear that well there I went to the precidio store yesterday in San Francisco and I would go there no matter what but

if you know I only agree with you in airports in airports I'm so time constrained that I'm like if mobile order isn't working the line's too long oh but I've had plenty of times where like I'm looking at stores in the radius I'm in I'm traveling I'm in a new city and it's like well I'm only going to go to the one that's open for mobile order and pay I'm not even going to try I got to hit one other Howard I know you hate it but one other like amazing business model benefit of mobile

order and pay if I'm buying $6 lattes over and over again with my Visa card and Starbucks is getting hit with 30 cents every time instead if I'm buying $25 gift cards well that's now three out of four times I'm I'm going and buying my coffee and Starbucks doesn't have to pay Visa 30 cents or the bank 30 cents that's a pretty amazing business unlock like you know I'm I I'm aware it degrades The Experience so you have to find ways to deal with that but I I'd be more than willing to sacrifice economics to

go back to ways to enhance the experience myself but I'm not unch charge all right listeners this is the perfect time to talk about another one of our favorite companies and longtime acquired partners pilot.com for startups and growth companies of all kinds pilot handles all of your company's accounting tax and book keeping needs and in fact now is by far the largest startup focused accounting firm in the entire us we talk all the time on acquired about Jeff bezos's AWS inspired Axiom that startups should focus on what makes your beer taste better in other words

only spend your limited time and resources only on what's actually going to move the needle for your product and customers and Outsource everything else that you need to do as a company but doesn't fit that bill yeah while we're in beverage land Starbucks is actually 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 manufacture the bottle beverages like Frappuccinos that you see in grocery stores they use Pepsi for that and they don't make

their own cups napkins silverware any of that from scratch they focus on what makes their coffee taste better I love that for startups and growth stage companies accounting is example number one of this idea every company needs it it needs to be done by a professional and you don't want to take any risk of something going wrong but at the same time it has zero impact on your actual product or customers so enter pilot pilot both sets up and operates your entire company's Financial stack so Finance accounting tax and even CFO services like investor reporting

from your general ledger all the way up to budget and financial sections of your board decks and they've been doing this now for years across thousands of startups from Silicon Valley and everywhere else so there's really no one better that you can trust to both get your Finance right and make it easy and painless for your company yep and when you say thousands of companies pilot does this for these are now companies like open AI air table and scale as well as large e-commerce and other companies so it's not just that they have experience across

startups they can also keep working with you as you scale to the growth phase and Beyond so if your company or a company you start in the future wants to go back to focusing on what makes your beer or coffee taste better go on over to pilot.com Acquired and tell them that Ben and David sent you thanks pilot moving on from technology and 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 era

is when people started looking at Starbucks and scratching their heads and being like there's two Starbucks across the corner from one another these guys must be insane uh talk to us about real estate uh the the basic idea early on uh given the beverages velocity in am uh 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 just physically account how many people were walking by what hours they 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 co- tencies of certain tenants that would be interesting to us um we also were very intrigued with being next to a grocery store early on because of the frequency in which people were buying food anytime were in an office building where there was 3 to 4 th000 people in a building that was a home run but then it became very clear that there were locations that we never imagined we could be in that became wildly successful and just opened

up an aperture to us that basically we had opportunities to do things that were not traditional for a retailer now the other thing which we haven't talked about is the decision I made early on not the franchise which you haven't surprised you haven't mentioned that oh well there were franchises but I'll let me explain that if I can which is all part of the real estate strategy I I never believed that we could build maintain and Elevate the culture of the company which I viewed as the thing in a franchise system where we had individual

franchisees who had their own subculture 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 we'd have no capex I said no we resisted that and I don't think we'd be having this conversation if Starbucks was a franchise system because McDonald's extraordinary company but they're they're a commodity-based product what was he been saying it's from the beginning it was about elevating yeah McDonald's great company but nobody would ever accuse them of elevating I don't think yeah and that's why I I

