4 Jun 2024 · 3h 14m · 29 quoted facts
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Howard Schultz argues Starbucks won by transforming a commodity into a premium experience: an 80% gross-margin store business with two-year paybacks and zero marketing spend, powered by a culture that exceeded employees' expectations — stock options and health insurance for part-timers — so they would exceed customers'. The company he built from six bean stores is, in his telling, a coffee company serving people, not a beverage company serving coffee.
The defining tension is scale versus intimacy. Schultz calls ubiquity the enemy of Starbucks: every era of runaway growth — pre-2008 efficiency shortcuts, the mobile app's unchecked convenience, post-2018 underinvestment — diluted the third-place experience, and each crisis pulled him back as CEO. The episode closes with Schultz out of operational power, insisting he will not return, yet publicly warning leadership against a drift toward mediocrity.
Wall Street had never seen the formula Schultz pitched at the 1992 IPO: a 2-to-1 sales-to-investment ratio with 20%+ operating profit, meaning each store paid back its build cost in under two years. Loyal customers visiting up to 18 times a month on 80% gross-margin beverages made the flywheel compound.
When investor Sam Strom lodged an all-cash bid to take the $3.8M Starbucks deal away from Schultz, Gates Sr. walked into Strom's office, declared 'it's not going to happen,' and helped raise the money. He never told anyone — including his son, who first heard the story decades later.
The 1991 Beanstalk program gave stock options worth 14% of base pay to all employees working 20+ hours a week, over the objections of two VC board members. Those $6-strike grants have appreciated roughly 800x, and Starbucks' employee turnover ran about half the industry rate.
Starbucks never paid for advertising. Costco bean sales, United Airlines coffee, bottled Frappuccino via a 50-50 Pepsi JV sketched on a napkin, and Barnes & Noble cafés put billions of logos into circulation, while the cup itself became a status badge customers carried through the streets.
The app now drives about a third of orders and holds roughly $1.8B in interest-free customer float, but Schultz says letting it run 24/7 without governors created 'mosh pit' pickup counters and depersonalized the third-place experience — the core asset the brand was built on.
Schultz says it sold an experience rather than just coffee, with high margins, cheap customer customization and a culture that treated employees well so they would treat customers well. He also says the company spent nothing on marketing, because the cups and stores did that work.
It is the idea of a place that is neither home nor work, where people gather. Schultz says he first saw it in Italian coffee bars and later in early Seattle stores, where customers hung around and talked.
He says the app made ordering convenient but crowded stores with orders, such as a Chicago rush where everyone was told 'seven minutes' and a 'mosh pit' formed. He says it weakened the community feeling, and he would not have let it run on demand around the clock.
Schultz says same-store sales turned negative for the first time, the market cap fell from about $30 billion to under $7 billion, and he told 10,000 store managers the company had about seven months of cash left. He closed about a thousand stores, laid people off and refocused on the customer experience.
No. He says he has told the board and CEO Laxman Narasimhan he has no desire or intent to return as CEO, though his public letters warned the company was drifting toward mediocrity.
Stated by the speakers. Each quote matches the transcript, which shows what was said, not that it is true.
Howard Schultz says that when Starbucks opened in Pike Place Market in 1971 it sold Pete's Coffee in Starbucks bags rather than roasting its own.
“Now, what is not known is that when Starbucks opened in the Pike Place Market in 1971, they were using Pete's Coffee.”
Schultz says Starbucks sold only whole-bean coffee, with no beverages, from 1971 until about 1985 or 1986.
“But you have to remember, Starbucks Coffee Company from 1971 until around 85, 86 only sold pounds of coffee. There was no beverage.”
Schultz joined Starbucks in 1982 as head of marketing, when the company was preparing to open its fourth store.
“I was offered the job as the head of marketing for Starbucks when they were getting ready to open their fourth store in 1982.”
Schultz says his Xerox sales job required 50 in-person cold calls a day in a New York territory.
“And I had to make 50 cold calls, physical cold calls a day.”
After his 1983 Milan trip, Schultz pushed Starbucks' founders for two years before they let him open a coffee bar at Fourth and Spring in Seattle.
“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”
Schultz says Bill Gates Sr. confronted an investor who was trying to buy Starbucks out from under him and told him Schultz would acquire the company.
“And he says, Howard Schultz is going to acquire a Starbucks coffee company, and he's never going to hear from you again.”
Schultz's company bought the six Starbucks stores in August 1987, and the combined business had 11 stores by year-end.
“August of 87, we bought the six Starbucks stores. We had the three old El Dernales, and there were two stores under construction.”
To raise the initial $1.6 million for Il Giornale, Schultz spoke to 242 investors and 217 of them declined.
“For the initial 1.6 million that you raised for Il Giornale, you talked to 242 investors, 217 of which said no.”
Schultz says sourcing, roasting and serving coffee as a beverage gave Starbucks roughly an 80% gross margin when he bought it.
“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.”
Schultz says each new Starbucks store was modeled on first-year sales of twice the investment and an operating profit above 20%.
“And the model basically was a sales to investment ratio of two to one and a operating profit of 20%.”
Schultz and designer Terry Heckler replaced small, medium and large with the names short, tall and grande for Starbucks cup sizes.
“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.”
After resistance from two venture-capital board members, Starbucks granted all employees stock options worth 14% of base pay, the Beanstalk program, a year before its IPO.
“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.”
Beanstalk in 1991 extended Starbucks stock options to everyone working 20-plus hours a week, covering about 1,300 employees.
“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.”
Schultz says selling Starbucks beans in Costco measurably increased traffic at nearby Starbucks stores on Seattle's east side.
“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.”
Starbucks passed 500 stores in 1995, around the time it bought Boston's Coffee Connection, which owned the Frappuccino trademark.
“In 1995, you crossed 500 stores. You had just bought the Coffee Connection, as we talked about, in Boston.”
Schultz says he and Pepsi's Craig Weatherup agreed a 50-50 joint venture to bottle Frappuccino, which became a multi-billion-dollar business.
“Craig Weatherup and I, on a napkin, I swear, shook hands and created a multi-billion dollar business for Pepsi and Starbucks in a 50-50 JV and bottle of Frappuccino.”
Schultz says Starbucks' Japan launch, a joint venture, was an immediate success and grew to about 2,000 stores.
“Japan was an extraordinary success from minute one. We got 2,000 stores there.”
By Schultz's 2008 return as CEO, Starbucks' market capitalization had fallen from about $30 billion to under $7 billion.
“the market cap had dropped from $30 billion to less than $7 billion.”
After returning as CEO in 2008, Schultz closed about a thousand underperforming Starbucks stores.
“There were a lot of unperforming stores that should have never been opened that we need to close. I think we closed a thousand stores.”
Starbucks' profit rose from $315 million at its 2008 low to $945 million in 2010 during Schultz's turnaround.
“Your low point in 2008 profits were 315 million. And by 2010, they were 945 million.”
Schultz says Steve Jobs advised him to replace his entire leadership team, and that all but the general counsel eventually left.
“you go back to Seattle and you fire everyone on your leadership team.”
The hosts say about 33% of Starbucks orders are placed through mobile order and pay.
“I think today, 33% of Starbucks orders are done with mobile order and pay.”
The hosts say about $14 billion a year is loaded onto Starbucks gift cards, which they compare to deposits at a top-tier US bank.
“In terms of velocity, about $14 billion a year gets loaded onto gift cards.”
Schultz credits Belinda Wong with building Starbucks' China business, which he says is about 18% of company revenue.
“She single-handedly built the China business. Today, 18% of Starbucks' revenue is China.”
Host Ben Gilbert says Starbucks has about $36 billion in revenue and $4.1 billion in net income, with the employee count cited as 380,000 before Schultz says it is now over 450,000.
“Starbucks does $36 billion in revenue, $4.1 billion in net income. There are 380,000 employees.”
Schultz says Starbucks' international partnerships vary by country, from 80-20 splits favoring Starbucks to 50-50 joint ventures.
“Some countries have been an 80-20. Starbucks owns 80. They own 20. Some are 50-50.”
Starbucks operates six Reserve Roasteries, in Seattle, Chicago, New York, Tokyo, Shanghai and Milan.
“So there are six roasteries starting in Seattle, Chicago, New York, Tokyo, Shanghai, and Milan.”
Schultz says the vacant former post office in Milan's Cordusio Square, which became the Italian roastery site, was owned by Blackstone.
“Turns out the owner of the space is Blackstone.”
On returning as interim CEO in 2022, Schultz says he suspended Starbucks' stock buybacks and redirected over $2 billion toward investing in partners.
“I announced that we were suspending the stock buybacks and the stock went down.”
Schultz reveals the three founders opened the 1971 Pike Place store selling Alfred Pete's coffee under the Starbucks name — beans only, no beverages — a detail he says has never been told publicly.
