Just before I started writing this chapter I traveled to Porto in Portugal. I had been invited by one of the country’s leading companies to give a talk. As I was driven into Porto that evening, my first experience of Portugal, I looked out of the taxi window at the buildings and signs that lined the river Douro. It was a pretty sight. Lights glowed, reflected on the still surface of the river.
Lots of the lights were on the tops of the quayside warehouses and they announced SANDEMAN, GRAHAM’S, TAYLOR’S, COCKBURN’S, names that seemed strangely British in this Portuguese setting. But it was a good example of the way brands cluster together as friends and competitors in a neighborhood.
My fellow speaker at the Porto conference was a French marketing academic called Michel Montebello. His theory talks about the way business and brands have moved from catering for “users” to serving “customers” and now to looking after “friends.” Perhaps we were all users in the 1970s. Our expectations were set low. Gradually customer service developed until we all became aware that we were customers. We could make demands, and we did. We chose brands that did not treat us simply as users, but we had relatively shallow loyalties.
The best brands now are striving to gain “friends.” Certainly that is what Starbucks would like its customers to feel. Perhaps there is an irony in the association with the US TV programme Friends, which often features gatherings in a coffee shop. The advantages of “friends” to a brand are a much higher degree of brand loyalty, and a much greater propensity to forgive when things go wrong.
Since 1987, Starbucks has been one of the leading brands moving in this direction. It has simply recognized the importance of sociability to a brand. Howard Schultz might say, “Strong brands create a powerful personal connection,” but then go on to say, “We never set out to build a brand.” This is honest, but slightly disingenuous. When he first became involved with Starbucks, he might not have said or thought, “We want to build a brand.” But because he understood marketing and branding instinctively, everything he did worked towards that goal, including the concentration on the core product, the determination to sell one cup of coffee at a time to individuals. Howard understood that brand-building relies on establishing emotional links – in effect, friendship – with people. You secure this deeper relationship through consistent adherence to a product idea and an experience that goes beyond the basic simplicity of the product itself. He also understood something that certainly was not commonly accepted in the 1980s: that a brand’s people are the most important element in delivering a brand experience.
This does not mean ignoring people outside – the customers – to concentrate all attention on the people inside – employees, or partners as Starbucks came to call them. It is simply an acknowledgement that the two depend on each other. You cannot deliver a brand that customers like unless your own people embody your brand. And if there is a lack of connection, the inside and outside worlds both rebel and fail to grant the trust that is essential to the growth of any brand.
These thoughts, benefiting from hindsight, provide the backdrop to the resumption of the narrative. In 1987, Jerry Baldwin and Gordon Bowker decided they had had enough of the business development treadmill. The business they had established in 1971 at the little Pike Place shop was the one that remained closest to their hearts. It was about coffee, pure and simple. Over time much else had been added to it, and these peripheral products and services represented frustrating distractions from the core business of coffee beans. They had bought Peet’s to follow their hearts in that direction. Now Jerry wanted to concentrate on Peet’s and Gordon wanted to do other things altogether and take some cash out of the business. So a For Sale sign went up on the Seattle stores, the roasting plant and Starbucks’ name.
Howard Schultz, owner of the fledgling business called Il Giornale, felt it was his destiny to buy Starbucks. He knew that Jerry and Gordon would sell to him at the right price, but it would still be an audacious move. Starbucks was much bigger than Il Giornale, and as Howard knew well, it had a name and reputation that counted for more than the physical assets of the six stores. He approached all the investors in Il Giornale, and invited them to invest in his bid for Starbucks. He had to face down one of the big investors who tried to hijack the deal, but all the smaller investors remained solidly behind him. He offered them a fair deal, as they acknowledged, and in time they were well rewarded. Howard Schultz acquired Starbucks in August 1987 for $4 million.
After a 20-month gap Howard was back in Starbucks. Now it was his company to run and grow in line with his own vision. But the company had changed a lot in 20 months. When he gathered the staff together to talk to them about his plans for the business, he realized that they were extremely guarded in their welcome to him. People had been starved of information and involvement in the company for the last couple of years as the founders withdrew into their own concerns. Now they were worried about their jobs, their future roles in the business, and they wanted evidence, not ambitious words. Howard was a visionary, a dreamer – “Who wants a dream that’s near-fetched?” he asked – but these were people who had not been encouraged to dream for a long while. The “dream big” message was met with some cynicism.
