How Starbucks Became An $80B Business

Summary

Starbucks, a $80 billion coffee giant, has seen impressive growth with nearly 30,000 cafes globally, capturing 57% of the cafe market. Founded in 1971, it evolved from a coffee bean shop to serving beverages, with Howard Schultz's vision of turning it into cafes. Despite challenges like the 2007 financial crash and over-saturation, Starbucks adapted by focusing on customer experience and innovative concepts like Starbucks Reserve Roasteries. It now faces changing consumer preferences, responding with healthier options and delivery services.

Takeaways

• 🌟 Starbucks has grown to a global presence with nearly 30,000 cafes and dominates the cafe market with 57% share.
• 🚀 The company's rapid expansion has led to over 14,000 locations in the U.S., causing profit cannibalization due to over-saturation.
• 💡 Starbucks was founded in 1971 by three friends in Seattle, inspired by the coffee roasting expertise of Alfred Peet.
• ☕ The introduction of espresso-based drinks and the transformation into cafes began after Howard Schultz's visit to Italy in 1983.
• 📈 Schultz's aggressive expansion strategy led to Starbucks going public in 1992 with 165 stores, growing to over 15,000 by 2007.
• 📉 The 2007 financial crisis hit Starbucks hard, causing a halt in growth and a 50% drop in stock price.
• 🛠 Howard Schultz's return as CEO in 2008 focused on improving customer experience and closing underperforming stores.
• 🏪 Starbucks closed all U.S. locations for an afternoon in 2008 for barista retraining to enhance the in-store coffee experience.
• 🍰 The company shifted focus from sugary drinks to lighter options like cold brew and Refreshers to align with changing consumer preferences.
• 🏬 Starbucks plans to open more upscale Starbucks Reserve Roasteries, which are large-format stores designed as tourist destinations.
• 📦 The company is also expanding its delivery service to a quarter of its company-owned stores by mid-2019.

Q & A

How many cafes does Starbucks have worldwide?

Starbucks has nearly 30,000 cafes across the globe.

What percentage of the total cafe market sales does Starbucks account for?

Starbucks sales account for 57 percent of the total cafe market.

How many locations does Starbucks have in the U.S.?

Starbucks has more than 14,000 locations in the U.S. alone.

Who founded Starbucks and when was it founded?

Starbucks was founded by Zev Siegl, Jerry Baldwin, and Gordon Bowker in 1971.

Who was Starbucks' mentor and what was his contribution?

Alfred Peet, founder of Peet's Coffee, was Starbucks' mentor. He provided roasted coffee beans and connected them with coffee brokers.

What was the initial focus of Starbucks before Howard Schultz joined?

The initial focus of Starbucks was to bring high-quality beans to consumers who were more accustomed to instant or canned coffee.

What significant change did Howard Schultz bring to Starbucks?

Howard Schultz turned the coffee bean stores into cafes, introducing coffee beverages like lattes.

What was the impact of the 2007 financial crash on Starbucks?

The 2007 financial crash caused Starbucks' rapid growth to screech to a halt and its stock price plummeted by 50 percent.

What measures did Howard Schultz take to improve Starbucks' performance after returning as CEO?

Schultz halted growth, focused on customer experience, shuttered underperforming cafes, laid off baristas, and retrained the staff to enhance the in-store experience.

What is Starbucks doing to address the issue of over-saturation and changing consumer preferences?

Starbucks is closing some stores, focusing on growth in targeted areas, promoting lighter drinks, and introducing new upscale stores like Starbucks Reserve Roasteries.

What is the concept behind Starbucks Reserve Roasteries?

Starbucks Reserve Roasteries are massive stores designed to be a tourist destination where baristas and bartenders experiment with different brewing methods and craft new beverages.

