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Starbucks' Schultz: Making His Macchiato

September 25, 1997

In 1987, Howard Schultz, a former housewares industry executive, acquired an obscure Seattle coffee roaster named Starbucks Coffee Co. Under his direction, Starbucks has grown from 17 stores into a chain with nearly $1 billion a year in sales--the McDonald's of coffee.

Intent on expansion, Schultz continues to open outlets in new territories and has guided Starbucks into other business lines. Its ice cream is sold in supermarkets, as is a bottled drink, Frappuccino. Its coffee is served on United Airlines flights. It is testing the sale of coffee in supermarkets--pitting itself against deep-pocketed giants such as Procter & Gamble.

Schultz, the 43-year-old son of a truck driver, grew up in the projects in Brooklyn, N.Y., and is now among the nation's most successful entrepreneurs. He earned $493,654 in salary in 1996; his stock holdings are worth $194.3 million.

Starbucks, no longer a small upstart, faces challenges. It is struggling with keeping a small, personal feeling even though it is a huge chain. Prototype stores have colorful murals, leather couches and even fireplaces--homey touches that contrast with the chrome and wood now found in most Starbucks outlets. Starbucks recently switched advertising agencies, selecting BBDO West in Los Angeles, saying it's had trouble finding its creative voice. And employees in Canada recently joined a union, a blow to Starbucks' highly touted commitment to its workers.

Times staff writer Greg Johnson talked to Schultz last week in Westwood, where Schultz was promoting his just-published autobiography, "Pour Your Heart Into It." What follows is an edited transcript.

Q: You have compared Starbucks to Nike. Why?

A: Who would have thought 20 years ago, when we were all wearing Chuck Taylor Converse sneakers, that a company would start making high-performance tennis shoes that people would spend lots of money on? Nike has built a brand in a commodity business, and Starbucks has done it as well. But while they've done it through marketing and mass distribution, we've done it with no advertising. Over the last 10 years, the company has spent more money on training than on advertising. And Starbucks is now beginning to leverage its brand. We've introduced Starbucks ice cream, which is now the No. 1 coffee ice cream in America. We have bottled Frappuccino and we're now testing Starbucks coffee on grocery store shelves in Illinois after a successful test in Oregon.

Q: Won't selling coffee beans through grocery stores cannibalize your existing business?

A: I believe it will be complementary, that it will not dilute the integrity of our company or cannibalize retail store sales. Right now, 87% of what we sell goes through our own retail stores. But over the next five years, that percentage could slip to as low as 60%. I think that will be very healthy, because it will help relieve the burden on our retail operation. Eighty percent of all coffee in America is sold through the supermarket aisles. We're in the position of possibly creating a significant business on supermarket aisles.

Q: You fought against serving nonfat milk products and misjudged the appeal of iced coffee drinks.

A: I've been wrong a number of times. But it speaks well of the processes in our company that people have the confidence to disagree with me. I didn't think nonfat milk was right for us. I didn't think iced Frappuccino would be a big item. I was wrong both times. Management teams today have to leave their egos at the door. They have to be willing to recognize we're in business for one reason: to satisfy our customers, and if we don't have the right idea, we have to acquiesce to those who do.

Q: But there is a line you won't cross, right?

A: There's a point at which you're no longer selling quality. It's a fragile balance, but a company has to stand for something. An example: artificial coffee, which is something we don't sell. And we never will sell it, because it's the bastardization of coffee.

Q: Are there product deals that you won't consider?

A: An idea we've said no to so far is alcohol. We did a joint venture with Red Hook Ale, but we've said no to hard alcohol. I just didn't think it was right for us at the time. A lot, though, has to do with the maturation of the company and the brand, of what it's available to absorb.

Q: You write that big companies are almost universally hated by consumers. How do you keep Starbucks from getting tarred and feathered with the charge of being big?

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