Interview with Howard Schultz

In a captivating interview with Acquired hosts Ben Gilbert and David Rosenthal, Howard Schultz, the architect behind the global phenomenon that is Starbucks, peeled back the layers of the company's tumultuous yet visionary journey. As Starbucks grapples with recent challenges like declining same-store sales and unionization, Schultz offered a rare glimpse into the core decisions, daring risks, and relentless drive that transformed a small Seattle bean seller into an iconic, worldwide institution. It's a story of ambition, humility, and the relentless pursuit of a vision that almost didn't happen.

The Audacity of Coffee and Community

Howard Schultz's path to Starbucks was anything but conventional. Dissatisfied with a comfortable but unfulfilling career at Xerox, where he famously received a "three" on his performance review, Schultz was driven by an innate desire for something more, fueled by the insecurities of a childhood spent in the projects. He stumbled upon Starbucks in 1981, a small chain of three stores selling only roasted beans, and was immediately "blown away by the experience, the romance of coffee, the education." He joined as Head of Marketing in 1982, but the true epiphany came a year later during a trip to Milan.

In Italy, Schultz witnessed a vibrant coffee culture he described as going from "a black and white movie and all of a sudden everything was color." He saw not just coffee, but community – a "third place" between home and work. Returning to Seattle, he declared to founders Jerry Baldwin and Gordon Bowker, "holy s*, what we got happening in Italy is the business that Starbucks has to be in." They vehemently disagreed, viewing the "restaurant business" as beneath them. Undeterred, Schultz persisted for two years until he was finally allowed to open a small coffee bar within Starbucks' sixth store. It was an instant hit, but the founders remained unconvinced, leading Schultz to leave and found his own company, Il Giornale, in 1986. Raising the initial $1.6 million was a brutal gauntlet, with 217 out of 242 potential investors saying no. Amidst this struggle, his pregnant wife Sherry’s father bluntly told him, "whatever you're doing I respect it but it's not a job it's a hobby," a moment of profound humiliation that only solidified Schultz’s conviction, thanks to Sherry’s unwavering support.

Key Learnings:

• Visionary Persistence: Schultz’s unwavering belief in the Italian coffee bar concept, despite internal and external skepticism, was crucial.
• Customer Experience Over Product: The focus wasn't just on coffee, but on the communal "third place" experience it facilitated.
• Resilience Against Rejection: His early experiences at Xerox prepared him for the constant "no's" during fundraising.

The Eleventh-Hour Rescue by a Giant

Starbucks' early story took a dramatic turn when the original founders, having acquired Peet's Coffee, found themselves in deep financial trouble with a 6:1 debt-to-equity ratio. Jerry Baldwin offered to sell Starbucks to Schultz for $3.8 million, giving him 99 days to raise the capital. Just as Schultz was nearing his goal, another investor, the revered Seattle titan Sam Strachman, put in an all-cash offer to buy Starbucks himself, effectively cutting Schultz out. Crushed, Schultz sought advice from an attorney friend who led him to one of Seattle's most imposing figures: Bill Gates Senior.

In a pivotal, five-minute meeting, the towering Bill Gates Senior leaned over Strachman’s desk and delivered a chilling ultimatum: "I don't know what you are planning but whatever it is it's not going to happen... Howard Schultz is going to acquire Starbucks coffee company and he's never going to hear from you again." With that, Gates Senior and his son helped Schultz secure the necessary funding, allowing Il Giornale to acquire the Starbucks stores in August 1987. Remarkably, Bill Gates Senior never publicly spoke of his role, a testament to what Schultz calls an "incredible lesson about humility." This acquisition was also foundational for Schultz’s business philosophy: "no debt," a principle deeply rooted in his childhood experiences with his parents' financial struggles.

Key Changes:

• From Supplier to Acquirer: Il Giornale, Schultz's startup, acquired its former parent company, fundamentally altering its destiny.
• Debt-Free Philosophy: Schultz instilled a strict no-debt policy, contrasting sharply with the original Starbucks' financial woes.
• Strategic Intervention: A critical, almost cinematic intervention saved the deal and ensured Schultz's vision could proceed.

Crafting the "Experiential Brand at Scale"

With Starbucks now under his leadership, Schultz rapidly began transforming the bean-centric business into the "third place" coffee bar he envisioned. The economic model was immediately clear: the ability to source, roast, and then serve high-quality arabica coffee as a beverage offered a staggering 80% gross margin. This high-margin, high-frequency business was "lightning in the bottle," allowing new stores to become profitable within 1.5 to 2 years, a model Wall Street would later marvel at.

Starbucks, under Schultz, became the first to mass-market concepts like the café latte and espresso in America, even if they failed to trademark "cafe latte." Innovation extended to seemingly small details like the cup and lid – Schultz recalls the horror of seeing hot coffee degrade Styrofoam, driving the search for a superior, compatible paper cup and the iconic "sip lid," a missed opportunity he now regrets not getting an exclusive on. The unique sizing (Short, Tall, Grande, Venti) and the simple act of Baristas writing names on cups—an organic solution to busy queues—further solidified the brand's unique identity. "Starbucks became the first experiential brand at scale," Schultz explains, noting that the ubiquitous cup, without any formal marketing budget, became a "badge of honor" and a powerful, free billboard.

Key Practices:

• Leverage High Gross Margins: The beverage model offered superior profitability compared to bean sales.
• Organic Customer-Driven Innovation: Customization and even the "name on the cup" practice evolved from customer and employee needs.
• Brand as Experience: Every element, from the language of sizing to the physical cup, contributed to a unique and proud customer experience.

Ambition Unbound: Building America's Coffee House

In a powerful 1988 shareholder and employee meeting, Schultz, then leading a mere 11 stores, unveiled his audacious vision. He told the room, "We are on top of something that is going to change... America's Coffee House." His targets were ambitious: transforming Starbucks from six stores built in 17 years to 26 in one year, and over a hundred in five. This accelerated pace of growth, doubling stores year over year, was driven by the knowledge that if Starbucks didn't seize the opportunity, a regional competitor, perhaps one that franchised, would.

The expansion wasn't without its stumbles; the initial foray into Chicago, Starbucks' first market outside the Pacific Northwest, struggled. However, this challenge led to the crucial involvement of Howard Behar, who "re-calibrated the mistakes we were making," along with Orin Smith, forming what many refer to as the "H2O era" – Schultz's vision, Behar's cultural leadership, and Smith's operational discipline. Together, they navigated the loneliness of entrepreneurship and built the framework for the global giant Starbucks would become.

Key Insights:

• Unwavering Ambition: Schultz's belief in Starbucks' potential was evident from the earliest days, pushing for rapid, transformative growth.
• Strategic Expansion: Rapid growth was not just about opportunity but also about pre-empting potential competitors.
• Complementary Leadership: The "H2O" triumvirate demonstrated the power of diverse leadership skills in scaling a company.

Howard Schultz's story is a testament to how personal resilience, visionary conviction, and strategic execution can turn a simple idea into a global phenomenon, even when faced with overwhelming odds.

"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... 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 I deserve to be" - Howard Schultz