Starbucks Corporation History
Seattle, Washington 98134
Telephone: (206) 447-1575
Fax: (206) 682-7570
Incorporated: 1985 as Il Giornale
Sales: $1.68 billion (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: SBUX
NAIC: 722213 Snack and Nonalcoholic Beverage Bars; 311920 Coffee and Tea Manufacturing; 312111 Soft Drink Manufacturing; 422490 Other Grocery and Related Products Wholesalers; 454110 Electronic Shopping and Mail-Order Houses
Over the years, we have worked tirelessly to make Starbucks an uplifting part of people's daily lives. We've always known that our brand name must stand for something-it must be authentic, reliable and aspirational. Every day, the passion and enthusiasm of our people and the quality of our coffee enable us to build a rewarding relationship with our customers. This connection has given us the chance to do things no one thought possible, and we believe our greatest accomplishments are yet to come. Key Dates:
- Gordon Bowker, Jerry Baldwin, and Zev Siegl open the first Starbucks in Seattle's Pike Place Market.
- Howard Schultz is hired to manage retail sales and marketing.
- Peet's Coffee is acquired.
- Schultz leaves the company to found Il Giornale, an operator of coffee bars.
- Schultz buys the six-unit Starbucks chain from the original owners for $4 million, merges them into Il Giornale, renames his company Starbucks Corporation, and begins a national expansion by opening stores in Chicago. Baldwin remains president of the now separate Peet's Coffee and Tea business.
- A mail-order catalog is introduced.
- Company goes public.
- First East Coast store opens, in Washington, D.C.
- Frappuccino beverages are introduced.
- Overseas expansion begins with units in Japan, Hawaii, and Singapore. Partnership with Dreyer's begins selling Starbucks Ice Cream. Partnership with Pepsi-Cola begins selling bottled Frappuccino beverages.
- U.K.-based Seattle Coffee Company is acquired. Partnership with Kraft Foods is formed for the distribution of Starbucks coffee into supermarkets.
- Pasqua Coffee Co. and Tazo Tea Company are acquired.
- Schultz steps aside as CEO to become chief global strategist, while remaining chairman; Orin Smith takes over as CEO.
Starbucks Corporation is the leading roaster, retailer, and marketer of specialty coffee in North America. Its operations include upwards of 2,400 coffee shops and kiosks in the United States and Canada, more than 100 in the United Kingdom, and more than 200 in other countries, including China, Japan, Kuwait, Lebanon, New Zealand, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand. In addition to a variety of coffees and coffee drinks, Starbucks shops also feature Tazo teas; pastries and other food items; and espresso machines, coffee brewers, and other assorted items. The company also sells many of these products via mail order and online at starbucks.com. It also wholesales its coffee to restaurants, businesses, education and healthcare institutions, hotels, and airlines. Through a joint venture with Pepsi-Cola Company, Starbucks bottles Frappuccino beverages and sells them through supermarkets and convenience and drugstores. Through a partnership with Kraft Foods, Inc., the company sells Starbucks whole bean and ground coffee into grocery, warehouse club, and mass merchandise stores. A third joint venture is with Dreyer's Grand Ice Cream. In addition, it distributes Starbucks premium coffee ice creams to U.S. supermarkets. From a single small store that opened in 1971 to its status as a gourmet coffee giant at the turn of the millennium, Starbucks has led a coffee revolution in the United States and beyond.
Roots in Coffee Retailing and Wholesaling
Starbucks was founded in Seattle, Washington, a haven for coffee aficionados. The city was noted for its coffee before World War II, but the quality of its coffee had declined so much by the late 1960s that resident Gordon Bowker made pilgrimages to Vancouver, British Columbia, to buy his beans there. His point of reference for the beverage was dark, delicious coffee he had discovered in Italy. Soon Bowker, then a writer for Seattle magazine, was making runs for friends as well. When Seattle folded, two of Bowker's friends, Jerry Baldwin, an English teacher, and Zev Siegl, a history teacher, also happened to be seeking new ventures; the three banded together and literally built their first store--located in Seattle's Pike Place Market--by hand. They raised $1,350 apiece, borrowed another $5,000, picked the name Starbucks--for the punchy 'st' sound and its reference to the coffee-loving first mate in Moby Dick--then designed a two-tailed siren for a logo and set out to learn about coffee.
