The Tale Of Schultz!

“It's not just coffee. It's Starbucks.”

The aforementioned quote is accurate and deserving for today’s leader in the cafe market. Something about Starbucks just feels different. I mean, one may go and ask anyone, what is the first thing they experience when first enter a Starbucks café? If you are an ‘amante de café’ like me, you already know the answer, don’t you?

It’s that beautiful yet intense aroma that wafts throughout a Starbucks café that completely fills your nostrils, leaving you with the need to look for the source of this strangely enticing scent. It’s almost as if a magical spell has been cast in the café, putting everyone under the spell from the moment they enter the store. The aroma, then, carries you to the counter of the shop, where you finally place the order for your dose of caffeine.

You watch as an employee swiftly gets to work on making your ordered beverage. The automated coffee-making machines are absent. The coffee is grounded and used for your beverage then and there. It’s almost poetic watching the employee make you a drink by his own hands. It carries with it, an aesthetic sense and honor to it. Finally, it is served to you in a paper glass with your name written on it, with intentional spelling errors.

The moment the drink touches your lips, your entire being gets wrapped in the magic that had ensnared you from the moment you entered the place. The entire experience is, simply put, enchanting.

But was Starbucks always like this? Or did it change its ways under the guidance of a certain someone? Who was the hero that had his fate intertwined with Starbucks, as if all of it was written in the stars? Let me unfold to you the adventurous tale of Howard Schultz.

The humble beginnings of Starbucks:

In 1970, the college students Zev Siegl, Jerry Baldwin and Gordon Bowker decided to get into the coffee business, mentored by Alfred Peet, founder of PEET'S COFFEE. He was the first person to bring custom roasted coffee in the US. The very first Starbucks opened in Seattle with Peet's help and in the first decade, 5 more shops were opened in Seattle alone.

Figure 1: The first Starbucks store in Seattle

But it wasn't a beverage store. It sold coffee beans, either grounded or as it is to the customers. Nobody at Starbucks was looking to turn the place into a café either. The investors were also content with the way things were. But all of it changed after the arrival of Schultz.

The Radical Hero’s arrival:

One day, when going through his normal routine at Hammerplast in 1981, Howard Schultz noticed that a small retailer store in Seattle was ordering a large number of Coffeemakers, more than any other retailer. This was Starbucks in its infancy.

The order piqued his interest a lot, so he flew out to Seattle to see what concoction this seemingly random retailer was brewing. What he found was love, love which the employees and founders had for coffee. Passion filled the place as much as the aroma of the coffee being sold. Schultz too fell in love with the place and came out wanting a job at Starbucks. However, he was not hired instantly. In fact, Starbucks had zero plans of hiring him.

Like any other love story, he had to persevere, a lot, to be one with his love.

He started pursuing Baldwin for several months to see how he could get a job there. Sold on the many ideas that Schultz offered, Baldwin decided to set up a meeting of Schultz with the investors. The next day, however, he got a call from Baldwin, saying that the investors did not agree because Schultz was representing too many changes. Schultz knew it was a mistake to not hire him and pursued Baldwin regarding this. He said that he'll talk to the investors again and call Schultz the next day. The next morning he called, saying he had changed his mind and that Schultz was right. Starbucks finally decided to hire Schultz. It took him a year to get the job after sheer determination and perseverance.

Figure 2: Howard Schultz (present)

The change of gears:

He traveled to Italy in 1983 and came back with the idea of turning the coffee beans store into a café. After a grueling process to convince everyone for it, Starbucks served its first latte in 1984. This experiment was a huge success and in 1987, Schultz, with the help of investors, bought Starbucks for $3.8 million, at the age of 34. He pursued the stratagem of aggressive expansion. When the company went public in 1992, it had 165 stores in the US and by 1996, the number increased to 1015, with international cafes in Japan and Singapore. Essentially, they had found a business model that worked both domestically and internationally, and just put the pedal to the metal, expanding all across the globe. Starbucks had hit almost 3500 stores at the dawn of the new century and in the span of the next seven years, managed to open almost 15k stores, averaging at 1500 stores/year.

In 2000, however, Schultz decided to step down as the CEO of the company.

Figure 3: The growth rate of the number of stores of Starbucks

The Antagonist- 2007 Financial Crisis:

During the financial crisis, the rapid growth of Starbucks came to a screeching halt and the stocks of Starbucks plummeted by 50%, the reason being the coffee was pricey and the customers were cash-backed.