“they were using Pete's Coffee”
At a housewares trade show in Italy, Schultz stumbles into espresso bar culture and races home convinced this is the business Starbucks must be in — only to be rejected by the founders for two years.
“all of a sudden everything was color”
Broke, salary-less, and humiliated by his father-in-law's demand that he get a real job, Schultz is saved by his pregnant wife's refusal to quit — the moment the whole venture could have ended.
“there's no way we're turning around we are going”
When a wealthy investor tries to snatch the Starbucks acquisition out from under him, Bill Gates Sr. personally kills the rival bid and helps Schultz raise the $3.8 million — then never speaks of it.
“whatever it is, it's not going to happen”
Schultz lays out the store-level math — two-year paybacks, 20%+ operating profit, 80% gross margins — that made Starbucks a retail machine rather than a restaurant, funding decades of self-financed expansion.
“a sales to investment ratio of two to one”
A year before the IPO, Schultz fights his VC board members to grant stock options to all employees working 20+ hours — the moment employees became 'partners' and the culture's turning point.
“give equity in a form of stock options to every single employee”
Against a board-commissioned study declaring Japan a non-starter, Starbucks opens in the Ginza to lines around the block, proving the brand traveled and unlocking the international business.
“double tall latte. As God is my witness, just like that”
Returning as CEO amid the financial crisis, Schultz closes a thousand stores, tells 10,000 managers the unvarnished truth in New Orleans, and reduces the turnaround to ten incremental customers per store per day.
“literally, we were trying to save Starbucks”
Schultz delivers the episode's sharpest self-criticism: the app that created convenience, float, and a third of orders also depersonalized the experience and overwhelmed stores — and he would have slow-rolled it.
“It is the biggest Achilles heel for Starbucks”
After a decade of losses and internal pressure to exit, one operator demanding full decentralized control rebuilds China into 18% of company revenue — Schultz's case study in trusting local leadership.
“She single-handedly built the China business”
Fifty years after the epiphany, Starbucks enters Italy through a Willy Wonka-inspired roastery in a former post office bought from Blackstone — and Italians make straight espresso the top-selling drink.
“Espresso is the number one beverage”
Schultz explains why he wrote publicly to Starbucks leadership during the 2024 slump — refusing to come back a fourth time while holding the board responsible for restoring the experience over transactions.
“the company is in a drift towards mediocrity”
All right. We're rolling? We're rolling. We get to see how you guys do this. It's kind of interesting. Usually a pump-up music. I feel pumped up. We can do that. We've got a turntable. 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 you? Who got the truth now? Is it you? Is it you? Is it you?
Sit me down. Say it straight. Another story on the way. Who got the truth? 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 Rosenthal. And we are your hosts. Seven years ago, David and I did an episode on the Starbucks IPO. Just the IPO. That episode was a mere one 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. Gotta 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 unionizing and a change in leadership.
We thought that this would be the perfect time to sit down with Howard and unpack, why did Starbucks work in the first place? And how 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 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, 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. And if you want more from David and I, you should check out our second show, ACQ2, 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 Synopsys, of Starfish Space, further exploring the space industry, and we've got some great stuff and 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. On to 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 feta wrap. 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 feta wrap, and so thank you for powering approximately a third of the cells in my body.
Oh, God. That's a great start. I also, here's another stat that David- You've done the math on- I have done the math. Yes. 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. Yeah. How did the company start? Well, since I wasn't there, this is what I know. There were three founders, Jerry Baldwin, Zev Siegel, and Gordon Belker. And the story that was told to me is that one or both of them were going to school in California, in the Bay Area. And they became enamored with Pete's Coffee Company, which- Alfred Pete?
Yeah. Alfred Pete was, you know, more than anyone else in the history of coffee in America was the true pioneer. He brought specialty coffee, Arabica coffee, to Northern California. And Jerry Baldwin and Zev became so interested and intrigued with what Pete's was doing, and given the fact that they were from Seattle, decided they would try and bring Starbucks coffee in the form of Starbucks to Seattle, Washington. Now, what is not known is that when Starbucks 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 were not roasting coffee. So they were bringing coffee from San Francisco to Seattle. They were not calling it Pete's, they were calling it Starbucks. So it was Pete's Coffee in Starbucks bags. Yeah, yeah. Again, I wasn't there, but that's kind of the folklore. After the three founders built that store, opened that store, I get the sense that there was some kind of fallout between the three of them and Zev Siegel 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 Hammerplast. 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 that was buying a lot of this product.
So given the fact I'd never been to Seattle, I was already in the West Coast, I figured I'd come to Seattle and see what was going on. Was Starbucks buying it for use in their... They were selling it in their store. Now, but here's the thing. Because this was a consumer device. Yeah, yeah. But you have to remember, Starbucks Coffee Company from 1971 until around 85, 86 only sold pounds of coffee. There was no beverage. That's, you know, we're going to get into the epiphany of that.
Yeah, 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 Pike Place market and I walked into the Starbucks store and I was blown away by the experience, the romance of coffee, the education. And it just spoke to me. I had never met Jerry Baldwin, the founder, who was the CEO at the time.
And I became interested and intrigued 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.
Sherry and I were dating, we're 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 beans.
The interest that the company had in me at the time, I think, was they were really interested in expanding, but their dream or the plan at the time was could we expand to Portland, Oregon? Remember, so it was a tiny company. It was a grand ambition. Yeah. And I never had any idea, of course, that what was about to happen and unfold over the subsequent years, but that was, I arrived in 1982 as the head of marketing.
So when you and Sherry arrive 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 like Folgers and Maxwell House, right? Yeah, it was de minimis. There was another coffee company, which was Seattle's best coffee, which was another retailer that was kind of at the same size and scale as Starbucks, both equal at the same time.
But you couldn't even 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 Pike Place market gave them an interesting vehicle because of the tourists. 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 were 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 and said, is this it? This is, you know, the 800, 900 square 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 and say, I'd like to have this mailed to me because I don't have anything like it 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. No, it wasn't. 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 could 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 in America. I think coffee had been declining since like 1940. It's 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... Especially 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 low-grade coffee that Starbucks was 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 in instant coffee, and high-grade Arabica coffee. But even within the Arabica coffee, there's significant segments of quality and integrity and Starbucks has always played from 1971 to today at the highest level. And my understanding from our research is that the Robusta 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 supplier of theirs, but you happen to be a pretty talented salesman from your time at Xerox. Yeah. 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 significant. And you put on your suit and tie and you go in an office building. There was no security at that time. Just go in and you go from the top floor to the bottom. And then there are other people selling other products who are doing the exact same thing.
And you had to get by the receptionist. I was making $1,000 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 it like a typewriter? No, it's a typewriter. No screen. It's like a typewriter with a little bit of cash, right? Yes, yes, exactly. So you could 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're working at Xerox, you had a whole different patina that you were, wow, that's working for Xerox. Wow. And so you quitting, well, Hammerplast, but quitting what seemed like a stable of pretty good jobs to drive across the country to provincial little Seattle. I mean, that's nuts. I knew after a couple of years if I stayed at Xerox for 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 one 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, you know, I was just saying to myself, I worked all year, I just had a performance appraisal for my manager and I'm a three.