Siegl went to Berkeley, California, to learn from a Dutchman, Alfred Peet, who ran Peet's Coffee, which had been a legend among local coffee drinkers since 1966. Peet's approach to coffee beans became the cornerstone for Starbucks' reputation: high-grade arabica beans, roasted to a dark extreme by a trained perfectionist roaster. Starbucks bought its coffee from Peet's for its first nine months, giving away cups of coffee to hook customers. The plan worked. By 1972 the three founders had opened a second store in University Village and invested in a Probat roaster. Baldwin became the young company's first roaster.
Within its first decade, Starbucks had opened stores in Bellevue, Capitol Hill, and University Way. By 1982 the original entrepreneurs had a solid retail business of five stores, a small toasting facility, and a wholesale business that sold coffee primarily to local restaurants. The first of the company's growth versus ethos challenges came here: how does one maintain a near fanatical dedication to freshness in wholesale? Starbucks insisted that the shelf life of coffee is less than 14 days after roasting. As a result, they donated all eight-day-old coffee to charity.
In 1982 Starbucks hired Howard Schultz to manage the company's retail sales and marketing. While vice-president of U.S. operations for Hammarplast, a Swedish housewares company, and working out of New York, Schultz met the Starbucks trio and considered their coffee a revelation. (He had grown up on instant.) He and his wife packed up and drove 3,000 miles west to Seattle to join Starbucks.
There were other changes taking place at Starbucks at the same time. Siegl had decided to leave in 1980. The name of the wholesale division was changed to Caravali, out of fear of sullying the Starbucks name with less than absolute freshness. Blue Anchor, a line of whole-bean coffees being prepackaged for supermarkets, was relinquished. Starbucks learned two lessons from their brief time in business with supermarkets: first, supermarkets and their narrow profit margins were not the best outlet for a coffee roaster who refused to compromise on quality in order to lower prices, and second, Starbucks needed to sell directly to consumers who were educated enough to know why the coffee they were buying was superior.
Mid-1980s: The Shift to Coffee Bars
In 1983 Starbucks bought Peet's Coffee, which had by then become a five-store operation itself. That same year, Schultz took a buying trip to Italy, where another coffee revelation took place. Wandering the piazzas of Milan, Schultz was captivated by the culture of coffee and the romance of Italian coffee bars. Milan had about 1,700 espresso bars, which were a third center for Italians, after work and home. Schultz returned home determined to bring Italian coffee bars to the United States, but found his bosses reluctant, being still more dedicated to retailing coffee. As a result, Schultz left the company to write a business plan of his own. His parting with Starbucks was so amicable that the founders invested in Schultz's vision. Schultz returned to Italy to do research, visiting hundreds of espresso and coffee bars. In the spring of 1986, he opened his first coffee bar in the Columbia Seafirst Center, the tallest building west of Chicago. Faithful to its inspiration, the bar had a stately espresso machine as its centerpiece. Called Il Giornale, the bar served Starbucks coffee and was an instant hit. A second was soon opened in Seattle, and a third in Vancouver. Schultz hired Dave Olsen, the proprietor of one of the first bohemian espresso bars in Seattle, as a coffee consultant and employee trainer.
A year later, Schultz was thriving while Starbucks was encountering frustration. The wholesale market had been reconfigured by the popularity of flavored coffees, which Starbucks resolutely refused to produce. The company's managers were also increasingly aggravated by the lack of wholesale quality control, so they sold their wholesale line, Caravali, to Seattle businessman Bart Wilson and a group of investors. In addition, Bowker was interested in leaving the company to concentrate on a new project, Red Hook Ale. Schultz approached his old colleagues with an attractive offer: how about $4 million for the six-unit Starbucks chain? They sold, with Olsen remaining as Starbucks' coffee buyer and roaster; the Starbucks stores were merged into Il Giornale. Baldwin remained president of the now separately operated Peet's Coffee and Tea. In 1987 the Il Giornale shops changed their names to Starbucks, and the company became Starbucks Corporation and prepared to go national.