I don't want Starbucks to become transactional coffee is personal the biggest magic and what you know the lightning in the bottle is when you go to Japan or Shanghai or Malaysia and you see the culture in a way that you just can't believe like how did it happen that we were able to transfer this to another country different language different culture different how do we do it that's actually quite befuddling to me cuz so many food and beverage Concepts do not transfer geographies and and I think it transferred because young people around the world we

all want the same thing they want opportunity they want to be respected they want to be rep they want 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 I'm moved emotionally because the humanity I speak of is universal that's why when I came back from China what I said was I just want to say something about China and the US I know all the rhetoric 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 that should be the theme of the world right now I want to pick up the thread on China now that we're of into the 2010s okay this decade saw huge ridiculous growth in China store openings so there were 500 stores in 2011 right when you're sort of coming out of that the the rut by 2017 there were 3,000 today there's almost 7,000 and there was a stat that was reported that a new store opened in China every 15 hours in 2017

true now bring us to that seed that you planted earlier with Belinda being the single most important employee China presented the enormity of opportunity with the significant challenge of pioneering and it's a tea drinking culture yeah tea drinking culture no morning business people eating rice in the morning we got real estate wrong we got breakfast wrong but it was all coming from the control of Seattle did you go in with essentially the Starbucks concept yeah was exactly what you see right now there's no no different but they didn't know the Chinese people hardly knew what

coffee was there was no morning traffic and in the early days of our partner we we didn't see eye to eye so we got them out when Belinda came along we had a worldclass operator who had succeeded in Singapore and Hong Kong she's a strong person who believed that Seattle the way we were organized was not a formula for Success you can't have people in Starbucks in Seattle designing the breakfast menu who have never been to China who think we're they're going to eat blueberry muffins and so when she said to me I will do

it if I'm in control of everything so I want to decentralize China I report to you it's you and me and John Culver who runs International take Seattle out of the equation we were failing what choice did I have H she turned it she singlehandedly built the China business today 18% of Starbucks's revenue is China yeah she deserves all the credit John and I have been to China almost every quarter during the building years of turning it with her and all the government me meetings to tell the Starbucks story and and then we did things

in China disruptively well Belinda decided that she could go to the government and go to an insurance company and come back to Starbucks and get government approval for Starbucks to do the F do something had never been done before and provide health insurance to the parents and grandparents of our partners cool so the Chinese government was so intrigued sitting down with them saying can you can you explain why do you want to do this right you don't have to yeah right yeah because it's the culture of our company we we want to do everything we

can to benefit our people humanity and it's Universal but it's so I think important to just um create at some guard rails so one day in the early stages of Starbucks Howard beer comes to my office one day remember we're small at this stage and he says we we got a terrible situation said the manager of the Seattle trust store on second in Madison Seattle Tom carrian has AIDS now AIDS at that time time was like leprosy leprosy so he Tom comes in and he says I need to resign from Starbucks and he's crying do

you have any health insurance no and so we covered Tom carrian from that point on but it was those kinds of imprinting moments and there were 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 Starbucks content over the last couple months and I've heard a a story about uh Starbucks employees wanting to buy a cow for a farmer in Africa and stories about Flint Michigan and stories about get the initiative to bring the company together to try to bring the country

together when the government was shut down in 2013 whenever that was and I 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-off anecdotes that are sure they're emblematic 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 XYZ happens and here's the economics but it turns out there are thousands of these stories and it's the humanity

seeping through and it's hard for the company to tell the story because everyone just feels like a random oneoff 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 historian 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 and Humanity the way that that Starbucks does and we're not perfect and so we do make mistakes and when you're when the brand is being shined so brightly it's a

high standard to be held to we live in an environment where if you do make a mistake and we are human we're going to make mistakes unfortunately that becomes the thing yep uh and it's tough to fight that are you open I'd love to kind of Flash Forward uh you know you were CEO through 2017 Kevin Johnson took over 2017 to 2022 you came back for one year as interim CEO and now laxman is the the CEO and has been in the seat for about a year um you came in after a tumultuous Co era

and and tried to basically figure out who the successor was going to be and and you know patch the ship in the meantime a lot of stuff has has happened in that last five years notably with labor unions I don't want to make this a podcast about labor unions but I do want to ask you what have you learned from the experience of you know having to do a deep dive into how we got here that's a very tough comp comp Lex question uh 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 country started moving in a postco 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 very pattern in a history of being unbelievably kind to your people yes yeah I entered Starbucks as the interim CEO when this was already going on and I think the company made