This is amazing. Howard Schultz got a three. I got a three. I got a three. for all entrepreneurs out there. 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 Hammerplast 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 have to go back to my childhood and think everything that I've experienced growing up in the projects in more or less a dysfunctional family because of 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 Sherry so much credit in realizing that together we wanted to build a different
kind of life and gave me the courage the conviction motivation and 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 deserved 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 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 sounds wrong that I had the appetite for all right so we're getting to the big risk so the year ticks 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 matcha which big convention center and it's a giant houseware show with equipment and all kinds of stuff and I I was staying at a relatively cheap
hotel in walking distance 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 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 shit what's happening 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 1200 square feet I got 100 feet and I designed and opened the coffee bar worked behind the counter as a barista and Starbucks probably had 200 to 300 customers
a day selling whole bean 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 to get a cafe of Allegro had it and that was Dave Olson 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 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 85 Jerry
Baldwin because of his love of Pete's and his relation with Alfred Pete had an opportunity for Starbucks to acquire Pete's coffee company and they did unfortunately Starbucks buys Pete's 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're 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 separate for now well it's important to know that between the opening of the fourth and spring coffee bar inside a 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 invest in Il Jernale which was the company you started ! so before they get into financial trouble Starbucks is an investor I 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 Faima and one
is the large Italian coffee company Lavazza 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 Giornale and only Starbucks and a couple other people have committed but I didn't have enough money I still needed more money and raising 1.6 million about 1.6 1.7 million and they said no one is going to buy Italian espresso in Seattle or in America which is stupid because you watched it happen I ran this store for six months and it was flying out they didn't want to do it so Lavazza and Faima just get that on the record
turned me down they'll deny it that's a fact so then I go back to the US I'm trying to raise money and I hit the three titans in Seattle Jack Benaroya Herman Sarkowski and Sam Strom three of the leading citizens of Seattle Washington at the time and the three of them have a little bit of an investment together in other things and they say we're going to believe in you and they take me over the hump wow okay and we opened three Il Drenales 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 much better business long term than coffee beans but probably more capital intensive right eating more staff yeah more labor yes but the stores weren't that expensive to open because they were small less than a thousand square feet and we understood how to do it and I was working as a barista with Dave Olson and other people to keep the cost down we were behind the counter and I had no salary I had no salary for almost two years while Sherry 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 than just a couple years later here you are
not making any money again while raising millions of dollars to try to start your own business it gets worse Sherry is six seven months pregnant she's working her parents visits Yale they're from Ohio father asked me to take a walk oh no god it's my true story take a walk and he says whatever you're doing I respect it but it's not a job it's a hobby you need to get a job my daughter is pregnant she's working you're not I start crying I so embarrassed and I come home it's three four o'clock 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 gotta tell you something happened she was so angry at her dad and so upset and she said there's no way we're turning around we are going so she is the glue to everything that's happened and I don't know if she's 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 if Sherry had said I wasn't going to say anything look at our situation objectively putting ourselves in your father-in-law's shoes how could you not feel that way for your daughter and her impending family and her father was a great guy and I understood but I was embarrassed
and humiliated how could I not be I guess that's another dimension here too this was not 2024 it's not like being an entrepreneur was a glorified profession here in a business that he clearly did not understand you know a coffee store the other interesting thing to point out around this time is for the people who were seeking high-risk business investments you know this is the late 80s it's time to look at tech like we're now 12 years into Microsoft Apple's four years past the Macintosh and 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 started talking about the language of community and 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 !
They were hanging out there and 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 could see it back then. And as I was talking to people about the investment opportunity, I was pointing out, look what's happening here. There's something happening. There's some magic going on here. It's not just the coffee. The coffee was the conduit.
All right. So we're at the pivotal moment. Starbucks and Pete's gets into financial trouble. And the debt to equity was north of six to one for a company that was tiny. Jerry comes to me and says, Jane and I, his wife, are going to move to California. And we're going to keep Pete's, and I'm going to sell Starbucks. And my heart is pounding. I said, OK. And then he finished 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're going to give it to me? I have 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 90 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 think I had about half of it raised. I might have fibbed a bit and said I had a little bit more, but 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 no due diligence and wants to close right away.
For him to take it over, not you. Yeah, yeah, I'm out. I'll 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 it 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 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've got to come to the office tomorrow and meet our senior partner and tell him the story. Bill Gates, senior. A titan. Incredible. The other titan. We foreshadowed this on the Microsoft episode. There were three titans there. But here is the titan. And Bill is six foot seven? He's six foot seven. He's a mountain of a man. And very imposing. So 9 o'clock 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 was going to happen. I go in there. And I must have been trembling. I was just 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. I said, okay. To do what? He says, I'll see you in an hour. And so we walk out. I'm walking around. I think we probably went to Columbia Center to get a coffee and come back. I go back with Scott. And Mr. Gates says, Scott, I'm going to see Howard alone. And Scott leaves. 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 Strom. One of your investors. One of the investors. We walk across the street to the Rainier Tower, the old Rainier 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 five minutes. Bill Gates, 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 a Starbucks coffee company, and he's never going to hear from you again. That was it. And we walk 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. Gates. There's one little problem. You still need the money, right? Yes. I say to Mr. Gates, 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. Hmm. And we raised the money. And that's the story. I never spoke to Sam Strom 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 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 Il Journale cap table?
Like, wasn't he an investor in your existing business? He and his family were investors to the end until they got out. Oh, wow. Until 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 a henchman who was his money guy who figured out we could just take this company. And what do we need Howard Schultz for? He's this young kid.
And Sam had experience with retail, with those auto stores. I see. So he could install some professional management from some other venture. Yeah, I'm sure. Run the playbook. Yeah. It would have been over. But the thing about Bill Gates is I saw him socially 100 plus times. He never, ever said anything public about what he did. He never took credit for it. So for listeners, Howard's told this elsewhere, but you spoke at the Microsoft CEO Summit.
You've recounted this story to the Fortune 500 CEOs. And Bill Gates III, Microsoft founder, comes up to you afterwards and says, 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 2015 or something. So Starbucks, 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 Sr. never told a soul what he did for me. Wow. Again, humility. Incredible lesson about humility. It's amazing. Yeah. And so were Bill Gates Sr. and Bill Gates III investors in that $3.8 million round? Bill Sr. was, but I don't know if it was part of Bill or- But yeah, Microsoft, interesting. 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 three-month 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, because 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 of years ago.
He was part of an investor group, and he brought them along. So the acquisition goes through. Yeah. August of 87, we bought the six Starbucks stores. We had the three old El Dernales, 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 California. They went to California. When did Pete's open coffee bars?
Many, many years later. Ah, so they, you weren't competing right away. No. But this is one of the great observations, David. Il Giornale buys the Starbucks stores, rebrands Il Giornale Incorporated as the Starbucks Corporation. Yeah. And the original Starbucks buys, you know, had owned Pete's and now needs a new name. So it rebrands the company Pete's. So Pete's was actually Starbucks. Starbucks was actually Il Giornale. Yes. It's amazing. Some stats, just for listeners to understand the gravity of the situation.
For the initial 1.6 million that you raised for Il Giornale, you talked to 242 investors, 217 of which said no. So anybody who's griping about their fundraising journey, you know, those are rookie numbers. 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 in the US turned me down. Nobody would believe in the idea. It was like I was cold calling again at Xerox.
The other thing that is worth pointing out is the Starbucks company with the six stores, when they bought Pete's with that six to one 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 want any debt again because of my childhood. I was going to ask you, was that informed by what you had seen with the Starbucks situation or more your childhood?
No, it was totally my childhood. My parents were always in debt. Bill collectors were always calling. And no, 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. Okay. 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 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 quote unquote restaurant business that people are imagining. And I could begin to see even early on the accretive 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. It 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 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 sub 1% of someone's 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 ridiculous business model where the way it shows up is your stores, basically from this point forward for all of Starbucks' life, you build a new store and the profits from that store would totally cover the cost within two years and often a year and a half. But I'll tell you the economic model that we applied to every single store we were opening.
By the way, I chose the first 500 locations myself. So I was in it in so many ways. But the economic model in Wall Street, when we went public in 92, when they heard the model, I said, well, we'd never seen a model like that. And the model basically was a sales to investment ratio of two to one and a operating profit of 20%. So what does that mean, sales to investment ratio? So if the sales were a million dollars, the investment was 500,000.
Just the sales to investment had to be a two to one. Wow. And year one of operation. Yeah, yes. And the operating profit was north of 20%. Wow. So the cash on cash return was just- So yeah, you get that two years at last payment. The retail world had never seen a model like this before. There was no physical storefront that could have this business model before this. Early on, it became clear to us that customers were also starting to customize the beverage on their own.
So we were just, the barista was behind the counter and somebody would say, 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- Espresso. Espresso. And you can put that espresso in frothed milk.
And that's basically your options. Yeah, yeah. Like none of this, you know- Yeah, exactly. But can I tell you a mistake I made? Please. Please. When Il Drenali 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 cup. 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 exists?
Because it doesn't taste good. And it doesn't feel right. Right. Why go to the trouble of this perfected roast of these beautifully sourced Arabica beans from all these farmers if you're going to pour it into styrofoam? Yeah. Okay, so- Did people think you were a hippie? Like when you were telling these things? Like are you on LSD or something? I think they just dismissed 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 Schilt 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 America. We didn't trademark it. We trademarked Frappuccino later on, but we didn't trademark cafe latte.
I wasn't thinking. You got enough right. You don't need to get them all right. No, I just, I missed it. When, the sizing. Grande, Venti. Oh, that was- The hidden trinta. 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'm just talking about the importance of language. We got to get the language right.
And 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 Venti not an original? Venti, we didn't have that size when we started. That was later on. Wow. 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 baristas 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 it 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, to my mind, just starting to create this incredible flywheel, right? 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 interpersonal 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 barista 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 didn't 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?
It was a lot of that kind of stuff. It's your free billboard. Yeah. That people are proud of. Perfect. Wow. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora, the agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there.
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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's like an hour and a half. 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 delights the shareholder or 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. 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. Right. 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 Il Giornale 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 100 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. That was Gloria Jeans out of Chicago. And at one point, I think they had more stores than we did because of the franchising opportunity. And that's one of the reasons why I went to Chicago as well in 87, 88. Because Chicago was the first market outside of Seattle and Vancouver, right?