Outlines

00:00

🌟 The Rise and Evolution of Starbucks

Starbucks, founded in 1971 by Zev Siegl, Jerry Baldwin, and Gordon Bowker, started as a coffee bean shop in Seattle. The company's growth was significantly influenced by Howard Schultz, who introduced the idea of turning the stores into cafes after a trip to Italy. This led to the introduction of beverages like lattes. Schultz's aggressive expansion strategy saw Starbucks grow from 165 stores in 1992 to over 15,000 by 2007, with sales increasing from $2 billion to $9.4 billion. However, the 2007 financial crisis led to a halt in growth and a drop in stock prices. Schultz returned as CEO, halted growth, and focused on improving customer experience, closing stores, and retraining staff. His efforts led to a rebound in sales and stock prices.

05:04

📉 Starbucks' Challenges and Future Directions

Despite Starbucks' global success, it faces challenges such as profit cannibalization due to over-saturation, particularly in urban areas, and changing consumer preferences towards healthier options. To address these issues, Starbucks announced the closure of 150 stores in 2019 and shifted focus to lighter drinks like cold brew and Refreshers. The company also planned to offer delivery services and introduced upscale Starbucks Reserve Roasteries designed as tourist destinations, which have proven to be popular and profitable. The Shanghai Roastery, for example, made an average of $64,000 daily in its first weeks, double what a regular cafe makes in a week.

Keywords

💡Starbucks

Starbucks is a leading global coffee company and a cafe chain, recognized for its widespread presence and iconic branding. In the video, Starbucks' journey from a single coffee bean shop in Seattle to an $80 billion business is highlighted, illustrating its significant role in the cafe market and its dominance with a 57 percent share.

💡Market Share

Market share refers to the percentage of total sales of a particular product or service in a market. The video emphasizes Starbucks' impressive market share of 57 percent, indicating that nearly two-thirds of all coffee sold at cafes in the U.S. comes from Starbucks, showcasing its dominance in the industry.

💡Expansion

Expansion in this context refers to the growth of Starbucks' physical presence through the opening of new stores. The video discusses how Starbucks' rapid expansion led to over-saturation, which in turn resulted in fewer transactions at individual stores, a common challenge faced by businesses experiencing rapid growth.

💡Price Increase

Price increase is a strategy used by companies to compensate for reduced transactions or to improve profitability. The video mentions that Starbucks raised prices to compensate for the drop in transactions due to over-saturation, but this approach carries the risk of driving customers away if not managed carefully.

💡Howard Schultz

Howard Schultz is a pivotal figure in Starbucks' history, serving as CEO and later Executive Chairman. The video details his introduction of espresso-based drinks and aggressive expansion strategy, which transformed Starbucks from a coffee bean store into a cafe chain and significantly increased its market presence.

💡Financial Crash of 2007

The financial crash of 2007 had a profound impact on many businesses, including Starbucks. The video describes how Starbucks' rapid growth was halted, and its stock price plummeted by 50 percent due to the economic downturn, leading to strategic changes in the company's operations.

💡Customer Experience

Customer experience encompasses all interactions a customer has with a company, from purchasing to service. The video highlights Starbucks' focus on enhancing customer experience during the financial crisis by closing stores temporarily for staff retraining and improving the in-store atmosphere to remind customers of the brand's appeal.

💡Profit Cannibalization

Profit cannibalization occurs when a company's new products or stores take sales away from its existing ones. The video discusses how Starbucks' over-saturation in certain areas led to profit cannibalization, where the sales of one store were reduced due to the presence of too many nearby Starbucks locations.

💡Changing Consumer Preferences

Changing consumer preferences refer to shifts in what customers want or demand. The video notes that consumers are moving away from sugary, high-calorie drinks, which are a staple of Starbucks' offerings, necessitating a shift in the company's product strategy to align with healthier choices.

💡Starbucks Reserve Roasteries

Starbucks Reserve Roasteries are upscale, large-format stores designed as tourist destinations. The video describes these Roasteries as a significant undertaking by Starbucks, where they experiment with different brewing methods and create innovative beverages, offering a unique experience that differentiates them from regular Starbucks cafes.