some early mistakes some of which were covid related again no textbook had to deal with covid issues health issues safety issues uh and then I think uh underestimated the ground swell of public sentiment uh for this movement in America and um 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 in relationship to the to the whole and then all of the people in Starbucks

who were depending on me to defend the company and trying to do that in a world of disinformation is very difficult at the time when I was trying to restore the company back to health clearly mistakes were made this story is still unfolding and um my heart's with the company and but the thing that I think was lost in the story is the shareholder is not the primary person it's the Starbucks partner in the green apron which is the cloth of the company and if we exceed the expectations of the cloth of the company and

our people shareholders and customers are going to win that's been my whole life story and that's basically worked for decades and decades it also seems like when you Starbucks has become 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 move F break things 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 100% of the focus is 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 reason for being and then stayed positively inclined to its customers what are you going to name and so the odds on getting this big and still being revered for who you once were is very very difficult and I would argue in so many ways we are better today than we were when we were smaller

that is expected of us uh but I don't think we get much credit maybe we shouldn't maybe this is uh our responsibility the elements the characteristics that built the Starbucks business the culture is compassion empathy and love those are not just words it's 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're you're dealing

with cynicism 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 Starbucks today and I'll kind of 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 why did Starbucks work um and at such a grand scale that it did so to catch listeners up on the business today Starbucks does 36 billion

in Revenue 4.1 billion in net income there are 380,000 employees you gave me a stat I think over 4 450,000 450,000 I must be using an old number um and over the lifetime of the company has employed over 5 million yes 5 million alone that a scale right there 39,000 stores globally in 86 countries almost half of which are in North America 18% in China and uh about half of those are licensed franchise and half are company operated and so while we're not you know you you mentioned we don't franchise in the traditional McDonald's sense

you do these joint ventures and you do this uh this way of entering countries where you don't need to own and operate the entire store yourself then not franchises in the ipal sense yeah so tell us about I think we should talk about that yeah the joint venture relationships that we've established and some goes back almost 30 years in the Middle East in Latin and Central America now in Italy in the EU in India and what does it mean to be your partner so uh every country is different depending on the economics of that country

the political issues um some countries have been an 8020 Starbucks owns 80 they own 20 some are 5050 some are some of the 8020 started out as 80 for us and they bought it in over the way uh it depends so but the the key thing is whether it's Alberto torado Latin and Central America Muhammad alai in the Middle East the Tata group in India the prasi family in in in Italy they understand the culture and 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 roasting the coffee MH for all the recipes which are consistent with Starbucks worldwide a co-design to the store where we're designing the store with the JV or the licensed partner and they control all the operations h and so all of Starbucks's franchise or license stores are done in this way where there's a partner in a country yes that there not no individual licens franchises of any kind unless it's certain real estate that we can't get uh that we want access to

like the a roadway uh on a highway in Switzerland or something odd see and airports are this way right airports are Master licensed with the with the master licy like Whoever has it in like Marriott or whoever has it I gotcha or Target that has 2,000 Starbucks stores and those are Target Opera yes I see and great partner and Brian Cornell great guy and it's interesting the basically you know half of Starbucks stores look like the platonic ideal of coming out of the Starbucks HQ here's how we imagine this this store to be and half

of them are there's some reason why we alone can't do this and need a partner and you you know you I mean ideally want the customer experience to be the same worldwide regardless of the shape and size of the store where it's located makes sense which is not always the case I I admit that so one market that we haven't talked about that I I want to ask you about while we're in this then we'll get to Playbook is Italy yeah the whole thing came out of Milan right and yet for decades 50 years no