Yes. Even before LA. Yeah. And it didn't work right away. Huh. Howard Behar 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 recalibrated the mistakes we were making. And of course, he and Oren were so instrumental into the loneliness that exists as an 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 H2O era. And 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 Behar. And Howard Behar joined in 1989. Oren 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 force them to think bigger and faster.
Okay. And then Howard Behar 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 tenet of Starbucks as we knew it through the 90s and 2000s. But that seems like it really arrived with him. And then Oren is like a numbers god. No, he was the adult in the room. Hmm. 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 the doors could say to me and Howard, you're both full of shit. We're not doing that. Hmm. And we listened. More or less. And is it true that the three of you had 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.
Hmm. There's a lot of creative conflict, especially between Howard and I. Hmm. Because he had to operate what we were trying to do. And at times he thought we were growing too fast or ahead of the resources. Hmm. Because he was basically training all these operators, 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 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, there was no technology. No. Were you running like an Oracle system? Not at that time, no. Wow. No. We're talking paper? Yeah, it was mostly manual. Wow. Yeah. I mean, 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-sale systems.
Sounds right. But obviously technology was not the secret sauce. I'm foreshadowing here of the future of the company. Yeah. Yeah. So let's take it forward from this 88, 89, 90. The first market after Chicago, after you sort of righted 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 realized it was a big fight. I just felt in my bones we had to go to LA.
Why? And he said, we're not ready for LA. We're going to San Diego. I said, San Diego? Triple A. 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 wanted to play in the majors. Yeah. So we had a meeting about it and it erupted, erupted into a bad scene. And one thing led to another. We did go to LA. I'm shocked. We did go to LA.
And it was fine. And your conviction of we have to go to LA, was that for? 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 the right decision. And LA, the halo on Starbucks from Seattle to Vancouver and Chicago was nothing. When we went to LA, it just exploded because celebrities embraced Starbucks. Was there an intentional strategy to create? Sort of a luxury brand out of Starbucks that 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 wanted Starbucks to be accessible to all. You'd have a CEO of a company and the person behind him was a blue collar 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, the experience, 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. 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 cachet? 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 costs 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 sensitivity of the price points. And I think in later years, maybe in the last couple of years, given the consumer inflationary time, I think it's become a bit of a problem.
And certainly I've always said as Starbucks was growing, that the ubiquity of Starbucks was an enemy to the company. And the challenge was we have to figure out a way to ensure the fact that we are getting smaller as we're getting bigger. And specifically, how do we maintain intimacy and the currency of trust with our customers and our people? That unto itself is kind of the capsule of making sure that the growth doesn't become so 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 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 how do I do that in a way that provides respect and dignity? Because I was so imprinted with how my father felt disrespected, devalued, 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 a poor family always under pressure with money.
And so I wanted to kind of crack the code on how do we create benefits that would, in a way, take the company in a 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 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 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 changed Starbucks for decades. And along with some other events based on doing the right thing.
I mean, the healthcare for part-time workers. So then, you know, healthcare, I think, 25 years before the Affordable Care Act, what we did was 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 origin story of mine. And the tragedy is my father passed away and never saw what we were able to do. Do you want the stats on that initial employee stock grant?
I'd love to hear it. So the program was called Beanstalk, listeners, that Howard was alluding to. Amazing name. So in 1988, the 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, Beanstalk 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 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'd.
Since even the part-time employees and baristas 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 we've studied 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 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. You just basically have extra money lying around is what Costco discovered. There's so much about Starbucks to David's point that's similar to Costco.
Did you ever speak with Jeff Brotman or Jim Senegal or any of those guys about this concept? Do you know the answer to that? I actually don't. No, we don't know the answer. I assume the answer to this, but I don't know it. First, Jeff Brotman invested in Starbucks in the round to buy Starbucks. No way. Yeah. In that 87 round. And that's when I met Jeff for the first time. Jeff became a board member of the early imprinting of Starbucks and clearly a mentor, mentor of mine.
And then he introduced me to Jim Senegal. 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 Starbucks saying, no effing way. Wow. And we did it. And Jeff and Jim took me to a parking 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. Yes. And that brand awareness of I buy Starbucks beans at home meant that that group of people went to the stores more often.
Because we introduced thousands of beverage customers to Costco through the beans. Wow. So Jeff and Jim were instrumental in so many things and were so kind to me as a young kid. Then we went nationwide with Costco. So this is a thing that I think many people don't realize now that Starbucks is ubiquitous. We sort of forget about this time when it wasn't and where people had to find some way to experience Starbucks. You know, you only get a few 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 Costco's 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 with just finding little billboards everywhere where you could put the Starbucks logo 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've 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 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 that you can do that actually might spit off some profit dollars.
But at the very least, it's a breakeven 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 did- But you weren't spending any money on marketing, so- But United Airlines was paying you for coffee, I assume. I don't know exactly how the deal went down. But yeah, I have to assume that Barnes & Noble was basically the same thing.
Barnes & Noble was a different deal. I met Len Riggio, 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 piece of trivia that you may know related to Costco. Do you know where Jeff Bezos and Jim Senegal met for the first time? Sounds like in a Costco. Not in a Costco, in the Starbucks, in the Barnes & Noble, in Bellevue. Did not know that. And that led to so many things, Amazon Prime among them. Yeah. Did not know that. And I still am friendly with Jim Senegal today. I mean, your companies rhyme in so many ways.
That's not surprising at all. I want to talk a little bit, before we get to the IPO here, about what the strategy was when you expanded market by market. Did you try to sprinkle a few stores in and see? Did you try to move into a market with force and be the dominant coffeehouse chain in that city? And in particular, it could be worth talking about Boston. Well, Boston's an anomaly because of the acquisition. But Bihar was so strident in not expanding to multiple markets at once.
And he was 100% right. And so we went to Chicago, went to LA, and we stayed there for quite a while. Went to Portland. We weren't ready for New York City in terms of the issues there. But we were very diligent. You went to DC first. Went to DC. 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 Bihar. Because he was managing all the operations. Boston was very different. We had a very strong, high-quality competitor called the Coffee Connection in Boston with a owner-operator in George Howell 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 Connection, right?
Yeah. And so George and I never saw eye to eye. But it was clear that if we came to Boston in a significant way, we were going to impact his business. And I think to his credit, he was willing to sell. So Coffee Connection was the first acquisition. And we had to tread very lightly after the acquisition because of the loyalty and be careful with the name and 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 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 the purchase. I think it was one-time sales. I think we were. Maybe a little over one-time sales. And the original Starbucks, ironically enough, was exactly a one-time sales, right?
That's what you bought it from the founders for. If they had the lock on all the best real estate and they had burned all the capital figuring out what stores we should be in, what stores we shouldn't be in. And then you just get to move into that market for one-time sales, 1.5, whatever it is, with all that already figured out. 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 it always seemed like in the good old days, everything was undervalued. Yeah. OK, let's talk about the IPO. So it seems like you knew the moment that you bought Starbucks from the founders, this is going to be a public company. I thought so. There was no... I think 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 and security as a kid.
So that was a... I was a driving force all along. Certainly the year before with Beanstalk is an indication what I was planning. If Beanstalk was turned down, I would have waited. I just... I 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, God. I don't... I remember exactly. I know what the market cap was the day we went public.
I think you ended up doing 93 million that year. But the year before, it was 50 million or something like that. Companies went public when they were smaller back then. But you were a small cap IPO. Yeah, we were. And 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 the... They were the patina on the prospectus to have Goldman Sachs.
It would be a very Starbucks thing for Goldman Sachs to be the lead left. Well, Blank Fine. I had a good friend who was a senior partner there who's since passed away. I thought I had it locked. I mean, there was just so many things about it. New York, everything. And they said, no. You're too small. Well, the thing that Dan Levitan told us years ago when we did an episode on the Starbucks IPO was that you were really only considering smaller banks because it was going to be a smaller IPO.
Well, I was considering it because Goldman Sachs turned me down. They told you. I had no choice. I had no choice. And Brotman at the time was not a big fan of Wertham Schroeder, 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 roadshow. 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 coffeehouse chains. I mean, truly unheard of. So when you're going on this roadshow, I think people, of course, are mystified. There's literally no public companies like yours. You have a huge investor education problem, right? Yeah. I think we had to take them through everything. We had the product there.
You know, we served coffee. I, you know, gave them the whole show. We had a short video that was probably in black and white. Right? 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, I mean, 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. You know, you're the first publicly traded coffee company. You end up doing $93 million in revenue that year. Do you remember the exact price? Yes. I mean, 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? Yeah. I guess 12 months before. Yeah. Six bucks a share. They tripled their money. Yeah. Fantastic. And that was when you started calling them partners, right? When they became. 91. As soon as Beanstalk was instituted, everyone was a partner.
