Starbucks: Just Getting Started

Seattles other big monopoly is swallowing the competition on its way to grinding out greater global dominance.

Schultz: visions of a one-bean world?

Schultz: visions of a one-bean world?

According to the crude arithmetic on my Starbucks napkin next to my Starbucks cup on a perch next to the Starbucks coffee kiosk at the City Centre tower at Fifth and Pike (another Starbucks coffee bar is 60 steps away in the same building), by the time the young Starbucks barista finishes his eight-hour grind behind the automated, push-button, steam-and-shot-making espresso machine, one more new Starbucks store will be born. It will open somewhere in North America, Latin America, Europe, the Pacific Rim, or the Middle East (not Iraqyet).

From one coffee-bean store in 1971 (the outlet still in Pike Place Market), Starbucks now has 6,458, mostly in the U.S. and in all but one state (South Dakota)so far. That number will click relentlessly upward, as steady as an atomic clock, advancing at least once every eight hours, three times every day, 23 times in a week, 100 times a month. By the end of this year, during which Starbucks expects a record $4 billion in coffee, tea, and merchandise sales, the company will have opened at least 1,200 new stores, similar to the number opened last year and the year before. That will reconfirm the Seattle corporation’s place as No. 1 specialty coffee chain, accounting for close to half of the globe’s 15,000 specialty coffee stores and doing its part to make the world an even more jittery place to live.

“The success we have enjoyed as we have entered new international markets is a validation of the worldwide acceptance of the Starbucks brand,” declares company public affairs director Audrey Lincoff, “and demonstrates that we are in the early days of our growth and development” (emphasis added). Chairman Howard Schultz, who was out of the country last week and unavailable for comment, told Fortune magazine earlier this month, “Those who talk about saturation obviously don’t understand our business strategy.” When Starbucks went public in 1992, it had 165 stores. By 2005, it hopes to have 15,000. Within a decade, the goal is 25,000. Observes Gordon Bowker, one of Starbucks’ co-founders who sold the assets to Schultz and investors in 1987, “Somewhere there is a saturation point, but I don’t think anyone knows where it is yet.” Adds Tony Gioia, Tully’s Coffee CEO, “I don’t think we’re even close to [saturation]. The American people are demanding more high-quality coffee, which we see as a huge opportunity for us.”

At this rate, Starbucks likely will challenge ubiquitous McDonald’s (currently 28,000 restaurants in 118 countries) for Most Annoying Expansion. Starbucks is likely too sophisticated to erect its version of McD’s hamburger tote board Billions of Cups Servedand, besides, has lost exact count of how much coffee it has poured in the last 32 years. But the total must be inching toward a number like the national debt (6.4 trillion and counting) now that McBucks is filling 5 million cups a week. That’s a whole lot of Starbucks Experience, as Schultz likes to call a cuppa joe.


The company has also begun feeding on its modest competition. Two weeks back, Starbucks added 150 stores in one day by spending $72 million to buy out one of its competitors, Seattle Coffee Company, which operates the Seattle’s Best Coffee and Torrefazione Italia coffee shops. That caused a round of griping here in the two companies’ hometown, spreading concern that those who prefer the mellow SBC roast or hearty TI served in ceramic cups will be forced to drink “Charbucks.” That’s what the disenchanted call Starbucks’ infamously bitter coffee, made, as the legend goes, from beans burned during the roasting process. (Starbucks says that’s urban legend, although Schultz, in a company statement, concedes that consumers have “an affinity for the smooth flavors of SBC coffees.”)

The sale also resurrected suspicions that the coffee imperialists from SoDo are conspiring to create a one-bean world, even though Seattle Coffee was itself part of a huge empire, AFC Enterprises, franchiser and operator of 4,071 restaurants, bakeries, and cafes. Some competitors are reluctant to talk publicly about the Seattle Coffee purchase. San Francisco publicist Julie Kim, spokesperson for 60-store chain Peet’s Coffee & Tea of Berkeley, says “Peet’s is unable to comment on another company’s activities, nor can we provide comment on the public’s perception of the sale.” Bowker, the Starbucks co-founder who is now on Peet’s board, says, “It’s kind of improper to offer an opinion on a competitor . . . it’s just that whatever their strategy is, we’re not privy to it.” But Tully’s Coffee, the 100-store Seattle chain, professes to love the buyout. “We are more excited than everthat’s one less competitor in the marketplace,” says CEO Gioia. “We’re focused on staying close to our conceptgreat coffee and great service.” But could Tully’s be next to be sucked into the Starbucks family? “We don’t even think about those things,” Gioia insists.