Starbucks 50 years no no Starbucks in Italy and the belief at least as I see it is they've perfected the coffee house concept don't bring an imitation in here yeah but it's worked it's it's working phenomenally well why is Starbucks being so well-received in Italy so I I know I'm going to be chastised for 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 that but that's that's that's my truth if you don't believe you have a better product who does yeah but I 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 and ways that we could couldn't even possibly imagine given the the history and the cultural relevance of espresso in the coffee bar and so we waited and waited and waited until The Roastery and so I before we

get to Italy I have to explain The Roastery for you please I mean the first time I went in there you know kidney candy store wide eyes so there are six roasteries starting in Seattle Chicago New York Tokyo Shanghai and Milan the road Roastery itself is probably the most entrepreneurial creative project that I could recall in my history of Starbucks what is the experience we could create that just absolutely blows people away so what did I do as a kid I've Loved this movie and so I invited the most creative people in the company to

my house and I said we're going to watch a movie of course they thought I was nuts and I turn on Willie Wonka I was say got to be turn on Wily W Wonka with Gene Wilder and we went to work starting to design a space now we realized early on and this was what 2013 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 to the brand and significantly elevat Starbucks which is fighting ubiquity all the

time every day and so we created this 30,000 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 manufact facturing like Willie Wonka did were manufacturing and roasting coffee in the space which makes the smell of the so we open it up and then over time we started opening a couple more we get approval from the Chinese government to manufacturer in the center of Shanghai we open up a 40,000 foot in Shanghai we open up an

incredible space in Tokyo we open up in the old Craton Barrel space in North Michigan Avenue in Chicago we open up in the me packing business in New York but the shrine has to be Milan this is the way to go back and this is the way we open on Italy now our partner in Italy is the prasi family fantastic people who are in the real estate business and they are showing me I'm going back and forth to Milan like all the time because they've got real estate and I got to see it I got

to touch it I got to smell it I keep going back and back and back no not the right sight not the right sight and I'm standing on the corner of of cardo square and I look at this face and I say what about that and he says that's the post office you can't get the post I said well it's empty it's empty you can't get it so I said can I meet the landlord said Howard it's the government I said well who who Who's responsible for it so they arrang 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't tell you said you have to tell me who the landlord is private Equity that's letting real estate sit empty where this is going okay it turns out I know I'm going to get killed for the story you're gonna have to fix this turns out the owner of the space is Blackstone no I knew it I

knew it of course of course so I said why am I in Italy I called John yor called John Gray up no way I said John I'm in Milan do you realize you own this space in cardo square that used to be a post office he said I don't know let me check you know said John I'm coming to see you tomorrow I'm on the next flate we do the deal with John Gray amazing unbelievable we John Gray of course being the number two person at Blackstone so uh and John's a big fan of Starbucks

he had previously been in Seattle for a wedding or bar mitzvah something and saw The Roastery he knew exactly what I was talking about and so that is how we entered in Milan now we have 30 stores we have 30 traditional stores in Italy did they already exist before the roas open open first first the roas then 30 stores in we're in Milan we're in Rome and we're in Florence and um two three years later what do you think the number one beverage is it's espresso for Starbucks yeah straight espresso espresso is the number one

beverage wow wow and so we're I don't take the the success in Italy for granted we've got to continue to earn it but what I'm most proud of is that we've respected the Italian people and Coffee Culture for 50 years and they they embraced us and so the implication of espresso being the number one beverage is it's not tourists it's the Italians coming to Starbucks there's a lot of tourists coming into The Roastery but yes it's and that they're choosing to get their espresso at Starbucks not it yeah yeah so I so and you know

Italy I'm going to Italy I think next week but just for me the the the gratification the satisfaction of you know complete full circle from 1983 is just beyond belief from I'm wondering another backdrop to The Roastery and really throughout all the 2010s must have been third wave coffee and I'm sure it was on your radar screen yes at the same time it doesn't seem like it's ever made a dent in Starbucks there's always been stories that all these competitors were going to steal business from Starbucks but from 1983 to all the way 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 for Starbucks now we created an industry that didn't exist and they have followed us and done really good things but we're not threatened by that interesting so you think third wave coffee brought consumers into the Coffee Culture Market yes that have then also become Starbucks consumers and maybe they wouldn't have been coffeee culture consumers at all yes H how do you define third wave coffee actually Howard is probably the best person to

ask I mean it's a very uh intentional independent coffee store that is small enough that they're roasting their own coffee or getting coffee from a small proprietary roaster M and creating a very unique handcrafted experience uh that in many ways Starbucks can't do in scale right right and so I I tip my hat to them but there's no coffee experience in the world that comes close to The Roastery any of them and do those roasteries Break Even or are they this like marketing show piece that loses some have some are making money and some aren't