And is that when you did the lowercase, when titles all became lowercase also? No, everyone was lowercase from the beginning. Oh. Out of respect. Everyone's lowercase. Listeners, when you look up a Starbucks employee on LinkedIn, it always looks like, is that a typo? Is that a mistake? And then you realize there's a pattern. All employees always put lowercase titles. So another interesting thing about the, 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 buy-in and getting them to bleed Starbucks as much as you did? Not intentionally. No. Okay. Not a strategy. No, that was not a strategy. Interesting. So then from there, you open in Washington, D.C. on the East Coast. I think that the reason you picked D.C. 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 up, but that's accurate. In 1995, you crossed 500 stores. You had just bought the Coffee Connection, as we talked about, in Boston. And they had one asset that was perhaps much more valuable than any of the real estate or any of the sales that you would generate from there. They owned the trademark on the word Frappuccino.
And I'm so smart that I looked at that Frappuccino with disdain. Really? I didn't like the name. I didn't like the beverage. I didn't think it was appropriate for Starbucks. And because I just saw Starbucks as such a purity with regard to coffee. And I was wrong. Dead wrong, obviously. Putting myself in your shoes back then, now Starbucks and Frappuccino are like, it's like a synonym. It's like you can't disentangle them. But yeah, it's very different than coffee.
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, it was just, it went crazy. So what changed your mind to greenlight it? I didn't have a choice. I mean, it was, Coffee Connection had it. Then we had it in Boston. People wanted it. And I just went along. And you ended up like reformulating it, right? It wasn't exactly what the coffee- A store manager in Santa Monica reformatted it.
And she was on it. I think Howard Behar 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 in retail, but what we ended up doing with it. In terms of leveraging the brand and distribution. That's another great story. Was that your first bottled drink in retail? Yeah. Yeah. So I went to Atlanta and Pepsi in the same day. Atlanta being Coke.
I went to Coke. I went to Pepsi in the same day. The Coke meeting was a meeting that lasted less than 30 minutes. I can't remember who I met with. They dismissed me. Didn't view Starbucks. Didn't understand what I was trying to do and didn't give me much time to even explain it. And then I went to Pepsi. And this is 95-ish? Mid-90s. See, 500 stores, your public company. But no one- But in East Coast, Starbucks wasn't really well known.
So I went to Pepsi and purchased New York. Met Roger Enrico, the iconic CEO. And Craig Weatherup, the president of Pepsi. They loved 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 dollar business for Pepsi and Starbucks in a 50-50 JV and bottle of Frappuccino. And Craig Weatherup 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? Because 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 store 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 power of Starbucks and bottle of Frappuccino and doing something we had never, no one, it was no bottle of coffee, let alone. And 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, 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 estimate it better. But you can see where 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're like 800 stores. Yeah, but then something else happened. And that is, we wake up one day and someone says, Starbucks is in a movie. And we said, what movie? You've got mail.
That wasn't coordinated? First of all, Starbucks never paid for placement. Someone must have approved it. I knew nothing about it. And then someone said, you've got to see this movie. Starbucks is all over it. I said, what movie? Tom Hanks, you've got mail. With Meg Ryan. I knew 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. We were so in it that 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 ahead of it. Never. And so there was a constant push. And I think this is where Oren was the wise man in the room to say, Howard, we just can't do that now. We don't have the infrastructure. We don't have the people. We don't have the systems. And I'd be screaming, we've got to do it. If we don't do it, someone else is going to do it.
We've got to do it. And that takes us to international. We weren't ready for that. Yeah. So I want to... Putting a bow on Frappuccino. Yeah. The year after it launched in 1996, Frappuccinos were 7% of revenue, which I can attest to. Maybe freshman year of high school. Seven-year-old Ben is like... I had my first... Hit me with that Frappuccino. Tall mocha Frappuccino with whipped cream and a little chocolate drizzle on top. And now here I am drinking...
What are we drinking here? You're drinking coffee from India. Yeah. And it's so good. No cream, no sugar, no this. No, no, only black. Yeah. And so the Frappuccino began my journey to the good stuff. So that's the Frappuccino story. 96, 97, 98. I mean, this is the international story. So I love the Japan story. You've told this to me before, but I'd love to hear about it. Okay. And there's a couple of things about this.
I started taking a couple of trips 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 off. This would be like an American luxury leather goods company coming in and competing with Hermes. Yeah. Not going to happen. And so we said, we just took it off the map.
And then we narrowed our focus very quickly on Japan. Japan had a couple of thousand coffee stores named Dotur. You 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 a board member said, if you're considering this, hire an outside resource to do a study.
But I was livid about that. Aren't there some consultants you could possibly pay to help this? And so we hired a consultant who came back with a 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 kept thinking about this. And then one day, we get a handwritten letter from a Japanese company. And the founder of the company, Yuji-san, had a LA restaurant. And he was enamored with Starbucks.
We sit down with him. We fall in love with him. And 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 the folklore at Starbucks, which is not that unrealistic, is the reason we went to Japan as an international market is because it had 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 live. Or they got cameras.
High risk, high reward. Wow. I'm so nervous. At 6 a.m., we get in the car. It's so hot. The tie around my neck, it feels like 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 is my witness, just like that. And I said, holy shit. How did they know? And Japan was an extraordinary success from minute one. We got 2,000 stores there. I was there two months ago. Incredible. We have a roastery there. Why were there people lined up around the block? Why did it work so well instantly? Was it a strong coffee culture?
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, and by the way, the research, that cup was all over Tokyo in months. Everyone was walking around with that cup. And this is nine years after you bought the six stores. It has turned into this icon. In all the events we just covered, Starbucks has already become Starbucks.
It is already this globally desirable brand. There by 1996. I honestly haven't thought about it in that way. That's so fast. I mean, to build something that... Didn't seem fast to us. I bet. The parallels to the Microsoft story are just so apt. 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 Kei 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.
They spent 50% of Microsoft's revenue for the first at least five years. And they stayed 50% international permanently. And that's what took them from this Albuquerque to like, hey, we're international. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done.
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So Japan's 96. In 97, you cross 1,000 stores globally. You're getting your feet under you. You're saying, okay, international is going to be a thing. In 1999, you... 2,000 stores. 2,000 stores. Because we had a goal of 2,000 by 2,000, we beat it by year. 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 honestly don't think we had any real understanding of what we're getting into.
And we went there with a partner that didn't work out. I should tell you that we had a theory of the case that any international market that we opened that didn't speak English, we needed a partner. And so 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 going. So you closed all the stores? No, no. We got out of the partnership, bought them out, and became company-owned.
And so that was legal to do that, to be an American-owned company operating in China. Yeah, but we struggled in China for almost a decade. Lost money. There was tremendous pressure inside the company that closed China. Until Belinda Wong, maybe the most valuable person in the company, from my view. Really? Yeah. When did Belinda get involved with Starbucks? Belinda was working. She started with Starbucks in Singapore, but she was working in Hong Kong. We were open in Hong Kong.
And 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 were really in trouble. Would you come to China and run it? And she said, I would consider doing that, 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 took over the role? I think it's about a decade after we opened. Okay. Well, I asked- She's still there today. I asked because I want to come back to it. There's a whole interim between 2000 and 2008 where you are not the CEO of the company. Right. So in 2000, I mean, 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.
No, it didn't. Like, you read all those investment banking reports and it's like, hey, Starbucks, here's all these price targets for Starbucks and here's what we think they're going to do in earnings. And oh, they beat it again. And like, I don't know, 30, 40 quarters in a row. It's just like this, I would say perfectly predictable, except you actually kept exceeding the expectations. So it wasn't predictable. I did 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 league. The lawyers took over after that many years, but no script. Which is your preferred communication style. I mean, it seems like whenever I see you up speaking, there's no teleprompters. It's from the heart. So at this point, I don't want to say 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? Yes. Executive chair with Orin as the CEO. In 2000. Yeah. What was your... I was, I was, I think I was physically and emotionally exhausted. Kids were getting older. I had missed a lot. Just think about all the things we're doing. And I had so much confidence in Orin, 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 3,500 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, you know, it's going to work out. At some point, Orin transitions the CEO role to Jim Donald, which I assume you're also very involved in. Yes. Yes. In working with him. What was that transition about? Orin never wanted to be the CEO. He's not a front guy.
In fact, he's shy and 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 need a new CEO. And we didn't have anyone internally. Behar didn't want it. And so we did a search. We met Jim Donald. Great, great guy. Had all this operational experience. And then certain things started appearing. We just weren't hitting our stride the way we usually do.
The economic environment was getting tougher. And things just kind of unveiled itself that 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 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, 2008 happens. And so the cataclysmic financial crisis is unfolding. And that plus the cracks that we were experiencing.
Board meeting. And I don't think the board meeting was set up for me to return. But it just kind of happened in the meeting about, OK, 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 was never your intent. When you stepped away, you thought you were really stepping away. It was not my intent to come back. And it was certainly not my intent that we're going to run into problems.