💡Delivery Service

Delivery service is a feature that allows customers to order products for direct delivery to their location. The video mentions Starbucks' plan to roll out delivery to a quarter of its company-owned stores, indicating a strategic move to adapt to modern consumer expectations for convenience.

Highlights

Starbucks has grown to nearly 30,000 cafes worldwide and represents an $80 billion business.

Starbucks sales dominate the cafe market, accounting for 57 percent of total sales.

Nearly two-thirds of all coffee sold at U.S. cafes comes from Starbucks.

Starbucks' rapid expansion has led to fewer transactions at individual stores.

The company has attempted to compensate for reduced transactions by raising prices.

Starbucks was founded in 1971 by three college friends in Seattle, inspired by Alfred Peet.

The initial focus of Starbucks was on selling high-quality coffee beans.

Howard Schultz, Starbucks' first professional Director of Marketing and Sales, introduced the idea of turning coffee bean stores into cafes.

Schultz bought Starbucks for $3.8 million in 1987, pursuing a strategy of aggressive expansion.

Between 2000 and 2007, the number of Starbucks cafes more than quadrupled.

The 2007 financial crash caused Starbucks' rapid growth to screech to a halt.

Howard Schultz returned as CEO in 2008 to halt growth and focus on customer experience.

Starbucks closed over 900 stores and laid off around 6,700 baristas during Schultz's restructuring.

Schultz's strategy included closing all U.S. locations for an afternoon to retrain baristas.

Starbucks' stock price soared more than 143 percent in 2009 following Schultz's makeover.

The company has been posting positive same-store sales since the makeover.

Starbucks is addressing over-saturation and changing consumer preferences by closing 150 stores in 2019.

The company is shifting focus to lighter drinks like cold brew and Refreshers.

Starbucks plans to roll out delivery to a quarter of its company-owned stores.

Starbucks Reserve Roasteries are a new line of upscale stores designed as tourist destinations.

The Shanghai Roastery made an average of $64,000 every day in its first weeks.

Transcripts

With nearly 30,000 cafes across the globe, Starbucks has become more than just a household name.

From its iconic cups, often adorned with misspelled names, to the espresso inside them, Starbucks has catapulted from one

coffee bean shop in Seattle to a sprawling $80 billion business over

the last 47 years. Starbucks sales account for 57 percent of the total

cafe market. Yes, 57 percent. Nearly two-thirds of all coffee sold at

cafes in the U.S. comes from a Starbucks. But this impressive expansion

hasn't come without growing pains. With more than 14,000 locations in the

U.S. alone, Starbucks has spread itself too thin. Having too many stores

has led to fewer transactions at individual stores. To compensate, the

company has raised prices. But doing this too quickly or too often can

drive customers away. So how did this happen? And what's a coffee giant to do about it?

The year is 1970. Three college friends, Zev Siegl, Jerry Baldwin and

Gordon Bowker decide to get into the coffee business. They found a mentor

in Alfred Peet, founder of Peet's Coffee and the man responsible for bringing custom coffee roasting to the U.S..

He knew the coffee industry inside and out, especially the gourmet end. He

was the most educated coffee guy in the country at that time.

So with Peet's help, the three friends open Starbucks, a coffee bean shop

and roastery at Seattle's famous Pike Place Market in 1971. Peet provided

the young entrepreneurs with roasted coffee beans and connected them with

coffee brokers until they could set up their own roastery and source their

own beans. For the first decade, the founders opened five more locations

in Seattle. At this point, contemporary coffee consumers might have

noticed a glaring absence: actual coffee drinks. But that's the thing

about the 70s coffee culture: it didn't really exist outside the home.

There were no coffee bars. Nor was there much of a demand for

espresso-based drinks. You purchased coffee beans and you either took them

home as beans or we ground them for you in the store. Nobody expected to

get a beverage at a Starbucks coffee store until after 1980.

Starbucks' initial focus was bringing high quality beans to consumers who

were more accustomed to instant or canned coffee. But that changed with

the addition of one man.