wow I mean but I don't I you I don't I've never viewed it that way Billboards it's it's you can't you couldn't put a price on the hundreds of thousands of people that come into this Roastery and have an experience of a lifetime and I took Mr Arno Through The Roastery really did yeah in Milan in Seattle Seattle he and his son yeah wow yeah spent a good amount of time with him I've taken a lot of of retail CEOs and iconic business people through the roas strey I bet who have who want to see

it wow wow what was Bernard doing in Seattle I don't know what he was doing in Seattle but I spent a feir around time with him and his son the son now runs Tiffany oh great wow and he his level of curiosity was uh very high I remember he was he kept looking at the leather railing and the stitching and I just said you spending a lot of time on the leather how bet he was maybe there's a partnership to be done um okay so now the the question sort of becomes what are the setum

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's ever done into caffeine is by and large it's neutral to helpful and like every other drug that you know at some point people have enjoyed whether it's smoking we drinking more as research comes out over time we find

out shoot that wasn't good for us that's not the case for coffee what an amazing thing to get to build a business on this delightful thing we have to consume every day because we're addicted and it's pretty good for us and it gives you superpowers yeah I I'd like to believe it's not based on what you are characterizing as an addictive beverage I'd like to believe it's the experience that has been created around the enjoyment of the coffee and the experience that happens uh I also think and we 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 incrementality of the price has been dictated by the consumer the base price is X but most people are doing something in plus y i I have a a very specific drink that I like and when I go to coffee shops that are not Starbucks I can't get it because it feels taboo to order like I

like an iced almond milk latte with whipped cream and when I go to most coffee houses want I'm like I can't ask for wh wh cream on top of that but Starbucks they're like of course that's what we do here this is something that I think has translated incredibly well to the mobile app and that no other food company has really the level of customization and I think the mobile app actually added velocity to customization it powered customization Y and I think the Starbucks Barista deserves so much credit because they are are dealing with so

many different variations of beverages some of which they're making for the first time on the Fly hard to do it's a hard work it has to be a good number because there's I don't know if it's I haven't done the math billions trillions of combinations of possible drinks and so it has to be every single day as a barista you making something for the first time yes I think I the the the number that people use inside the compy is 100,000 different variations of beverages that are being made consistently a 100,000 different beverages wow this

is actually a really interesting way to lead into Playbook because on the surface it's like an obvious question right like yes it's an addictive substance caffeine is of course on the other hand you're in a highly competitive market right selling a commodity and the market actually is not just coffee it's let's stick with this theme it's caffeine broadly which there's Coca-Cola there's peps there's you know well not only that but every food company every retail Food business from McDonald's on yeah took a page out of Starbucks went to school on us right put espresso machines

in their stores and started doing coffee beverages 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 it's third wave or competitors in other geographies or domestic competitors or McDonald's getting into the business or folders in Maxwell House there is a unique tapestry that we've been weaving throughout this episode that you know in Hamilton Elmer's terms has power here yes coffee so here's my second one in addition to the the um it's a but delightful it is

perceived to be virtuous to be a barista where it is not perceived to be virtuous to flip burgers and I don't know if that's 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 lineage but there's all these incredible benefits that Starbucks and any other Coffee House chains get to enjoy because 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 of all 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 Baristas know the names of their customers they know their dog's name we have a drive-thru and I saw a video where the Barista knows the name of the dog and knows the it just the whole thing is it's like a magical dance that happens when the cars pull in and all of a sudden it's not a transaction one

of the beauties that we've been we have been able to do is Elevate the experience of the drive-thru not all the time so I think your question is steeped in one is a commoditized environment and the other clearly is not and the challenge for Starbucks is continuing to innovate for the Barista 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 employee so they can improve the experience for your customers whereas in other things that are

commoditized they start from a position of I have to do this job and it's a really tough uphill battle to invest in your people whereas Starbucks kind of has a Tailwind but it is a hard job certainly and we have to honor the people who are doing it more so today than ever before yep another one that I have is it's funny it flies in the face of some of the um pitfalls of ubiquity that we were discussing before the fact that it is everywhere uh almost cheapens the experience to me Starbucks's ubiquity is a