And so in the Christmas vacation of 2007, I knew I was going to return in January. And 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, I didn't know he was there, but it was Michael Dell 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 2008. And when you came back in 2008, I mean, this is the whole crux of your book, Onward. There's an entire book's worth of material here. So we're not going to do it all. But suffice to say, just to put some numbers on it, the market cap had dropped from $30 billion to less than $7 billion.
Same source sales, the comparables number when you compare the store this quarter last year to this quarter, you know, this year to last year, had dropped. Growth began to slow. 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. First off, every rock I turned over was worse than I thought. There were a lot of unperforming stores that should have never been opened that we need to close.
I think we closed a thousand stores. And I had a company-wide meeting. I remember it vividly because I started crying and apologized 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 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've let you down. I promise I'm going to 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 a big, successful company. It's fast-growing. It's profitable. And then I read, you were seven months from being insolvent. So we didn't have enough cash. We never had negative comps in the history of Starbucks. So negative, I didn't- Every single quarter was better than 12 months before. Never had a negative comp month in my history of the company. I didn't even understand how we- I didn't understand it.
It's such an anomaly. So we closed all those stores. And then you got to decide, OK, how do we turn it? What do we do? And I think going back to your line of questions in the past about the people is, of all the things that I could point to that demonstrates what Starbucks is, has been, and needs to be. 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 that equation. And so I just said, I need to be in front of every store manager. I need a meeting with 10,000 people. It's a 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 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 walked through and we built basically a tutorial on how to restore the business and how people walked 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. 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 shit 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 you... Yeah, well, social media didn't exist at 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. 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 was manageable and tangible. 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 the problem when you get this big is you start thinking about large numbers. But if you reduce it to the 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 did crazy.
I mean, the tactics involved in the turnaround. We closed the stores. For what? Noon onward, right? For an entire afternoon and evening. Because the previous administration had done things that diluted the integrity of coffee to maximize yield. Like what? What does that mean? Well, let's say you're making a batch of brewed coffee. Yep. Well, what if that brewed 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. Hmm. It's little things. Just 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. Mm-hmm. And what are the headwinds? Headwinds were the level of attrition of customers. As the financial climate deteriorated.
Yeah. Yeah. Spending that $6 on the latte daily habit. Yeah. Gets harder to justify. And we weren't as good as we were when we were small. Yeah. Then it makes it easier to give up. And this goes back to what I said earlier. Growth covers up mistakes. Mm-hmm. And success breeds hubris. And it did. How could it not? I mean, 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 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 order and pay, which we haven't even talked about. Which is a thing I love and do every day and depersonalizes the experience by definition.
Yes. Starbucks demands nurturance. It's 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 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 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 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 as long as these numbers, 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 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've been- 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 story you have about Steve Jobs around this point in time too. Yeah, it's a funny story, another story. And so in Hawaii, when I was on vacation, I'm talking to Michael Dell and Benioff.
And you're cycling with Michael Dell, right? Yeah, I'm cycling with Dell almost every day. And I'm talking to Benny. Michael introduced me to Benioff, didn't know him. And so his- It's a pretty good Hawaii crew. So I get back and Adam Brotman is 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 around mobile order and pay and other things. And I met Steve on a phone call. I never met him. I was talking to him on the phone. And 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 and we'd walk around the building. Have you heard this before? This is Infinite Loop at their old campus?
Yeah, yeah. Yeah. And so I went down there and basically went down and we took a walk. And I just told him all my problems, everything that was going on. And he just stopped me. And he said, this is what you need to do. Just look at 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. Effing fire all those people. He's like screaming at me in my face. Fire all those people. That's what I would do. I said, Steve, I can't fire all those 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? Yes, they were all gone.
Wow. That's the story about Steve Jobs. Wow. Did you ever call him back and tell him? Oh, I talked to him since then. And we were on stage together at an event. And I told him, they're all gone. He said, well, you're six 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, I think today, 33% of Starbucks orders are done with mobile order and pay.
So obviously this huge pillar 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. That's right. And now you have the most sophisticated technology platform of probably any retailer in the world. So you're talking to a non-tech person. So I'm not focused on anything other than the customer experience. Yeah. Adam Brotman, to his credit, along with Stephen Gillette, who was at Starbucks very shortly, came to us with the idea of building a mobile app.
I didn't even know what it was. Honestly, we're in a meeting. I'm trying to figure out 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 apps exist.
Well, 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 then, holy shit. Overnight, it was just an unbelievable new vehicle. Now, if we fast forward, I don't know if you want to do that here, on 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 became so seductive for the company. It also created an even better business model for you, right? It was more efficient and you get the float with customer funds. All that is true, but it was beginning to deteriorate at a rapid rate, the third place experience and the sense of community.
And then, it over flowed 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 a.m. Because people wanted to show me the problem. And so, everyone is getting off the loop, the train, at 8 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 wasn't involved in the company from basically 2018 to 2022.
Yep. I was not involved. You stayed CEO from 2008 until 2017. Then I left. And 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 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 the company has that problem today, which they will solve. But it's late. And also, everyone has caught up to we were the only game in town. And the novelty of that and the uniqueness of it, especially for our product. And everyone pretty much copied it. It is interesting. 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, if you look at Starbucks' financial statements, right now, at any given time, there's about $1.8 billion of cash that Starbucks has gotten in the form, effectively, as an advance from customers, that Starbucks can use to operate. It's like this amazing— Investing in the growth, capital, you know, store expansion, et cetera, et cetera. Right. We're not the only one. I mean, everyone— Right. You know, Amazon has this. Apple. Apple has this. Berkshire has this, the insurance business.
Yeah. But it's effectively interest-free loan from customers. And a loan that's not all going to get called at once. Some of it will never get called. Right. The breakage. And so there's this benefit of, like, it's a reasonably predictable amount of cash that comes in that you get to use, you know, for your advantage. In terms of velocity, about $14 billion a year gets loaded onto gift cards. That's unbelievable. I mean, 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 idea itself. And I think whether we talked about bottle frappuccino, the cup, you just thread all these things. 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 disruptive innovation to monitor how is it being used, how is it being abused, and the era of judgment. And the period where this was really kind of, where it really took hold, this five-year period between 2018 and 2022, is the government didn't exist. Oh, you feel like it wasn't really taking hold in that whole run before. It was taking hold. And I'm not criticizing anyone because we're all, everyone's trying to do a good job.
But the result is the runner, 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 my view is, we should not succumb to the mobile app. Looking back now, I'm not, when you were in the moment, and you and others in the management team, things happened. 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 don't think I would have allowed the mobile app to be on demand 24 hours a day. Hmm. I would have slow rolled the availability of it and then understood how it was being used and whether or not it was going to disrupt the experience. But now it's, you know, on demand, whatever you want it. Right. And now you can't. You can't shut it off from eight to nine. Right, the expectation's been set. Dini's out of the bottle.
Whenever I get that message, you know, mobile order ahead is not available at this time. I'm like, oh, but it's available 99% of the time. It's not available now. And because the store's over. Yeah, I won't even go to a store if it doesn't have. The store's over. You wouldn't go. Yeah. That breaks my heart. I hate to hear that. Well, there's certain stuff. No, I understand. I went to the Presidio store yesterday in San Francisco and I would go there no matter what.
No, I 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 in charge. All right, listeners. Now is a great time to thank our longtime friend of the show service. Now, if you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.
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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. Talk to us about real estate. The basic idea early on, given the beverage's velocity in AM, 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 count how many people were walking by, what hours they were 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-tenancies of certain tenants that would be interesting to us. We also were very intrigued with being next to a grocery store early on because of the frequency of which people were buying food.
Anytime we were in an office building where there was 3,000 to 4,000 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 a decision I made early on not to 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 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 a commodity-based product. Well, as you've been saying, 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 don't want Starbucks to become transactional. Coffee is personal. The biggest magic and, 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 politics? How did we do it? That's actually quite befuddling to me. Yeah. Because so many food and beverage concepts do not transfer geographies. 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 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 U.S. 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 sort of into the 2010s. 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 rut. By 2017, there were 3,000. And 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. 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, it was exactly what you see right now. There's 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 didn't see eye to eye, so we got them out. When Belinda came along, we had a world-class 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 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 wanted to centralize China. I report to you. It's you and me. And John Culver, who runs International, takes Seattle out of the equation. We were failing. What choice did I have? Hmm. She turned it. She single-handedly built the China business. Today, 18% of Starbucks' 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 meetings to tell the Starbucks story. 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 something that had never been done before and provide health insurance to the parents and grandparents of our partners. Cool. Cool. So the Chinese government was so intrigued, sitting down with them, saying, 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 want to do everything we can to benefit our people. Humanity. And it's universal. But it's so, I think, important to just create some guardrails. So one day in the early stages of Starbucks, Howard Beyer comes to my office one day. Remember, we're small at this stage. And he says, we got a terrible situation. He said, the manager of the Seattle Trust store on 2nd and Madison, Seattle, Tom Kerrigan, has AIDS.
