Starbucks CEO Howard Schultz Got the World Hooked on Lattes. Here’s How.

The origins of American success stories.
Oct. 24 2013 11:10 AM

The Starbucks Guide to World Domination

Step 1: Serve coffee, not just coffee beans. Step 2: Offer employee benefits.

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Can you remember the last time you walked down a busy urban street, schlepped through a mall, or reported for day-job duty and didn’t see someone toting a tall paper cup with a green mermaid logo? If not, then you’re living in a world Howard Schultz envisioned more than 30 years ago. But it almost never happened.

Rachael Larimore Rachael Larimore

Rachael Larimore is a Slate senior editor.

Schultz, now the chairman and CEO of Starbucks, joined the company some 10 years after its founding in Seattle in 1971, when three friends who had met at the University of San Francisco bonded over their shared passion for quality roasted coffee. Back then, you could only buy roasted beans at Starbucks—no brews. But in 1983, Schultz returned from an über-caffeinated trip to Italy having fallen hard for the country’s espresso bar culture—the convivial spots where Italians stopped on the way to work for their morning shot—and for a drink he discovered in Verona: the latte. He dreamed of selling espresso and other specialty drinks at Starbucks.

Starbucks founders Jerry Baldwin and Gordon Bowker—the third partner, Zev Siegl, sold his stake in 1980—said no. Schultz was relentless. As he relates in his 1997 book Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time, Schultz finally got space in one corner of one store in 1984. The lattes and cappuccinos were a hit. But there would be no expansion. Starbucks was a roasting company, not a restaurant, Baldwin insisted.

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So how did Schultz take Starbucks from a small chain—six stores as of 1984—to world domination: 18,000 stores in 60 countries, generating $13 billion in sales? First, he quit. If he couldn’t sell drinks to Starbucks customers, he would start his own chain. In 1986, Schultz, backed by Seattle investors, started a company called Il Giornale, opening three stores in less than a year.

And so why is it that today we all drink Starbucks and not Il Giornale? It’s not because Schultz failed. It’s because Baldwin and Bowker decided to sell Starbucks to focus their energy on Peet’s Coffee, which Starbucks had purchased in 1984. Schultz, who struggled for more than a year to raise the capital to start Il Giornale, now had to go back to his investors—and find some others—to raise even more money to buy Starbucks from his old bosses. He succeeded, and Il Giornale acquired Starbucks’ six stores and its small roasting plant outside of Seattle in 1987. The melded company, called Starbucks, was operating only 17 stores by that year’s end, but it became a big business the day that Schultz took over. He presented his investors with an ambitious growth plan: to open 75 stores in five years.

In his book, Schultz credits Starbucks’ success in those early years—becoming profitable on schedule, opening more stores than originally planned—to several factors. He surrounded himself with good people and learned when and when not to compromise. That’s the kind of thing you read in lots of business books by CEOs. But there is one move that Starbucks made early in the Schultz era that was almost unheard of at the time: In 1988, part-time employees became eligible for benefits.

It’s funny, in a way. Starbucks’ rapid expansion in the late 1980s and 1990s looked to the naked eye like ruthless capitalism in action—the chain ballooned to 3,500 outlets by 2000 (and we’ve all heard the jokes about the Starbucks that’s across the street from Starbucks). But the good-hearted humanitarianism of offering benefits to part-timers—and later including them in the stock program—was actually a calculated and well-reasoned business decision. Schultz described what he saw early in his tenure as CEO:

Morale at Starbucks was terrible. In the twenty months since I had left, divisions had grown within the company. People were cynical and wary, beaten down and underappreciated. They felt abandoned by previous management and anxious about me. The fabric of trust and common vision that Starbucks had had when I first joined had frayed badly. … It quickly became obvious to me that my number-one priority would have to be to build a new relationship of mutual respect between employees and management.

It was also simply something that Schultz, the son of a working-class couple, always wanted to do. When he needed to sell the idea to his investors, he explained that providing benefits to an existing employee for a year cost half as much as training a new employee.

Schultz’s benevolence makes perfect business sense in hindsight. Back then, coffee was still a specialty business. Few people knew how to roast coffee to Starbucks’ standards. Making a perfect cappuccino—achieving the exact proportions of milk and foam—is tricky. If your employees feel a sense of loyalty, they can train the newcomers, and then they become veterans who can train the next round of newbies.

It’s hard to say whether the Starbucks model could work for all other companies that rely on part-time help. A few big companies—namely Target, Whole Foods, and Costco—do offer benefits to part-time employees. Most don’t. But it’s clear that it’s worked for Starbucks. Aside from a Great Recession–era rough patch during which it closed 900 stores (while still opening others), Starbucks has grown every year. The stock is up more than 12,000 percent since its initial public offering in 1992. And the next time I walk into my regular Starbucks, I’m confident that the same barista I’ve seen almost every week for the last four years will know to start my venti Americano.

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