massive feature the fact that I can go anywhere in the world and get basically my same order or certainly 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 uh it's reliable it's predictable like it's the same reason I bank with Chase and I buy Apple products it's 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 it was starting but it really feels like

it's reached this 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 yeah 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 the humanity is actually the answer yeah scaling humanity is actually the you know along with got this long list here this obsessive quality of product the fact that product isn't just product but experience is the product as it's everything you experience around consuming the beverage itself it's uh a bunch of the things we've already talked about you invest in your employees they take care of the customers who takes

care of the shareholders but the shareholders are last 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 billboard so you're intentionally picking real estate in these places where you're building familiarity with people they're walking by over and over and over you're extending the brand by doing United Airlines by going to grocery stores everything is a billboard everything is a billboard yeah

that's the like why pay for customer acquisition when you can you know product in people's hands yeah um 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 in infrastructure in our society it is assumed like when I go to an airport or a city and there's not an easy way to get to a store I'm

like what what is this place what Backwoods Place am I in like it's 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 I think the other piece that you didn't just list off there uh that we've covered in depth is is you know the cost go like investment in your employees and the people and the reduction of turnover and you know in in Costco's case I think it's probably much more so the reduction of

turnover in Starbucks's case it really is like that's a a key the key element to building the humanity right like I don't know the employees at my Costco store no what's the stat that you have on um I've heard you say it a number of times on um employee tenure at Starbucks versus others in the category it's a 2X is what I believe that employee tenure is 2x longer or turnover is half of what it is industrywide yes it makes a huge difference and you've talked about bean stock you've talked about Comprehensive Health Insurance when

I think about the most important thing we probably have done in the last 20 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 4-year free college tuition through AR Ona state for every single partner at Starbucks and we did it and thousands of Starbucks partners are engaged and going to school and thousands have graduated the college achievement plan demonstrates going back to the early years of the speeches I was giving about what is the responsibility for a for-profit company in

the world we're living in and it's not just to make money here's one that we haven't talked as much about you were part of this secular trend of gourmet coffee and I'm curious if you view that to be a true statement or if you're saying no we created this entire wave it wasn't going to happen it wasn't just like I don't want to sound arrogant at all but I think it's so clear that Starbucks created an industry that did not exist and as a result tens of thousands of stores have followed in our wake and

we created an employment industry that did not exist not to mention that 5 million this five million alone right yeah that's a lot of people who have gone on to do other things after and I think one thing that's always been missed is that Starbucks has always been a great first job so in your mind then let's say there's a parallel universe where Howard Schultz doesn't exist the year is 1995 is there a nationwide chain not called Starbucks with Gourmet 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 M but would have been more commoditized a Dunkin Donuts for instance yeah nothing I don't think anything would have been executed like Starbucks but I think some someone would have showed up right the opportunity was just right too much white space the the there was clearly demand there we were coming off this horrible you know folders in Maxwell House era and there was this growing demand but that doesn't mean that a company like Starbucks would have been created it

means just in some way that consumer demand would have been satisfied well you have to remember our intent was not to build a global business you know the first business plan and I've I've said this many times when I was raising money was a 100 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 Whited it out no one's even to know what that means I whiteed out 75 when was the last time you used a white out yeah it's

been a while it's been wait really so you yeah why did it out 75 cuz I couldn't did it feel too ambitious yeah people didn't believe I think you're crazy but we never we we you know Japan was the turning point of thinking we could build an international business but we we none of us had any International experience no one in the whole entire company I mean in anyways you could say this shouldn't have happened yeah okay so this brings us to the absolute magic of founder-led businesses mhm I mean when you have a Founder

at the helm you get all this leeway from shareholders from employees you can take crazy risks and people know it's cuz you're you but for you it wouldn't exist at all so run with it what are the biggest innovations that have happened at Starbucks not under Howard Schultz what a question I'm pausing not because there hasn't been any uh because I'm sure there has been but I'm hard pressed to kind of think about what it was I don't think you were uh running the show when the pumpkin spice latte came out yes I was you