Of course, swallowing the competition is a tenet of Schultz’s original business formula. After all, Starbucks is itself the product of a buyout, by Schultz and investors, 16 years ago. Though Starbucks Coffee, Tea, and Spices dates to 1971, the Starbucks Corporation of today wasn’t born until August 1987, when new owner Schultz launched his marketing strategy: “More than retail, but not a restaurant,” as he explains in his 1997 autobiography that details the birth of a company and an industryand his eureka moment when he suddenly realized that selling specialty coffee by the cup was a profitable entr饠to the land of steamed milk and honey. Until then, Starbucks was essentially a bean store.

Bowker and co-founders Zev Siegl and Jerry Baldwin (who left the company in 1980) had only limited expansion plans in mind. Schultz says in his book that it wasn’t until the sixth store opened, at Fourth Avenue and Spring Street 19 years ago this month, that Starbucks introduced its coffee bar, although last week Bowkeralso a co-founder of Seattle Weekly in 1976 said that’s wrong. “We were already in the coffee bar business. At University Village [store No. 2] we had a big ol’ La Victoria espresso machine as early as 1974.” Either way, Schultz, who had been Starbucks’ marketing director, quit to start his own line of coffee bars. In 1986, the Weekly reported that ex-New Yorker Schultz, owner of a new Italian-inspired espresso bar in Columbia Center called Il Giornale, “envisions Il Giornale packing them in on opposite sides of the same street.” Within a year, Schultz and investors expanded by buying out Starbucks for $3.8 million. As he notes in his autobiography, “The Starbucks of today is actually Il Giornale.” Schultz briefly toyed with the idea of launching the assets under the Il Giornale logo. Then he had his second eureka moment: Starbucks was just a damn lot easier to pronounce.


Today, Starbucks is pronounced in the languages of 30 countries. Sometimes it is spat outOh no, not another Starbucks! (sound of hand slapping forehead). There are few better examples of Schultz’s all-out, opposite-side-of-the-same-street strategy than downtown Seattle. Counting the two Starbucks at the City Centre and the two Starbucks at Pacific Place (one of them, the Barnes & Noble Caf鬠is a de facto Starbucks), there are 11 Starbucks and one SBC within two minutes walking distance, according to my Bulova. Altogether, Starbucks says it has 35 stores in the “downtown core” and 90 in the city. The concentration continues into the burbs. In downtown Bellevue, a large Starbucks is located next to the transit center off 108th Avenue Northeast. Directly across the street is another large Starbucks. It took me 40 steps to cross overeven closer than the City Centre operations. Who is this for? People afraid to cross streets? “Starbucks,” says spokesperson Lincoff, “builds stores where customers want us to be. Because we are part of our customers’ daily routine, often crossing a street could interrupt that routine.”

It’s that lazy man’s approach to espresso that helped fuel the Seattle Coffee buyout, several industry officials think. Starbucks indicated that it especially prized Seattle Coffee’s wholesale bean operations, featuring 12,000 accounts, including 5,000 supermarkets. Schultz promises to maintain the SBC and TI brands, using them to “launch the next phase of our specialty coffee growth,” which he didn’t define. In its annual report to the Securities and Exchange Commission, Starbucks says, “The Company’s objective is to establish Starbucks as the most recognized and respected brand in the world. To achieve this goal, the Company plans to continue rapid expansion of its retail operations, grow its Specialty Operations, and selectively pursue other opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels.”

But big as it is, Starbucks has cornered only 7 percent of the overall coffee market. Tully’s is out there slowly adding stores, and the Bay Area’s Peet’s is making its moveits first Seattle store will open in Fremont this summer, opposite a Starbucks and a Seattle’s Best. Always nibbling at the edges are myriad small chains along the lines of Seattle’s Caff頖ita, Caff頌adro, and Caff頁ppassionato, plus independents and mom-and-pop operations, many which still see espresso as an art form. Despite its blitzkrieg construction program, Starbucks’ purchase of Seattle Coffee allowed it to snap up 150 stores it didn’t have to build on the opposite side of the street. Whether espresso drinkers are attracted by the SBC and TI brands or driven there by Starbucks’ alleged bitter taste, Schultz goes to the bank happy.