Now, AIDS at that time was like leprosy. Leprosy. So 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 Kerrigan 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 story about Starbucks employees wanting to buy a cow for a farmer in Africa. And stories about Flint, Michigan. And stories about 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 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 one-off 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 Starbucks does. And we're not perfect. And so we do make mistakes. And 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. And it's tough to fight that. Are you open? I'd love to kind of flash forward. 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 CEO and has been in the seat for about a year. You came in after a tumultuous COVID era and tried to basically figure out who the successor was going to be and patch the ship in the meantime.
A lot of stuff 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, complex question. I think my personal relationship with the company and how personal it is to me and the things that we, not I, but we have tried to do to build a different kind of company.
When the country started moving in a post-COVID era to a direction that I didn't recognize, very, very hard to understand why Starbucks would be under assault or just being challenged this way. Particularly when you had built a reputation on a fact pattern and 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. And then I think underestimated the groundswell of public sentiment for this movement in America. And then became vilified for trying to defend the company in a way that I thought was appropriate. 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 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 my heart's with the company. 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 fast and 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 of 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. But I don't think we get much credit. Maybe we shouldn't. Maybe this is 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 being taught in business schools. And people on the outside view it as 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 execute that because 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. 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.
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 450,000. 450,000 now. Globally. I must be using an old number. And over the lifetime, the company has employed over 5 million. Yes. 5 million alum. At a scale right there. 39,000 stores globally in 86 countries, almost half of which are in North America, 18% in China.
And about half of those are licensed franchise and half are company operated. And so while we're not, you know, you mentioned we don't franchise in the traditional McDonald's sense. You do these joint ventures. And you do this way of entering countries where you don't need to own and operate the entire store yourself. They're not franchises in the typical sense. Yeah. So tell us about that. 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 every country is different depending on the economics of that country, the political issues. Some countries have been an 80-20. Starbucks owns 80. They own 20. Some are 50-50. Some of the 80-20 started out as 80 for us, and they brought it in over the way. It depends. But the key thing is, whether it's Alberto Torado in Latin and Central America, Muhammad al-Shay in the Middle East, the Tata group in India, the Percocci family in Italy, they understand the culture and values of Starbucks.
And so tactically, 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, for all the recipes which are consistent with Starbucks worldwide, a co-design of the store, where we're designing the store with the JV or the licensed partner, and they control all the operations. And so all of Starbucks' franchise or licensed stores are done in this way, where there's a partner in a country.
Yes, there are no individual licensed franchises of any kind unless it's certain real estate that we can't get that we want access to, like a roadway on a highway in Switzerland. It's something odd. And airports are this way, right? Airports are master licensed with the master licensee, like whoever has it in Marriott or whoever has it. I gotcha. Or Target that has 2,000 Starbucks stores. And those are Target operated. Yes. I see. And great partner. And Brian Cornell, great guy.
And it's interesting. Basically, half of Starbucks stores look like the platonic ideal of coming out of the Starbucks HQ, here is how we imagine 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 spend a lifetime doing this. I mean, ideally, you 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 admit that. So one market that we haven't talked about that I want to ask you about while we're in this, and 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 Starbucks in Italy. And the belief, at least as I see it, is they've perfected the coffeehouse concept, don't bring an imitation in here.
Yeah. But it's worked. It's working phenomenally well. Why is Starbucks being so well received in Italy? So I know I'm going to be chastised for what I'm about to say, but it's true. 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 my truth. If you don't believe you have a better product, who does?
Yeah. But I didn't think we earned the right to go to Italy until we were really ready to present ourselves in the best possible way. Because I knew the knives would be out for us in ways that we couldn't even possibly imagine, given 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 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 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 turned on Willy Wonka. I was going to say that. It has to be. It's got to be. Turn on Willy Wonka with Gene Wilder. And we went to work starting to design a space. Now, we realized early on. And this was what, 2013? It was seven years ago. 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 accretive to the brand and significantly elevate Starbucks, which is fighting ubiquity all the time, every day. And so we created this 30,000 square foot space in Seattle, which we opened seven years ago, which is the most dynamic, entertaining vehicle of theater, romance, seduction. And we opened it to rave reviews. And we're manufacturing, like Willy Wonka did. We're manufacturing and roasting coffee in the space.
Which makes the smell of the, it's just amazing. So we opened it up. And then over time, we started opening a couple more. We got approval from the Chinese government to manufacture in the center of Shanghai. We opened up a 40,000 square foot in Shanghai. We opened up an incredible space in Tokyo. We opened up in the old crate and barrel space in North Michigan Avenue in Chicago. We opened up in the meatpacking 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 Percasi 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 site. Not the right site. And I'm standing on the corner of Carduso Square. And I look at this space. And I said, what about that? And he says, that's the post office. You can't get the post office. I said, well, it's empty. It's empty. You can't get it. So I said, can I meet the landlord? He said, Howard, it's the government. I said, well, who's responsible for it? So they arrange a meeting for me.
And I meet the broker who's involved in this. But it's empty space. And I 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. You have to tell me you're the landlord. Private equity that's letting real estate sit empty? It's empty. I know where this is going. OK. It turns out. I know I'm going to get killed for this story.
You're going to have to fix this. Turns out the owner of the space is Blackstone. I knew it. I knew it. Of course. Of course. So I said, why am I in Italy? I called John Gray. You've got to go to New York. I called John Gray up. No way. I said, John, I'm in Milan. Do you realize you own this space in Cartuso Square? There used to be a post office. He said, I don't know.
Let me check. I said, John, I'm coming to see you tomorrow. I'm on the next flight. We do the deal with John Gray. Amazing. It's unbelievable. John Gray, of course, being the number two person at Blackstone. And John's a big fan of Starbucks. He had previously been in Seattle for a wedding or bar mitzvah or something and saw the roastery. So 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 roastery opened? No, Milan opened first. First the roastery. Then 30 stores. We're in Milan. We're in Rome. We're in Florence. And two, three years later, what do you think the number one beverage is? It's espresso for Starbucks. Yeah. Yeah. Straight espresso. Espresso is the number one beverage. Wow. And so I don't take 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 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. And that they're choosing to get their espresso at Starbucks. Yeah. Yeah. Yeah. So, you know, Italy, I'm going to Italy, I think, next week.
But just, for me, the gratification, the satisfaction of, you know, complete full circle from 1983 is just beyond belief for me. So 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 has 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 specialty 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 that have then also become Starbucks consumers.
And maybe they wouldn't have been coffee culture consumers at all. Yes. How do you define third wave coffee? Actually, Howard is probably the best person to ask. I mean, it's a very intentional, independent coffee store that is small enough that they're roasting their own coffee or getting coffee from a small proprietary roaster. Mm-hmm. And creating a very unique, handcrafted experience that in many ways Starbucks can't do in scale. Right. And so 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 marketing showpiece? Some are making money and some aren't. Wow. But I've never viewed it that way. It's like the billboards. 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. Arnaud to the roastery.
Really? Wow. Yeah. In Milan? In Seattle. In Seattle? He and his son, yeah. Wow. Yeah. I spent a good amount of time with him. I've taken a lot of retail CEOs and iconic business people through the roastery. I bet. 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 fair amount of time with him and his son. His son will now run Tiffany.
Oh, great. Wow. And his level of curiosity was very high. I remember he kept looking at the leather railing and the stitching, and I just said, he's spending a lot of time on the leather. I bet he was. Maybe there's a partnership to be done. Okay. So now the question sort of becomes, what are the set of circumstances that had to be true in order for Starbucks today to exist? And the one thing we haven't talked about, or one of the things, is how much of what Starbucks has accomplished could have happened if it wasn't an addictive substance?
Like, it's kind of this incredible thing that it's a legal drug that all the research anyone'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 or drinking, as research comes out over time, we find out, shoot, that wasn't good for us. That's not the case for coffee. No. 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'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. I also think, and we haven't really spoke that much about it, is I can't state enough over the last two decades what customization meant to the company. Yeah. And how customers created a personal beverage well beyond what the menu was.
And I don't know any other business in which the incrementality of the price has been dictated by the consumer. The base price is X, but most people are doing something in addition. X plus Y. I have 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, I'm like, I can't ask for whipped cream on top of it.