In August 1987 Starbucks Corporation had 11 stores and fewer than 100 employees. In October of that year it opened its first store in Chicago, and by 1989 there were nine Chicago Starbucks, where employees trained by Seattle managers served coffee roasted in the Seattle plant.
Their methods were costly, using high-grade arabica beans and expensive dark roasting, while suffering the financial consequences of snubbing the supermarket and wholesale markets. Nevertheless, Starbucks' market was growing rapidly: sales of specialty coffee in the United States grew from $50 million in 1983 to $500 million five years later.
In 1988 Starbucks introduced a mail-order catalog, and by the end of that year, the company was serving mail-order customers in every state and operating a total of 33 stores. Because the company's reputation grew steadily by word of mouth, it spent little on ads. Schultz's management philosophy, 'hire people smarter than you are and get out of their way,' fed his aggressive expansion plans. Industry experts were brought in to manage Starbucks' finances, human resources, marketing, and mail-order divisions. The company's middle ranks were filled with experienced managers from such giants as Taco Bell, Wendy's, and Blockbuster. Schultz was willing to lose money while preparing Starbucks for explosive growth. By 1990 he had hired two star executives: Howard Behar, previously president of a leading developer of outdoor resorts, Thousand Trails, Inc.; and Orin Smith, chief financial and administrative officer for Danzas, USA, a freight forwarder.
Starbucks installed a costly computer network and hired a specialist in information technology from McDonald's Corporation to design a point-of-sale system via PCs for store managers to use. Every night, stores passed their sales information to Seattle headquarters, which allowed planners to spot regional buying trends almost instantly. Starbucks lost money while preparing for its planned expansion, including more than $1 million in 1989 alone. In 1990 the headquarters expanded and a new roasting plant was built. Nevertheless, Schultz resisted both the temptation to franchise and to flavor the beans. Slowly, the chain developed near-cult status.
Rapid Early 1990s Growth As a Public Company
Starbucks also developed a reputation for treating its employees well. In 1991 it became the first privately owned company in history to establish an employee stock option program that included part-timers. Starbucks also offered health and dental benefits to both full- and part-time employees. As a result, the company had a turnover rate that was very low for the food service industry. Employees were rigorously trained, completing at least 25 hours of coursework on topics including the history of coffee, drink preparation, and how to brew a perfect cup at home. The company went public in 1992, the same year it opened its first stores in San Francisco, San Diego, Orange County, and Denver. Its stores totaled 165 by year's end. The company began special relationships with Nordstrom's and Barnes & Noble, Inc., offering coffee to shoppers at both chains.
Growth mandated the opening of a second roasting plant, located in Kent, Washington, by 1993. After 22 years in business, Starbucks had only 19 individuals it deemed qualified to roast coffee. One of the 19 was Schultz, who considered it a tremendous privilege. Roasters were trained for more than a year before being allowed to roast a batch, which consisted of up to 600 pounds of coffee roasted for 12 to 15 minutes in a gas oven. The beans made a popping sound, like popcorn, when ready, but roasters also used sight and smell to tell when the beans were done to perfection. Starbucks standards required roasters to test the roasted beans in an Agron blood-cell analyzer to assure that each batch was up to standards. If not, it was discarded.
Starbucks' first East Coast store opened in 1993, in a premier location in Washington, D.C. The chain had 275 stores by the end of 1993 and 425 one year later. Sales had grown an average of 65 percent annually over the previous three years (reaching $284.9 million in 1994), with net income growing 70 to 100 percent a year during that time. Starbucks broke into important new markets in 1994, including Minneapolis, Boston, New York, Atlanta, Dallas, and Houston, and purchased the Coffee Connection, a 23-store rival based in Boston, for $23 million, making it a wholly owned subsidiary. Smith was promoted to president and COO and Behar became president, international. Starbucks also announced a partnership with Pepsi-Cola to develop new ready-to-drink coffee beverages. After Starbucks debuted a frozen coffee drink called Frappuccino in its stores in the summer of 1995, resulting in a sales bonanza, the partnership with Pepsi began rolling out a bottled version in grocery, convenience, and drugstores the following year. Starbucks broke into new markets in 1995, including Pittsburgh, San Antonio, Las Vegas, and Philadelphia. That same year, Starbucks began supplying coffee for United Airlines flights and launched a line of Starbucks compilation music CDs which were sold in its coffee houses.