All Howard Schultz had to offer, until his actions and subsequent developments could prove his sincerity, was his passion and belief. He was made uneasily aware that he now stood for the company. His personal beliefs would become the beliefs of the brand. You can choose to believe him or not, but Howard Schultz seems driven by a need to help people make their way, gain respect through work, achieve satisfaction at least and attain their dreams at best. Much of this goes back to his upbringing and his realization that his own father did not gain respect, satisfaction or dreams through his own working life. In many ways this is an archetypal story of the American dream – the boy from the Projects made good – but it is much more complex than that. At Starbucks, as opposed to, say, McDonald’s or KFC, there is an almost tangible sense that the people and the company’s “friends” are united by a common outlook on life: one to do with embracing, not resenting, the tolerant opportunities of a broader view of life, and with not much room for cynicism. This sometimes exposes Starbucks to attack from more cynical commentators who are not disposed to give a business or a brand the benefit of the doubt.
So Howard knew that he had to move quickly on a number of fronts, addressing the needs of people inside as well as outside the company. His confidence in the product was undiminished, and with Dave Olsen in charge he knew that issues of roasting, making and serving the best cups of coffee were in safe hands. This freed him to think of everything else, to think of the brand, because he now believed that the brand was in everything and everything was in the brand. He expressed it like this: “A company can grow big without losing the passion and personality that built it, but only if it’s driven not by profits but by values and by people.”
Howard set about creating the basic building blocks of the brand. This meant first defining what kind of business he wanted Starbucks to be, then showing his own people what it might mean to them and involving them in the discussion. Aware that a certain amount of trust had seeped out of employees, he made it his priority to reestablish a climate of trust and confidence, and a sense of fairness and respect. His aim was to create a business that valued and inspired people, and shared rewards as fairly as possible.
The first big decision he had to take had the effect of reassuring Starbucks’ people. It also happened to be the right business decision for the long term. The question was this: with the coming together of Il Giornale and Starbucks, what should be the name and logo on the shop fronts? Il Giornale might be Howard’s new baby, but he knew that the name Starbucks meant more in Seattle. It had been around for much longer and was easier to pronounce. There was also a feeling that it would be more honest to go with the unmistakably American “Starbucks” rather than the pretend Italian “Il Giornale.”
Deciding on a name is, of course, crucial for any brand. Names send signals of intent, personality, identity. We all know from our own experience how names shape our sense of self. Starbucks was chosen because it had equity, but also because it still retained the resonance of legend and mystery that had made it seem such a good name in the first place. Now there was an opportunity to build on the legend.
As always in these situations, the staff of Il Giornale were left wondering. Many of them had grown attached to their Italian name. But they accepted the force of the argument, and the company’s new visual identity at least gave them the feeling that something had been salvaged from the business they had been building. Both the Starbucks and Il Giornale logos featured illustrations of mythical figures. With the help of Terry Heckler, Gordon’s creative partner and the designer responsible for the original Starbucks identity, the two logos were merged. The new Starbucks siren was less like a book-plate engraving; she had a strong graphic presence that was contemporary, and she was set in a roundel with the brand name in the style and color from Il Giornale. A similar approach was taken with the look of the stores. They changed from brown to green and were opened out to be lighter and fresher. These were shops where you could enjoy a cup of coffee; they certainly were not restaurants. This philosophy has remained as the shop design has evolved over the years.
People, as we all know, pose a trickier problem. We all have our own personalities and values, so why would we want to adopt anyone else’s? Yet that, effectively, is the pact that a brand makes with its employees. A brand has values; they have to mean something if the brand is not to be completely hollow; and employees have to represent these values. In a sense, this is quite a moral challenge for any employee joining a company that really believes in its brand. Starbucks believes, above all, in respect and dignity to be shown to all employees. If you accept that pact, if you feel able to offer all your fellow employees respect and dignity, that is quite a high standard to set yourself as a person. It is certainly no invitation to join the forces of evil.
Starbucks has been committed to that standard of behavior since 1987, and talks about its values from the first minute of its training programs. What emerges is not a cult religion, but a philosophy of tolerance. The fear people have and the cynicism they show about brands is that they aim to create a Moonie-like uniformity. What emerges from Starbucks is quite different because an essential element of its values has always been to respect individuality and diversity.
But Starbucks needs to do more than just give its employees respect: it needs to demonstrate that respect through its actions. From the early days of his stewardship of the company, Howard Schultz gave his attention to tangible ways that he could reward employees. The seemingly cosmetic change from calling people “employees” to calling them “partners” is one aspect of that.
