It was started by three University friends, Jerry Baldwin, Zev Siegl, and Gordon Bowker.The company increased sales by a respectable 16.5% for fiscal year ending 09/2015. It has been able to increase sales in all but one year in the past 10-year period. The company’s net income is a bit more staggered but in the past three years has been on the increase. Before 2013, net income rose steadily year-over-year. A good part of the reason is attributable to restructuring costs.
When brainstorming for a name, a partner in an advertising agency co-owned by Bowker, suggested that the name begin with the letters “ST.” He felt names starting with these two letters were strong names.
The company used a map to try and come up with ideas, and one idea was for Starbo. This led another to think of a character from Moby-Dick (Starbuck).
The character has nothing to do with the company. It is just something that fit with those first two letters. It is interesting that the logo for the company has a seafaring design. Again, the company claims there is no connection to the book or the character.
How the Company Started
The partners were inspired by coffee roaster Alfred Peet, who taught them how he roasts coffee beans. The company started out selling coffee beans and did not brew coffee early on, except to offer as free samples.
The company bought beans from Peet but then later found a grower to buy direct from to save money. This all transpired in the early 1970’s.
Under the partners, the company expanded to selling coffee and opened six shops in the Seattle area. General coffee sales were flat, but specialty coffee sales were doing well. By 1987, the partners sold out their shares to a former employee, Howard Shultz.
Shultz had existing stores from a company he started and changed to the Starbucks name. He then was responsible for branching outside of the Seattle area. It is undisclosed how the original management team raised capital.
Many believe Schultz infused cash when he bought out the company. He did this from the cash earned from the coffee business he had started.
Sales of regular coffee were not doing well under the leadership of the original partners. This likely frustrated the team and why they sold to Schultz.
While working for them, Shultz tried to convince the team that they should sell cups of coffee along with bean and coffee brewing products, and they did not agree. Schultz then branched out on his own and incorporated the stores he developed into the Starbucks brand after buying the company.
The company’s success under management by Schultz actually became a problem. People became complacent, and the company rewarded shareholders rather than customers and hard working employees. The priorities were not where Schultz thought they ought to be, and he made changes accordingly.
Why it Works
As big as the company is, you’d expect they would use franchising as an integral part of their strategic plan. However, the company chooses to limit the number of franchises and does not allow for any in North America.
Although, you will find Kiosk implementations at airports and mini stores in book retailers such as Barnes & Noble, these arrangements are licensed and not franchised.
Amazingly, the concept of opening a coffee shop is low tech and can be replicated by others. While there are plenty of coffee copycats, there’s no doubt Starbucks wins in the brand recognition category. Name three coffee shops in a major city near you. There’s Starbucks, and?
The quality of the coffee is high and consistent from store-to-store. You could easily go to a Starbucks in another country and find similar quality to one in your home country (if one exists). While the company does cater to local tastes, it does try to keep as consistent a brand as possible.
Starbucks does not sell a cheap cup of coffee. It would be for this reason you would think people would be turned off by this. However, loyal customers buy day in and day out. Their specialty coffees are quite popular, and they experiment with different combinations of flavors.
Starbucks was an early adopter of offering free WiFi to its customers. This allowed for people to work in remote locations as well as conduct business meetings. Of course, most who did this would likely buy at least one cup of coffee. More often than not, they would buy food items the company sold as well.
The company did a fair amount of advertising in its early days, but it’s not as needed today due to its brand strength. It tends to reserve its advertising for new product or service announcements.
Customers are given a rewards card that employees punch after each purchase. After a certain number of purchases, the customer can redeem the card for a free purchase, usually a cup of coffee.
Ratings for Starbucks on Yelp.com tend to remain high with at least 4 or more stars. Typically, the ratings are about the outstanding service, but you will also find reports about the products offered and how good people feel they are.
Lessons Learned By The Business
- Shultz is not afraid to innovate. This can be a scary proposition, especially when things don’t work out as planned. But, you can’t know if something is going to work unless you try to implement it and see. If it doesn’t work, you move onto something that will.
- The company does not spend a whole lot of time worrying about what its competitors are doing. When you do that, you tend to play catch up rather than being the market leader. Schultz focuses his attention on his own strategy and spends his time seeing how that works. He makes changes accordingly.
- Shultz believes that the current business structure works and will continue working for years to come. He had a lot of pressure from shareholders to open up more of a franchise strategy, and he stood firm and refused. He feels that the company can manage its stores better when they are owned and operated by the company.
- The culture of the company is for employees to get to know regular customers personally. Know their names and what they typically order. This relationship is one that lasts a long time, and it brings customers back.
- Starbucks prides itself on listening to its employees. The baristas are on the front lines, working the business directly with the customers. They know what works and what may need improvements. They may even have ideas for new product lines that they learned from speaking with customers. There is no amount of back office market research that can uncover that quality of data.
How Other Businesses Can Learn From This
Hire people who want to be part of your business. Not everyone is qualified or enthusiastic about what your company does. But, there are plenty of people who will be.
Continue the search until you find employees and management who will be your brand ambassadors. The best employees are the ones you can leave alone, and the company will still operate as if you are there.