Late 1990s and Beyond: International Expansion and New Ventures
The following year--in addition to continued North American expansion into Rhode Island, Idaho, North Carolina, Arizona, Utah, and Ontario--the company ventured overseas for the first time. Its initial foreign forays were launched through joint venture and licensing arrangements with prominent local retailers. With the help of SAZABY Inc., a Japanese retailer and restaurateur, the first market developed in 1996 was Japan; through other partnerships, Hawaii and Singapore also received their first Starbucks that year. The Philippines followed in 1997. Meantime, Starbucks entered into a partnership with Dreyer's Grand Ice Cream, Inc. in 1996 to develop and sell Starbucks Ice Cream. Within eight months of introduction, the product became the number one coffee ice cream in the United States. Starbucks' expansion into Florida, Michigan, and Wisconsin in 1997 helped the total number of units reach an astounding 1,412 by year-end, more than double the previous two-year total. Sales approached the $1 billion mark that year, while net income hit $57.4 million, more than five times the result for 1994.
As this rapid growth continued, the company began to be needled by late night talk show hosts for its seeming Starbucks-on-every-corner expansion strategy, while a number of owners and patrons of local coffee shops began speaking out and demonstrating against what they considered overly aggressive and even predatory moves into new territory. Critics complained that the company was deliberately locating its units near local coffee merchants to siphon off sales, sometimes placing a Starbucks directly across the street. In 1996 and 1997 residents in Toronto, San Francisco, Brooklyn, and Portland, Oregon, staged sidewalk protests to attempt to keep Starbucks out of their neighborhoods. One of the company's responses to the scattered resistance was to try to enhance its image through stepped-up advertising. Still, like Wal-Mart Stores, Inc. and its reputation in some quarters as a destroyer of Main Street, Starbucks remained the object of snickers from comedians and derision from a vocal minority of protesters. This undercurrent of hostility burst into the spotlight in late 1999 when some of the more aggressive protesters against a World Trade Organization meeting took their anger out on several Starbucks stores in the company's hometown of Seattle, tagging a number of the 26 downtown locations with graffiti and inflicting more serious vandalism on three stores, which were then temporarily closed.
The anti-multinational protesters in Seattle also singled out stores operated by McDonald's Corporation and Nike, Inc. The lumping of the once-modest purveyor of gourmet coffee in with these global giants was in part an outgrowth of the company's aggressive overseas expansion in the late 1990s. Growth in the Pacific Rim continued with the opening of locations in Taiwan, Thailand, New Zealand, and Malaysia in 1998 and in China and South Korea in 1999. By early 2000 the number of Starbucks in Japan had reached 100. The company aimed to have 500 stores in the Pacific Rim by 2003. The Middle East was another target of global growth, with stores opened in Kuwait and Lebanon in 1999, but it was the United Kingdom that was the object of the company's other big late 1990s push. In 1998 Starbucks acquired Seattle Coffee Company, the leading U.K. specialty coffee firm, for about $86 million in stock. Starbucks began rebranding Seattle Coffee's locations under the Starbucks name. Aggressive expansion in the United Kingdom yielded more than 100 units by late 1999. Starbucks hoped to use its U.K. base for an invasion of the Continent, aiming for 500 stores in Europe by 2003.
Growth was not slowing back home either. Areas receiving their first Starbucks in 1998 and 1999 included New Orleans, St. Louis, Kansas City, and Memphis and Nashville, Tennessee. The number of North American locations approached 2,200 by early 2000. Always searching for new revenue streams, Starbucks in 1998 entered into a long-term licensing agreement with Kraft Foods, Inc. for the marketing and distribution of Starbucks whole bean and ground coffee into grocery, warehouse club, and mass merchandise stores. The company also began experimenting with a full-service casual restaurant called Café Starbucks. A further move into food came in early 1999 through the purchase of Pasqua Coffee Co., a chain of coffee and sandwich shops with 56 units in California and New York. Starbucks had already developed its own in-house tea brand, Infusia, but it was replaced following the early 1999 acquisition of Tazo Tea Company, a Portland, Oregon-based maker of premium teas and related products with distribution through 5,000 retail outlets.