Now 49, Schultz, whose official titles include chief global strategist, has much to bear as both capitalist running dog and owner of a losing basketball team. Paid $2.4 million in compensation last year and $17.5 million in exercised stock options, he’s worth about $700 million, sits on the boards of several companies, and oversees his own venture capital firm here, Maveron LLC, formed with investment banker Dan Levitan and boasting $400 million in capital (Maveron is a combination of “maverick” and “vision”). Though an American retail legend, Schultz will be forever remembered as the rich guy who built a road to his Seattle mansion through a public park, the Sonics owner who traded Gary Payton, and, to caffeine anarchists, one of the world’s biggest drug dealers. Yet he’s emphatic about ethics and created a business that this month leapt onto the Fortune 500 list (No. 465, edging out Advance Auto Parts). That was the result principally of Schultz’s brand-building genius and Starbucks’ corporate huckstering. The company believes, it says in its SEC filings, “that its customers choose among retailers primarily on the basis of product quality, service, and convenience, and, to a lesser extent, on price,” referring, perhaps, to the $4.75 Frappuccino.

In a recent talk here, playwright David Mamet explained how languageespecially advertisingis used to manipulate behavior, and couldn’t help pointing out that one of Starbucks’ smallest drinks is called the “tall” (choices include tall, grande, and venti, Starbuckese for small, medium, and large). Its ice cream is “superpremium,” its beverages “expertly crafted,” and its product line “best of class.” Starbucks sees all that as part of its coffee “culture,” which it guards carefully. Schultz suffers no pretenders to the company’s throne, waving lawsuits at anyone who approaches its copyrighted property (ask such upstart brands as Sambucks, Warbucks, andno kiddingCharbucks, who’ve all faced suits).


The company nicely finesses social- responsibility issues of labor, fair trade, farming, and environment and deflects any suspicions of corporate misbehavior by invoking the image of the little store that could. Last week, as union workers were demonstrating in U.S. cities over a new apron-and-linen-service contract Starbucks signed with a company accused of harassing and illegally firing its workers, Starbucks announced it was “reconnecting customers with the sweet nostalgic flavor of malt” by introducing two new Frappuccino blends. Co-founder Bowker doesn’t begrudge his former company’s success. But he allows that if he and Siegl had not sold the company, “It would certainly be different today.” Frankly, he says, “I try not to think about it. It’s not for reasons of greed or anything like that. But we had something totally different in mind when we created Starbucks.”

What Schultz had in mind has prospered even in a slumping economy, earning $954 million in the first quarter ending March 30, a stunning 22 percent increase from the same period a year ago. Its stock has split two-for-one four times and hovers around a strong $25. And the public corporation has suffered no Enron-style accounting sleight-of-hand. With 68,000 full- and part-time employees, most of whom get health, stock, and retirement benefits at one of Fortune‘s 100 Best Companies to Work For, it considers itself a responsible big corporation with an economic and charitable commitment to its far-flung communities. Starbucks has donated $5 million to U.S. literacy programs and doled out thousands in grants to aid low-income at-risk youths, including the after-school writing and athletics program, SCORES.

The company tries not to look as arrogant as it is big, but there are public relations mishaps along the way. Last Wednesday, Schultz was scheduled to be inducted into the SCORES Hall of Champions in a ceremony at Experience Music Project, preceding a SCORES benefit appearance by the Rock Bottom Remaindersthe all-author, frustrated-musician band that includes frontman Dave Barry, keyboarder Mitch Albom, singer Amy Tan, and, in a fright wig, warbler Scott Turow. Basketball legend Bill Russell flew in from the NBA playoffs in New Jersey that morning to give Schultz the award, then flew out that night to Boston. It was a big deal. But Schultz was a no-show. “Howard wishes he could be here,” apologized stand-in Dave Pace, Starbucks executive vice president. “He’s actually in Europe tonight.”

Nevertheless, Pace said, “This is a very, very special program to us. By the end of this year, the Starbucks Foundation is going to have contributed over $500,000 to America SCORES and, more importantly, thousands of volunteer hours from people in our company.” The applause was hearty. No gripes this night about Starbucks, or even the complimentary Charbucks being served. Probably no one but me noticed there are two Starbucks within two minutes walking distance. Yeah, I timed it.

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