Two features of its partner contract set Starbucks apart from other companies, particularly those in the food and drink industry. Both date back to the early days after Howard Schultz’s acquisition. The first is the provision of healthcare as part of a partner’s benefit package. Starbucks has always opted to pay a salary that is better than the industry norm and to offer additional benefits for full-time and part-time employees. There is a little bit of altruism in this, but a lot more common sense. Starbucks and its brand depend on the quality of its people. It has always aimed to attract and retain intelligent, enthusiastic, motivated people, but recognizes that to do so it needs to offer employment benefits that will feed their intelligence, enthusiasm and motivation. Not only that, but everyone has to be included, because exclusion from benefits will breed resentment and envy.
Howard Schultz was drawing on his family experiences. His father’s illness and injury, coupled with his inability to pay for adequate healthcare, had led to hardship and deprivation for the whole family. The decision to give health-care coverage to partners, including those who worked only 20 hours a week, was made by a sceptical board. But the decision was made effectively by an impassioned Howard Schultz. He argued for the healthcare plan on the grounds that it was simply the right thing to do. All employees needed to be valued. It would build loyalty, reduce turnover, and cut the costs of recruitment and training. Most of all, it would be fair and it would prove that the company really believed in respect and dignity.
This decision made Starbucks something of a rarity in corporate America. Such generosity was not commonplace in the late 1980s. This was the era when Wall Street power players were idolized, when lunch was for wimps, and when companies made a point of treating workforces as disposable resources, not valuable assets. But the plan was agreed, and Starbucks became the only US company to offer such benefits to part-time workers.
Since the US had minimal free public health provision, the impact of the scheme was greater than it would have been elsewhere. It was more expensive for the company and more valuable for the partners, so the psychological impact on them was deeper. People outside the company noticed, too; a few years later, Howard Schultz was invited to the White House to tell President Clinton all about it.
Some board members had resisted the health scheme, arguing for a profit-sharing scheme instead. Howard Schultz was interested, but knew that, at least for the early years, there would be no profits. The offer would have been a dishonest one, so he decided on a different way of giving partners a stake in the company. The solution he came up with became the second distinctive feature of the Starbucks partner contract.
Howard wanted partners to share in the growth of the company by having stock options, or Bean Stock as it was called. This would make employees genuine partners, with vested interests in the success of the business. Each partner – 700 of them in 1991 when the Bean Stock scheme was initiated – was given stock options worth 12 percent of annual base pay. The following year it went up to 14 percent of salary. Year by year, as Starbucks’ stock price has increased, the scheme’s value to the individual has grown incrementally. As a result, the company has some wealthy and long-serving partners.
Again there had been questioning of the scheme at board level. Most board members were there because they had invested large amounts of their own money in Starbucks. Naturally they were concerned that their share of the company was shrinking. From one angle shareholders’ value was diluted; from a different angle, it was expanded. Howard Schultz was an expansionist, arguing that if they had faith in doing what was right for the brand, benefits would accrue in terms of loyalty and trust, leading to growth and profits. For him, people were unarguably the key to the brand’s success.
Nothing could have sent stronger signals to the partners. Here was the proof that they were valued highly. Both decisions – to provide healthcare and to offer Bean Stock – were based on the belief that people in the front line have to feel good if they are to represent the brand well. But what then was the brand that they were representing? What was it trying to achieve? What were its beliefs and values? These questions had never been answered in any consistent way or committed to paper. In 1990, Starbucks decided that it needed to do so, and that it needed to involve as many of its people as possible in the process.
The executive team drafted a mission statement. The idea was to define a set of principles that would then be used to guide every decision taken at Starbucks. The six principles are important in their order, putting people first and profits last, but making clear that all the principles are interrelated. The statement was then incorporated into a deeper strategy planning process that involved more than 50 people in the company and was facilitated by a consulting firm.
What is interesting is that the six principles are altruistic (albeit with an edge), but fairly generic to any business. You could, for example, lift “Develop enthusiastically satisfied customers all of the time” and drop it into the principles of many other brands. It would sit there inoffensively. What gives the Starbucks principles more teeth is that these are meant (and used) to measure whether the right decisions are being taken for the brand.
What perhaps further sets them apart is that behind each principle is an awareness of a particular audience whose needs have to be satisfied. First, Starbucks’ own people: the partners who must be treated well because the business and the brand depend on their motivation. Second, the liberal, thinking constituency that Starbucks traces back to European coffee houses. Third, the real coffee lovers, the core loyalists who were behind the original founding and development of the company from 1971. Fourth, there are customers with a range of needs and interests, and Starbucks needs to understand and cater for them while remaining true to itself and its core product. Fifth, there are local and global interest groups, communities touched by Starbucks’ presence and activities. And last, there are the financial audiences, the market analysts and investors, but also, importantly, the partners again because they too have a personal stake in the wealth of the company.