Starbucks had also launched a web site featuring an online store in 1998, and Schultz began talking about Starbucks becoming a mega-cybermerchant offering everything from gourmet foods to furniture. To this end, the company attempted, but failed, to acquire Williams-Sonoma, Inc., a specialty retailer of high-end kitchenware. Wall Street analysts began questioning the wisdom of moving so far afield from the company's core coffee business. In mid-1999, following Starbucks' announcement of an earnings shortfall, the company's stock plunged 28 percent, leading Schultz to pull back on his ambitious cyber plans. In early 2000, however, the company did enter into an agreement with Kozmo.com Inc., an operator of an Internet home-delivery service providing its customers with videos, snacks, magazines, books, and other items. Kozmo.com agreed to pay Starbucks $150 million over a five-year period to place drop boxes in Starbucks stores for the return of videos and other items, and to begin delivering Starbucks coffee, Tazo teas, and other items to its customers.
Other developments included an agreement with Albertson's, Inc. to open more than 100 Starbucks coffee bars in Albertson's supermarkets in the United States; and the acquisition of the five-store San Francisco-based Hear Music chain, in an extension of Starbucks' music retailing ventures. Image problems continued to crop up for the rapidly growing company, whose fiscal 1999 revenues of $1.68 billion were nearly six times the figure of five years earlier. In April 2000 a San Francisco-based human rights group called Global Exchange was readying a large protest at Starbucks in 29 cities to publicize its allegations that the coffee company was buying its beans from wholesalers who were paying farmers what amounted to poverty wages. In a preemptive move, which staved off the protests and the resultant bad publicity, Starbucks announced that it would buy more coffee certified as 'fair trade,' meaning that the farmers who grew it received more than market price for their crop, sometimes as high as three times the 30 cents per pound they typically received.
In the early 21st century, Starbucks was working to achieve Schultz's ambitious goals of 500 stores in both Japan and Europe by 2003, as well as his ultimate goal of 20,000 units worldwide. With about half of that total envisioned to be located outside North America, Schultz decided to spend more time on the company's overseas operations. In June 2000 he stepped down as CEO of the company to become its chief global strategist, while remaining chairman. Schultz would work closely with Peter Maslen, who had taken charge of the international division in late 1999, following the retirement of Howard Behar. Assuming the CEO title was Orin Smith, who retained his previous responsibility for domestic retail and wholesale operations, alliances, and coffee roasting and distribution.
Principal Subsidiaries: The Coffee Connection, Inc.; Starbucks New Venture Company; Starbucks Coffee International, Inc.; Starbucks Holding Company; Starbucks Manufacturing Corporation; SBI Nevada, Inc.; Circadia Corporation; Starbucks U.S. Brands Corporation; Starbucks Asset Management Corporation; Starbucks Foreign Sales Corporation; Starbucks Coffee Holdings (UK) Limited; Starbucks Coffee Company (UK) Limited; Seattle Coffee Company International (U.K.); Torz & Macatonia Limited (U.K.); Tazo Tea Company; Pasqua Inc.; Starbucks Coffee France, EURL; Starbucks Coffee Asia Pacific Ltd.; Starbucks Coffee Company (Australia) Pty Ltd (90%); Tympanum, Inc.
Principal Competitors: ABP Corporation; AFC Enterprises, Inc.; Allied Domecq PLC; BAB Holdings, Inc.; Diedrich Coffee, Inc.; Einstein/Noah Bagel Corp.; Farmer Bros. Co.; Green Mountain Coffee, Inc.; Kraft Foods, Inc.; Nestlé S.A.; New World Coffee-Manhattan Bagel, Inc.; New York Bagel Enterprises, Inc.; Panera Bread Company; Peet's Coffee & Tea; The Procter & Gamble Company; Sara Lee Corporation; Tully's Coffee Corporation.
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