In this episode, the guys talk about one of our favorite beverages and how one coffee brand started a grammy-winning music production company in the hopes of increasing coffee sales but almost destroyed the company. Chad talks about why leadership is so important and Nico talks about why your employees are your most important customers.
Today’s episode isn’t about how one of the worst became the best and it isn’t a story about how one of the best became the worst. This is a story about how a mediocre product turned a brand into an 80 billion dollar business. This episode of the Marketing Rescue Podcast is about Starbucks.
Plenty of people believe Starbucks’ coffee is great. However, in some blind taste tests, their coffee has finished middle of the pack. In other blind taste tests, Starbucks coffee even came in last after brands like Dunkin’ Donuts and Folgers.
Starbucks had been around long before it started to appear in blind taste tests and solidified its status as one of the most beloved modern brands of coffee in the early 2000s.
In 1971, Jerry Baldwin, Zev Siegl, and Gordon Bowker founded Starbucks at Seattle’s Pike Place Market. They sold the company to Howard Schultz in the early 1980s. It wasn’t until after a business trip to Milan, Italy, that Schultz decided to turn the bean store into a coffee shop. Under Schultz’s tenure as chief executive – which lasted from 1986 to 2000 – the franchise underwent an aggressive expansion and experienced tremendous success in growing its brand throughout the 80s and 90s. Feeling good about where they were as a company, Starbucks started looking for new opportunities to grow beyond coffee and they started to define their brand as an “escape.”
For many of its consumers, Starbucks does offer moments of escape between home and work. Some even believe that the experience the brand creates makes the coffee taste great. However, in 2003, Starbucks’ may have lost control of its ego.
The mermaid slapped on a metaphorical pair of ‘too-cool-for-you’ aviators and the company:
- Created its own music recording company
- Won eight Grammys
- Launched a movie with Lionsgate in 2006 called Akeelah and the Bee
- Started a partnership with William Morris – the longest-running talent agency – to scout for music, books, and films
- Opened an “entertainment” office in Los Angeles
By 2008, it was clear that Starbucks had lost focus of who it was. With these new businesses serving as distractions, the coffee-centric core of the brand suffered dramatically: coffee sales plummeted, stock prices fell from $37 to $7.83 and the company had to cut 18,000 jobs and close 977 stores.
Thankfully, Starbucks realized they were falling before they actually hit the ground. Most turnaround stories start with a question. Some of the best turnaround stories specifically start with, “So, what do we do best?” Unsurprisingly, Starbucks found that the answer to that was coffee. Starbucks exited the entertainment business and rebuilt everything so that the focus was back on coffee.
It closed each store location for an entire day to retrain every barista. This accomplished a couple of things like It told consumers that the most important thing Starbucks does is make a great cup of coffee. It also told baristas themselves that they are essential to the brand. Exiting the entertainment business, retraining their baristas, and creating a food menu all had two things in common: the same overarching purpose: rekindle the consumer experience and Howard Schultz. Schultz originally became Director of Retail Operations of Starbucks in 1982. At that time, there were only four branches of the coffee company in the Seattle area. Less than two decades after Schultz came on board, Starbucks had a presence on six continents, with 3,501 total stores and well over $2 billion in revenue. When Schultz stepped down in 2000, he did it because he was exhausted. By 2008, he could tell the coffee chain was drifting from its core values and its poorer performance was concerning to him. After an eight-year gap, he returned as CEO (and at the height of the 2008 financial crisis no less). He walked into a company whose stock price had fallen 75% over the previous two years and whose competitors, such as McDonald’s and Dunkin’ Donuts, were closing in.
Schultz thought the best thing to do was to preserve the integrity of the brand. Consequently, he fired nearly all executives, shut down lagging stores, and mapped out a new course for the company to ensure that operations would not be sacrificed for growth.
As for just how much he helped the company, between his return as CEO in 2008 and 2010, Starbucks’ profits tripled from $315 million to $945 million. Better yet, between his return as CEO in 2008 and January 2020, Starbucks stock climbed approximately 2,100%. Not so coincidentally, Schultz’s original tenure as CEO also coincided with a more than tenfold rise in the stock price between its IPO in 1992 and his resignation in 2000.
On June 4, 2018, Schultz announced that after 37 years, he would retire from active management of Starbucks. After all, the company was once again in good standing and Schultz had other things to do. In an interview with The New York Times he said: “I want to be truthful with you without creating more speculative headlines. For some time now, I have been deeply concerned about our country — the growing division at home and our standing in the world.”
What Can We Learn?
- Figure out what you do best, do it, and stick to it. Converse makes shoes. Champion makes athleticwear. Starbucks makes coffee
- Kindness goes a long way. Sometimes that kindness has to trickle down in order to go a long way; i.e. Baristas are made an integral part of the brand’s image → baristas are approved a $100 million settlement in back tips → baristas get to qualify for free tuition and online college courses → baristas get retrained in making coffee → and finally, customers get a better cup of coffee
We talk about
[02:30] Coffee in the US
[06:30] Starbucks Origins and company losing its focus
[10:00] Importance of ‘what do we do best’
[12:20] Howard Schultz and the importance of his leadership
[20:50] What can be learned
Episode Script Writer: Grace Wall
Research Analyst: Gertruda Gilyte