were I thought I had one yeah yes I was I didn't like it oh 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 ilali store only played Italian opera and had no had no chairs I mean 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 it's completely

different then no I think I had to see the light I had to understand we were not in business to please me please the customers I mean what is it 70% of drinks are now ice Beverages and it was when you started 0% didn't have a cold beverage for the first decade it was Zero yeah so to me there's this threat 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 Innovations not under yeah so what's the point what's the what's your it's not it's not that there hasn't been Innovation I think uh there's a burden that the organization has and a Reliance on the founder that over time can become unhealthy and not that I didn't want succession I just I wasn't wasn't really on my mind and uh the the marketing and the merchant mentality of Starbucks BS was always with me and probably did not allow others who were well intended and could have done good things were following and leaning on me which

is not the healthiest thing over the longevity of the company and I think that has covered up mistakes that that's covered up things and then was revealed when I left I mean it's the very things that make the business success uccessful the founder bets that then at some point in the company's second act kind of hold it back you have all 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 entrepreneurially driven they're they're 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 I'm not talking about me historically and companies lose not only the extent of the entrepreneurial DNA but they lose the ability to be on offense and the worst thing that a company can do like a sports team is start playing defense because you're afraid to fail that is a disease not unlike another disease which has happened at Starbucks which is ubis the worst thing that could

happen to a company is believing that you are incapable of doing anything but succeeding and you deserve the success but if you start playing defense and don't have the the offensive mind it's it's not going to go well and I think over time that has happened at sterox you've transitioned from being the CEO to someone else three different times if you could go back let's even just say the first time if you could go back years 1999 or 1997 so you can start working on some Talent Development um what would you do differently to make

sure that succession I would have believed Orin when he said I only want to do this for a couple years and I convinced myself I could just get Orin to do this 5 years maybe 10 years and so when he kept saying you know I I want I don't want to 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 and but I didn't I I was very

I I believed that I could convince norin to stay longer and so I think and also Jim Donald's a great guy but I I think the immersion of an outside at that time given we were moving into a crisis not a Starbucks crisis but the financial financial crisis very difficult so 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 30 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 commodity that is very very challenging because it's coming from 30 producing countries and each coffee each coffee from every country has its own proprietary taste profile that has to be roasted differently and when you're blending it like a winery it it's art and so we're

we're an agricultural buyer we are a manufacturer we are a retailer we are a wholesaler we are managing JV relationships in 80 countries we have JVS with two Behemoth companies Nestle and pepsicola and above all else we are in the people business managing the behavior the motivation and the opportunity creation for five almost 500,000 people and we're a public company in which the expectations based on our success are have been higher than most not to mention your quasi fin institution too yeah and we've got it yeah all of that and uh 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't escape it you you made your point you want to go somewhere and get I mean you can't escape it so it's always around you I'm so glad you're bringing this up it really resonates to us hearing you say that like it's the way we feel about acquired in our show and like to imagine like that's easy for us we

have no stakeholders we never would expect that this would scale to 500,000 people if it did I can't even imagine the complexity of that but you also have now that you've achieved this level of success you you you have an expectation that you've got to keep not Reinventing but you've got to make sure that you're as good as you've been no better you got to be better again and your success is not an entitlement like Starbucks just isn't and and and when you have success it gets harder because the bar keeps getting higher yeah that's

just human expectations I going into this I was thinking um I had some funny thing occur to me which was at some point why does Starbucks need to grow anymore it's already everywhere and of course like it's a public company so it it 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 should people should just figure it out and make it better we all think that about every product and experience that we have indeed well listeners we were thinking about

how to land this episode and you know in our normal episodes we land the plane in some way or come up with the one thing you really you can't leave the episode with 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 20124 this felt like the right way to

address that back to the interview well Howard we're we're at the end here and uh I think listeners may be wondering okay but what about Starbucks today yeah and the last few years have seen you know you come back as an 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 it is coming out of the pandemic but um I think anybody who tuned in the last earnings call is wondering what's up with the future of this

company right 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 interim CEO in April of 22 um I was asked by the board to come back to the company and I I said no I I 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 exential 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 uh I came back to the company now when I came back and I want to be fair 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 to five year period and also I didn't like the way the stock BuyBacks were were being used used to