The company hired its first really professional Director of Marketing and

Sales, and that man was Howard Schultz. And he couldn't figure out why we weren't selling beverages.

In 1983, Schultz travels to Italy and returns with an idea: turn the coffee

bean stores into cafes. Starbucks served its first latte the next year.

The experiment was a success, and four years later, Schultz partnered with

investors and bought Starbucks for $3.8 million. He was only 34 at the

time. Schultz pursued a strategy of aggressive expansion. By the time the

company went public in 1992, it had 165 stores. By 1996, it had opened

more than a thousand locations, including its first international cafes in

Japan and Singapore. Growth was so rapid that, just three years later, Starbucks opened its 2,000th location.

Schultz switched from CEO to Executive Chairman in 2000, at which time

Starbucks operated 3,500 stores in more than a dozen countries. Between

2000 and 2007, the number of Starbucks cafes more than quadrupled, from

3,500 to over 15,000. During this period, the company opened an average of

1,500 stores every year, including 2,500 in 2007 alone. Sales shot up from $2 billion to $9.4 billion.

Consumers were increasingly ditching their kitchen mugs for these iconic

paper to-go cups. But then, Starbucks hit a wall: the 2007 financial crash.

That year, its rapid growth screeched to a halt and its stock price plummeted by 50 percent

as cash-strapped consumers backed away from pricey coffee habits. So Starbucks brought back Howard Schultz.

This news alone caused Starbucks stock to shoot up by 9 percent. Schultz

halted growth and focused on customer experience. He shuttered cafes -

more than 600 in 2008 and another 300 in 2009 - and laid off around 6,700

baristas. A month after his return, Schultz ordered Starbucks to close all

of its U.S. locations for one afternoon so he could retrain more than

135,000 baristas about how to make its signature espresso. Schultz's goal

was to remind customers what they loved about the brand by making the

stores an experience, not just a place to get a quick coffee. They stopped

selling breakfast sandwiches and brought back in-house grinding, infusing

the cafes once again with that fresh coffee aroma. Schultz even mandated

the removal of automatic espresso machines. These made service faster, but

removed much of the romance and theater of watching baristas craft each

cup of coffee. Schultz's makeover worked. The company's stock soared more

than 143 percent in 2009 and same-store sales rebounded. Starbucks has

posted positive same-store sales ever since. During Schultz's makeover of

the cafes, Starbucks barely opened any new stores. But the pace picked up

again in 2012. By 2017, Starbucks opened nearly 3,000 more locations,

ending the year with 28,000 cafes around the world.

However this brings us back to the first problem:

profit cannibalization. Over-saturation, particularly in urban locations,

has spread sales thin. Because Starbucks has so many locations, customers

don't have to be loyal to just one. So even if Starbucks overall sales are

growing, its individual same-store sales won't reflect it. Compounding

this problem are changing consumer preferences. People are shying away

from sugar-laden calorie bombs. which happens to be one of Starbucks'

staples. These signature Frappuccinos contain an average of 57 grams of

sugar. That's more than double the recommended daily limit of sugar. So to

combat these problems, Starbucks is changing once again. The company

announced the closure of 150 stores in 2019. That may seem like a drop in

the bucket for a sprawling company like Starbucks, but it's three times

the number of stores it usually closes each year. The company will still

open stores, but future growth will be more focused. Additionally,

decadent drinks topped with whipped cream are taking a backseat. Instead,

the company is pushing lighter drinks like cold brew and its fruity

Refreshers. The company also plans to roll out delivery to a quarter of

its company-owned stores by the middle of 2019. Perhaps the company's

biggest undertaking is its new line of upscale stores: Starbucks Reserve

Roasteries. These massive, 20,000-square foot stores are designed to be a

tourist destination. Here, Starbucks baristas and bartenders experiment

with different brewing methods and craft new, innovative beverages. These

have proven popular. In the first weeks, the Shanghai Roastery made an

average of $64,000 every day, which is double what a regular cafe makes in

a week. The company has opened four Roasteries so far with plans for two more.