Mission statements can be a problem. All companies and brands feel the need to have one. But often they become a dead weight around the business as the mere fact of having agreed a form of words becomes more important than what the words mean. We have all read mission statements that are vacuous because they have been created by people who agree only on the most superficial principles. Starbucks’ mission statement still has something of “motherhood and apple pie” about it, yet it is clear that the statement is treated seriously by everyone in the company. Part of this, no doubt, comes from the decision, taken in that 1990 strategic planning process, to give the mission statement real meaning by setting up a mission review team.
The aim of this team is to encourage comments and questioning by partners in the stores. In effect, partners are asked to question management decisions that they feel are not in line with the principles of the mission statement. Clearly, then, this is not the kind of mission statement that has been produced to hang in a frame behind the reception desk to impress visitors. Indeed, it is a challenge to managers at every level. But if management sets and expects high standards, it has to be seen to live by them. So any partner can comment (anonymously if preferred), and the relevant managers have to respond to their suggestions or criticisms within two weeks. The comments are reviewed by senior directors monthly and aired in quarterly open forums. As a result, communications are open, the mission statement is alive, and many valuable suggestions have been put into practice to improve the business.
All this meant that the soul of the company was healthy. Much had been done to strengthen it: in effect, to lay strong foundations for the development of the brand. In the meantime, there was still a business to run, a business that lived or died by its ability to make and sell one cup of coffee at a time to individual customers. This business was developing into a machine, a fast-running one. It did not deliver profits for at least three years but investors retained their faith and their investment, persuaded that this was all part of the plan.
It was clear, though, that the original management team needed to be strengthened. It lacked the size and experience to deliver the growth that was now planned. Howard Schultz and Dave Olsen, in particular, had established the business on firm ground, but they now needed seasoned professionals. In 1989 and 1990, two people joined at a senior level who were to be crucial to the development of Starbucks. Howard Behar was put in charge of retail operations, and Orin Smith was made chief financial officer. Both men were recruited from outside the world of coffee.
Until 1991, when it entered California, Starbucks had been a regional company almost entirely based in the north-west of America. It was by now a sizeable operation, with 150 stores. It had a Chicago store that had been one of its most difficult challenges. At this point, a number of fundamental decisions were taken that benefited from a level of investment that was proportionately greater than the size of the company demanded. The investment that was made in Starbucks’ systems and organization seemed lavish at the time, and no doubt accounted for the losses in the first three years of operations, but it made growth much easier in the long term. As the investment started to pay off, new members joined the board bringing with them fresh funds. Most were wealthy individuals from venture capital firms who were attracted by the potential financial reward and by the power they saw in the developing Starbucks brand.
Howard Behar was not a financier. He was a retail manager who had learned how to develop from one outlet to many, mainly in the furniture business. His role was to direct the accelerating growth of Starbucks’ shops beyond its Seattle heartland. This meant, at least in his interpretation of the job, working closely with the partners to understand and meet customers’ needs. He was quite different from the other Howard. Howard Schultz is a visionary, soon bored with processes and implementation, always looking for the next big idea. Howard Behar is pragmatic and wants to get things done, but that makes him impatient with people and situations that are not working properly. When he joined Starbucks in 1989, the Chicago store was in its third loss-making year. He knew what to do, hiring new staff, sharpening up the systems, adjusting the prices, focusing on the customers.
More than anything else, it was his focus on customer service that made a difference. His arrival in Starbucks marked a virtual cultural revolution. Chairman Mao–like, he challenged everything and everyone, especially Howard Schultz. Confrontation had never been Starbucks’ style, but Howard Behar confronted. Obsession with coffee quality had always been endemic to the exclusion of everything else. Why? he asked. What if a customer does not agree with your judgment of what constitutes the best coffee? What if the customer wants coffee with skimmed milk?
As he was to prove, some customers did indeed want coffee with skimmed milk. His philosophy was “Say yes to customers,” and he made it a mantra with partners. It has led to the wilder concoctions that customers ask for in a language that is unique to Starbucks: “A double tall skinny hazelnut decaf latte.” Whatever; it’s the customer’s drink. Starbucks will provide the best possible version of that drink. Howard Behar insisted, “We’re not filling bellies, we’re filling souls.” Be less obsessed with absolute product purity if that means a narrow range of customer choice. But be as obsessed as you can be with giving the customer the drink that will meet her desires. Think more about people, less about product.
That was, and still is in many ways, heretical in Starbucks. My first day in Seattle was spent not with managers but with coffee-makers, and they were determined to educate me about coffee through cuppings, blendings, roastings, tastings. The product remains central. Howard Behar ensured, though, that people mattered just as much: both partners and customers.