basically uh increase EPs and uh it's no way to run a company so the First first day I came back and I knew what the market would do is I I announced that we were suspending the stock BuyBacks and the stock went down I expected it and I announced that we were going to take basically the money we're using to stock BuyBacks for the year and I think was north of $2 billion and invest back into the people of Starbucks the partners which I did the most important thing I did though because I'm not a

messiah but I have an instinct about the company and I know the inner workings of the company better than anyone else I know the people and so in a in a year's time despite the underinvestment and the challenges we we brought the company back to a much healthier place operationally and certainly the stock price was significantly higher when I left I think when I came back when I when I started it was in the 70s when I left it was you know but that's an output that's investors voting on the performance yeah yeah we don't

have to talk about stock price we don't want to um nevertheless um again succession and uh the board led a succession process you have to remember I wasn't on the board for f for long four or five years and I resigned when I when I decided to leave the company after a year despite the board asking me to stay another year I just said I've I've done my duty we have to find a new coo and so they wanted you to be interim CEO for a second yeah they wanted it was up it was up

to me and I I just that we and so the board led a search uh there was a number of candidates uh laxman was chosen I met him I approved his hiring uh but the search Community was driving the process so now we're a year later um and I think we probably let's just fast forward it hasn't been a great year for Starbucks in fairness to laxman there's 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 it should have

I go into the stores you know like I I know the company and I think we're we're not we're not our best right now why did I write the letter I didn't write the letter because he had a bad interview on Kramer this on LinkedIn 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 a I don't get financial information so I don't have any understanding whether the company's making the

cord or not I was as surprised as anyone else to see the dramatic drop in revenue and in profit but I wrote the soul of 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 Howard Schultz and I've made it clear to lockman Howard Schultz has no desire or intent to return as

CEO of Starbucks if you want I'll say it again but I don't but I can't ignore what we've just discussed for the last few hours if the company is do a drift towards mediocrity and I hold leadership and the board responsible for that and my letter was not accusatory my letter was not predatory my letter was steeped in counsel and advice based on 40 plus years of experience in building this company that's the advice in counsel I'm giving you if you want to take the advice it's up to you if you don't you're responsible for

the outcome and so I'm I'm not I have no operational role I'm not on the board and I'm watching from afar in rooting and cheering for Starbucks and I wrote the letter in hope that it would be a c cyst for 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 cons

consistently lute the Integrity of the experience of Starbucks we're not in the transaction business we have to we have to execute transactions but that has to go through the lens of being an experienced business an experienced place people are longing for human connection even if they're on a mobile app let's provide it but I also recognize this is a complex time it's difficult uh but that's your job yeah make sense well to finish the episode I can definitely say uh as a unabashed fan the same way I opened the episode um rooting for everyone over

you know few miles away to pull it off thank you very much and I think you know Starbucks is so resilient uh Starbucks has had many many challenges uh I have great faith in the company and the equity of the brand and the people who wear the cloth of the company the green apron y thanks Howard thanks Howard thank you great really enjoyed it all right well listeners thank you for being on the journey with us that was super fun to do with Howard remember the huge announcement from the top of the show San Francisco

in September click the link in the show notes to stay fully in the loop on what that is when we are able to share more details our good friends at uh JP Morgan payments are um cooking up something very cool with us so stay tuned for more acquired. fmsf or click the link in the show notes to uh stay in the loop and of course we'll be sharing this on uh Twitter and probably talking about it on the podcast again but find out more acquired. fmsf if you want to talk about this episode come to

the slack acquired. FMS slack and if you want to keep going with acquired you're out of episodes you know you you've uh decided that I've listened to the entire back catalog and I really wish a second show good news we have one so check out acq 2 lots more interviews there and I know the backlog and it's only getting better from here and you can imagine that having a great piece in the Wall Street Journal and hitting number one on Apple and Spotify which we will reflect on at some point a totally surreal few weeks

here certainly um prime the pump for a whole bunch of great interviews that we've got coming on aq2 so uh with that a huge thank you to our sponsors JP Morgan payments service now and pilot.com Tom and listeners we will see you next time we'll see you next time who got the truth is it you is it you is it you who got the truth now huh [Music]