In a report from 2008 a writer wrote "As national economic growth grinds to halt, worried consumers have saved their pennies (more likely, $5 bills, if we're talking about that mocha whip-fraps) and visited Starbucks less frequently. In the three months that ended on March 30, Starbucks profits fell 28 per cent compared with the same time a year earlier. 'We believe absolutely we are seeing a major impact from [the] economy,' Starbucks CFO Pete Bocian said in a conference call with investment analysts today. Previously, Starbucks had announced it would close 100 poorly performing stores. But with nearly 600 stores now slated to be closed, it is almost as if Starbucks faces its own version of the collapse in the housing market."

Figure 4: Graph showing the fall of revenues of Starbucks

So, they had to bring back Schultz, whose news of homecoming alone saw the stocks shoot up by 9%.

The harbinger of success:

The primary focus of Schultz was no longer aggressive expansion, but was enhancing the customer experience. He no longer wanted Starbucks to be a normal cafe, but a place which will provide a sensitive yet exquisite experience to anyone from the moment they enter a cafe. He shut down more than 600 cafes in 2008 alone and almost 300 in the succeeding year, laying off a lot of employees in the process. He also gave to order to shut all outlets for one afternoon for the training of the employees. His vision was to make a visit at a store in Starbucks an experience, not just a visit for a dose of caffeine. They stopped selling breakfast meals and brought back in-house grinding, infusing the cafe with that fresh aroma from before. Also, what followed was the complete removal of the automatic espresso machine. While these were helpful in increasing the speed of making coffee, it does not match the feeling people get watching the employees make coffee, which is a work of art in and of itself, for them.

This complete makeover of Starbucks by Schultz worked wonders, as the stocks of Starbucks rose to an astounding 143% in just a span of a year, with positive reports of store sales.

However, it is to be noted that during this makeover, no new stores were opened until 2012. What happened afterwards however, is a completely different story. The aggressive expansion was followed once more and by the time 2013 came, Starbucks had already established 20000 cafes across the globe. In 2017, around 3000 cafes were opened, giving a total of 28000 cafes. It’s like, once they were sure that the antagonist of their story had been defeated, there was no looking back.

A new challenger approaches!

With so many stores open in the US alone, the next problem that Starbucks faced was profit cannibalization, which refers to a reduction in sales volume, sales revenue, or market share of a product or a brand. Because of too many stores in a single geographical area, the sales for the individual stores started spreading thin, as customers didn't need to be loyal to a single store. So, even if the overall sales of Starbucks were rising, individual sales remained nominal. Another problem that the company faced was the changes in consumer preference, as they started preferring healthier options over a normal cup of coffee. The flagship product of Starbucks “Frappuccino” was not selling well because of this.

So, what did our hero do about this, you ask?

Figure 5: Map showing the number of Starbucks Cafes in the US

Time to fight!

Starbucks, with directions from Schultz, announced the closure of 150 stores in 2019, saying that while they would still open new stores, future growth will be more focused, essentially discarding the aggressive expansion model. Also came the introduction of healthier options like refresher drinks. The original products took a backseat.

Another new thing is the new line of stores by Starbucks- Starbucks Reserve Roastery, which is basically massive stores designed as a tourist destination. In these, the bartender experiments and crafts new drinks in public viewing. These have become very popular and successful. The Roastery in Shanghai alone reported earnings of $64000 every day, which is double what a regular cafe makes in a week. Only 4 roasteries have been opened so far, with plans of 2 more.

These experimental stores kind of placed a halo effect on customer mindset, placing Starbucks in a higher light than other brands. And so, Starbucks was saved once more!

Figure 6: Starbucks Reserve Roastery in Chelsea

Where is our hero now?

Schultz, now 66, serves as the Starbuck's chairman emeritus after retiring as executive chairman in June of 2018. He, to this day, says that the only thing that worked for him was clearing his self-doubts and persevere. He says that its completely humane to have self-doubts about anything, but once you've set your mind to something, that self-doubt should no longer exist. He goes on to say that there will never be a single moment where everything will just click, you just have to do everything with "great discipline and thoughtfulness". Nobody, other than your courage and conviction, will move you into taking action.

Truly a mad lad and an inspiration for us young people!

- Jeevtesh Singh and Akshit Dangi