Orin Smith has a different personality and made a different impact. Now chief executive, he was originally brought in to look after the finances. His recruitment was an example of the Starbucks way. Presented with a succession of potential finance officers, Howard Schultz was beginning to despair because none of them “got it.” To be part of Starbucks, you need to identify and empathize with its culture. Contrary to the version portrayed by some opponents, this does not mean go for growth at all costs. Orin Smith brought a calm, measured approach to Starbucks at a time when it was becoming frantic. With rapid growth as part of the plan, he brought balance to his judgments, ensuring that a professional approach to systems, finance, logistics and operations kept the business steady.
The danger, and one feared by Howard Schultz, was that discipline might stifle creativity. Yet it soon became clear that Orin Smith’s discipline actually freed creative people (Howard Schultz among them) to use their abilities more effectively. Rather than fire-fighting when little things went wrong, the creative people in the company could concentrate on the issues that they could influence best. The front of store could look good and offer a great experience, but only because the back of store was functioning smoothly. Howard Schultz put it in this way: “In business, the front room is what the world sees: in our case, the coffee, the stores, the style, the brand. But the back room is where we win. The efficiency of the back room is really what’s made Starbucks a financial success.”
By the end of the period leading up to 1992, certain truths about the Starbucks brand were becoming established. They were forced into the open by decisions that had to be made. One of these decisions – a key one for any brand – was about franchising. Given the rate of expansion envisaged, franchising would have been an easy option. Indeed, many competitors went the franchising route and grew faster than Starbucks at this time. Starbucks resisted the attraction of franchising because it could not then ensure the quality of its product and service. Similarly, other decisions were taken: not to flavor coffee beans artificially; not to use chemicals; not to sell beans through supermarkets. The wrong decisions would have led to a loss of product quality that would have undermined the brand. The right decisions were taken: to keep pursuing the perfect cup of coffee, using the best beans and roasting them to the high standards Starbucks had always set.
Of these decisions, the rejection of franchising is perhaps the most significant for the Starbucks brand. It was one of many decisions, as I will explain in later chapters, where Starbucks leaned heavily on its understanding of its brand. With franchising, a business can grow more quickly and economically, but it sacrifices control. While retaining the external appearance of brand control through the application of visual identity, design formats and product sourcing, the company loses influence over the most important aspect of its brand: its people. It is a simple matter of who employs you: Starbucks or the franchisee? Which option will give you a more consistent brand?
Starbucks decided for Starbucks and its own people. It is a distinctive aspect of the brand that it controls just about every interaction with the outside world, as opposed to, say, even a brand like Coca-Cola, which relinquishes its control in the outlets where it is sold. You do not need to go to a Coca-Cola shop to buy Coca-Cola. But you do go to a Starbucks kiosk or store to buy a Starbucks coffee. This is an unusual degree of vertical integration, but it springs from a fear that one bad cup of coffee, one bad experience, can fatally undermine the brand. It calls for an extraordinary attention to quality control at every stage of the process, from growing to sourcing to roasting to brewing to serving.
Franchising was rejected because it would have weakened the Starbucks culture. Recruiting, training, communicating with people remain with Starbucks. But the purity of this approach could not be sustained indefinitely. In airports, for example, there is little option but to work through concessionaires. The first relationship was with Host Marriott in O’Hare airport, Chicago. Airports are natural, essential outlets for a brand like Starbucks: they bring the brand into contact with an international audience that then prepares the ground for international growth. Starbucks decided that it would operate through licensing in airports to achieve its development plans. So there was a retreat from control freakery towards a more balanced view, with the reins kept simultaneously loose and tight.
The scene was set for the next stage. Starbucks was about to embark on a period of accelerated expansion. To do so, it decided it needed to go public: to raise funds through the stock market rather than the provision of private capital. In arriving at that point, though, it had made some solid decisions that consolidated its own understanding of the Starbucks brand. And it had come to realize what it had perhaps always felt: that the brand was its greatest asset. It was the brand that allowed it, almost effortlessly it seemed, to roll out a program of store openings through the rest of America and, in time, through many other countries in the world.
What were the pillars of this brand? The mission statement and the six principles, certainly. The visual identity, and also the language of coffee that Starbucks was creating. But other things too, that seemed to come in clusters of three. First, the realization that if you give equal value to your product, your own people and your customers, you will have the foundations of a strong brand. Then, almost mirroring this in its structure, the bringing together of a tight business team, a core of three people with contrasting personalities but shared ambitions: Howard Schultz to supply the vision, Howard Behar to focus on the soul, and Orin Smith to provide the discipline. One final use of three: the all-important notion of the third place. Put all this together, and a world-beating brand was in the making.