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. Yes. 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. Yeah. And I think the Starbucks barista deserves so much credit because they 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're making something for the first time. Yes. I think the number that people use inside the company is 100,000 different variations of beverages that are being made consistently. 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. Yeah. Of course. Because on the other hand, you're in a highly competitive market. Right. Yeah. Highly competitive. Selling a commodity. And the market actually is not just coffee. It's, let's stick with this theme, it's caffeine broadly. Well, I know. There's Coca-Cola, there's Pepsi, there's, you know. Well, not only that, but every food company, every retail food business from McDonald's on took a page out of Starbucks, went to school on us, 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 Folgers and Maxwell House. There is a unique tapestry that we've been weaving throughout this episode that, you know, in Hamilton Helmer's terms, has power here. Mm-hmm. Yes. Coffee. So here's my second one in addition to the, it's addictive but delightful.
It is perceived to be virtuous to be a barista, or 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 coffeehouse chains get to enjoy because it's respected to do that work. And I'm curious, why do you think that's respected when similar ways of spending your hours in restaurant work isn't?
First 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-through, and I saw a video where the barista knows the name of the dog and knows the, it's just, the whole thing is just 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 have been able to do is elevate the experience at the drive-through, 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 is 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 pitfalls of ubiquity that we were discussing before. The fact that it is everywhere almost cheapens the experience. To me, Starbucks' 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.
It's reliable. It's predictable. Like, it's the same reason I bank with Chase and I buy Apple products. It's this thing that I just know works everywhere and I never have to, you know, take any risk on. And Starbucks didn't have that when 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. 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 is the framework of the daily challenge of the company.
Mm-hmm. 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 answer. You know, along with this long list here, this obsessive quality of product, the fact that product isn't just product, but experience is the product. It's everything you experience around consuming the beverage itself. It's 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, 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 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, get a product in people's hands. The third place, you know, very novel idea at first. Turned out that was something basically the entire country and then the world wanted to participate in. Not obvious at first. And it's so easy to think about these things that now we take completely for granted. Like, Starbucks is infrastructure in our society.
It is assumed. Like, when I go to 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 backwards place am I in? Like, it's expected. And when you live with something, you know, most of your life, you forget that it was once a crazy idea. I think that's the... Yeah. I think the other piece that you didn't just list off there that we've covered in depth is, you know, the Costco-like investment in your employees and the people and the reduction of turnover.
And, you know, 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 like the key element to building the humanity, right? Like, I don't know the employees at my Costco store. What's the stat that you have on... I've heard you say it a number of times on 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 industry-wide.
Yes. It makes a huge difference. And you've talked about Beanstalk. 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 four-year free college tuition through Arizona 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 is 5 million alum. 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 but would have been more commoditized.
A Dunkin' Donuts, for instance. Yeah. I don't think anything would have been executed like Starbucks. But I think someone would have showed up. Right. The opportunity was just too much white space. There was clearly demand there. We were coming off this horrible Folgers and 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. The first business plan, and I've said this many times, when I was raising money was 100 stores. And I wasn't raising the money and I couldn't afford to reprint the whole document, whatever that was at the time. And I whited out. No one is going to know what that means. How do you use whited out? Whited out 175. When was the last time you used a whited out?
Yeah. It's been a while. It's been a while. Wait, really? Yeah, I whited it out at 75 because I couldn't. Did it feel too ambitious? Yeah, people didn't believe. Think you were crazy. But we never, you know, Japan was the turning point of thinking we could build an international business. But none of us had any international experience. No one. In the entire company. I mean, in many ways, you could say this shouldn't have happened. Yeah. Okay, so this brings us to the absolute magic of founder-led businesses.
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 because 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, 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 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 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 Il Janali store only played Italian opera and had no chairs.
Probably wouldn't 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, yeah. It's completely different than that. No, I think I had to see the light. I had to understand. We were not in business to please me, but please the customers. I mean, what is it? 70% of drinks are now iced beverages, and it was when you started, 0%. Didn't have a cold beverage.
For the first decade, it was 0%. Yeah. So to me, there's this thread of, 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 your... It's not that there hasn't been innovation. I think 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... I wasn't really on my mind. And the marketing and the merchant mentality of Starbucks was always with me and probably did not allow others who were well-intended and could have done good things 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's covered up things and then was revealed when I left.
I mean, it's the very things that make the business successful, the founder bets, that then at some point in the company's second act kind of hold it back. You have all this muscle memory as a company of relying on founder maverick acts. Yeah. And at some point you need to figure out how as a company to not. Well, the other thing about that is most founder-led companies are entrepreneurially driven. 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. It's 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 hubris.
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 offensive mind, it's not going to go well. And I think over time that has happened at Starbucks. 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 the year's 1999 or 1997, so you can start working on some talent development.
What would you do differently to make sure that succession... I would have believed Oren when he said, I only want to do this for a couple of years. And I convinced myself I could just get Oren to do this for five years, maybe 10 years. And so when he kept saying, I don't want to do this anymore. 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, but I didn't. I was very... I believed that I could convince Oren to stay longer. And so I think... And also, Jim Donald's a great guy. But I think the immersion of an outsider at that time, given we were moving into a crisis, not a Starbucks crisis, but the 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 say one more thing about Starbucks and 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, many of which are not in our control. Political, all kinds of stuff. Second, we are manufacturing a commodity that is very, very challenging because it's coming from 30 producing countries. And 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's art. And so 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 Pepsi-Cola. And above all else, we are in the people business, managing the behavior, the motivation, and the opportunity creation for almost 500,000 people. And we're a public company in which the expectations based on our success have been higher than most.
Not to mention your quasi-financial institution too. Yeah. And we've got, yeah, all of that. And lastly, I think the personal responsibility of a founder, in my case, who loves this company as much as I love my family. And so it's a challenging, fragile thing on a very personal level. And you can't escape it. 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 and 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 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. Yeah, better. You've got to be better. Again, and your success is not an entitlement like Starbucks. It just isn't. And when you have success, it gets harder. Because the bar keeps getting higher. Yeah, that's just human expectations. Going into this, I was thinking, 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 literally just has to keep growing.
But it's just human expectation that things keep getting better than they were last year. They should. They should, yeah. 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 can't leave the episode without thinking about.
And I feel like we covered a lot of those in Playbook. And so rather than drilling into that again, we were talking with Howard, and he threw out this idea. I really do have one more thing to say. Yeah, given this moment that Starbucks is in right now here in summer of 2024, this felt like the right way to address that. Back to the interview. Well, Howard, we're at the end here. And I think listeners may be wondering, OK, but what about Starbucks today?
And the last few years have seen, you know, you come back as interim CEO for a year, transition to a new CEO. It's been about a year after that. And it's been a rough couple of years. I mean, part of it is coming out of the pandemic. But I think anybody who tuned in the last earnings call is wondering, what's up with the future of this company? 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. I was asked by the board to come back to the company. And I said, no, my life has changed. 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 an existential crisis. And if your listeners take anything away from what we've talked about, it's my love of the company is so significant that I changed my life.
And 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 being used to basically increase EPS. And it's no way to run a company. So the first day I came back, and I knew what the market would do is 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 were using to stock buybacks for the year. And I think it 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 year's time, despite the underinvestment and the challenges, 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 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 the stock price if you don't want to.
Nevertheless, again, succession. And the board led a succession process. You have to remember, I wasn't on the board for a long, four or five years. And I resigned when I decided to leave the company after a year, despite the board asking me to stay another year. I just said, I've done my duty. We have to find a new CEO. They wanted you to be interim CEO for a second year. Yeah, they wanted. It was up to me.
And so the board led a search. There was a number of candidates. Laxman was chosen. I met him. I approved his hiring. But the search community was driving the process. So now we're a year later. 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. I know the company, and I think we're not at 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 is 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 able, I don't get financial information, so I don't have any understanding whether the company's making the quarter 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 Loxman, 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 in 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 and 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 not – I have no operational role. I'm not on the board. And I'm watching from afar and rooting and cheering for Starbucks. And I wrote the letter in hope that it would be a catalyst 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 consistently dilute the integrity of the experience of Starbucks. We're not in the transaction business. 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.
But that's your job. Yeah. Makes sense. Well, to finish the episode, I can definitely say, as an unabashed fan, the same way I opened the episode, rooting for everyone over a few miles away to pull it off. Thank you very much. And I think Starbucks is so resilient. Starbucks has had many, many challenges. 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.
Yeah. Thanks, Howard. Thanks, Howard. Thank you. Great. Really enjoyed it. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes. Long time acquired partner. There is a reason why the best product teams at companies like OpenAI and Notion, Atlassian, Figma, Rippling, Brex, and more rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now.
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All right, well, listeners, thank you for being on the journey with us. That was super fun to do with Howard. If you want to talk about this episode, come to the Slack, acquired.fm slash Slack. And if you want to keep going with Acquired, you're out of episodes, you've decided that I've listened to the entire back catalog, and I really wish they had a second show. Good news, we have one. So check out ACQ2. 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 primed the pump for a whole bunch of great interviews that we've got coming on ACQ2. And listeners, we will see you next time. We'll see you next time. We'll see you next time.