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November 7th, 2007 Taylor Clark | News Stories
 

Starbucked

Our excerpt from a new book about the coffee colossus.

     
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Excerpted from STARBUCKED by Taylor Clark. ©2007 by Taylor Clark. Reprinted by permission of Little, Brown and Company, New York, NY. All rights reserved.

In 2004, Taylor Clark had a close encounter with a mermaid.

After someone attempted a firebombing at a new Starbucks in Southeast Portland, Clark, then a staff writer for WW, wrote a cover story about the Seattle-based coffee giant, which has long featured the sea siren in its logo. In it, Clark examined the charges commonly lobbed at Starbucks and found some of them had scant grounds.

The article generated grande buzz—and not just in Portland. A few months after the article hit print, Clark got an email from a New York publishing house, planting the prospect of a book deal and an advance that would let him quit his job and devote his time to fleshing out the Starbucks story.

We haven’t seen anyone vanish so quickly since D.B. Cooper.

This week, the long-awaited Starbucked: A Double Tall Tale of Caffeine, Commerce, and Culture (Little, Brown and Company, 304 pages, $25.99) hits bookstores. We are pleased to present this excerpt of Clark's book.

Starbucks didn’t invent coffee; it just did something with it that no one thought possible. The company took a commodity that Americans could get for a quarter at carts and diners, reshaped it into a luxury product, convinced customers to buy it at hugely inflated prices, and built stores only a few blocks apart in every major city—yet patrons continue to line up in ever-greater numbers to fork over their money.

Starbucks now owns its market like few other companies in recent memory. Here’s a challenge: try to name the number two coffeehouse chain in America. Any ideas? The question is especially tough to answer because the company’s closest competitor, the Minnesota-based Caribou Coffee, is just one twenty-fifth the size of Starbucks. In fact, if you merged all of its rivals (that is, chains with more than three stores) into one patchwork coffee goliath, it still wouldn’t be even half the size of Starbucks. “It’s like McDonald’s with no Burger King or Wendy’s or Subway,” said Kevin Knox, a longtime Starbucks roasting expert who is now an industry consultant. “It’s total domination.”

With $7.8 billion in annual revenues, 40 million customers a week, and more than 14,000 stores, Starbucks is no passing fad. It’s a new American institution.

Actually, given the chain’s breakneck international expansion and its ability to reshape coffee-drinking habits the world over, Starbucks is more like a global institution. It’s no stretch to say that the company has changed the dynamics of the modern world. It influences automotive traffic patterns, affects the welfare of some 25 million coffee farmers, and sways the cultural customs of entire nations toward espresso consumption. It has inserted itself into the American urban landscape more quickly and craftily than any other retail company in history, and it has forever changed the way Western companies market themselves to consumers. Former Starbucks CEO Orin Smith, speaking to Fortune magazine, stated all of this even more boldly: “We changed the way people live their lives, what they do when they get up in the morning, how they reward themselves, and where they meet.”

Judging him solely by his autobiography, Pour Your Heart into It, and by his various public statements over the years, one can reach but a single conclusion about Starbucks chairman Howard Schultz: that he is the nicest, most warmhearted guy on the planet. In the book, Schultz relentlessly adorns his memories with inspirational platitudes; for instance, one chapter is titled, "Act Your Dreams with Open Eyes." He wants his company to "lead with its heart and nurture its soul" and asks, "Who wants a dream that's nearfetched?" Flipping through the pages, one almost starts believing that the whole Middle Eastern conflict could be cleared up in an hour if the leaders of Israel and Palestine would just grab a couple hazelnut lattes at the nearest Starbucks and share their feelings.

The sappiness is hardly surprising—CEOs today aren't exactly renowned for their soul-baring candor—but the sentimental bromides don't tell us much about how one actually builds a global coffee juggernaut. If you really want to get to know Schultz, try engaging in a friendly sporting contest with him. How about volleyball?

“Howard was so competitive,” said Dawn Pinaud, an early Starbucks employee. “I remember once we played volleyball at a company picnic and I missed the ball. Howard was so furious. I asked him, ‘Are you going to fire me because I missed the volleyball?’ He wouldn’t play again for two years because everybody made such a big deal out of how competitive he was. I’m surprised he hasn’t had a heart attack by now. He just loses it.”

Okay, maybe basketball?

“I formed an intra-company basketball team with Jim Reynolds, me, Gordon [Bowker], Jerry [Baldwin], Howard, all of those guys [who ran Starbucks in the ’80s], in some little gym on Capitol Hill,” recalled Chris Calkins, who managed Starbucks’ restaurant accounts. “Howard’s a hell of a guy, but he is the most aggressive guy I’ve ever played basketball with. I mean, he really showed his colors.” Put simply, Schultz despises losing. In a drawer of his old mahogany desk at home, he keeps dozens of newspaper and magazine clippings by those who have doubted Starbucks; he once told Fortune magazine, “Not a week goes by when I don’t look at those pieces.” Schultz has been known to call reporters at home and berate them after reading stories he disliked, and according to Dori Jones Yang, the co-author of his autobiography, he even named his first child, Jordan, after one of the most fiercely competitive athletes who ever lived: Michael Jordan.

This drive to succeed made Schultz stick out in the tranquil Pacific Northwest. “I didn’t know what to make of Howard back then, to be honest,” said Joe Monaghan, a Seattle coffee-industry veteran. “He was aggressive, not at all like the typical person I was used to dealing with in the coffee industry—laid-back people who thought one or two stores would be plenty. Howard was always thinking bigger than that.”

The average Starbucks customer comes in 18 times a month, a rate Schultz claims makes the company "the most frequented retailer in the world." Just how good is Starbucks at winning over the hearts and wallets of its clientele? Consider the case of Tully's Coffee, a midsize chain that has made a policy of locating each of its stores as close to a Starbucks as possible, to capitalize on overflow customers and Starbucks' savvy real-estate machine. Tully's offers more or less the same drinks as its giant rival, its stores look very similar, and its freshly baked pastries are vastly better than those at Starbucks. On the surface, the two companies seem an awful lot alike. Yet the average Tully's brings in revenues of about $400,000 a year; the average Starbucks has over $1 million in revenue.

So why would Starbucks stores demolish the competition by such a wide margin? Price couldn’t have been a factor, since the chain generally charges more than its competitors. And it certainly isn’t due to the company’s advertising presence; between 1987 and 1997, Starbucks spent $10 million total on ads—an amount Coca-Cola blows through every two days. Maybe it was something about the coffee? “To be honest, you could train a monkey to pull a double shot,” said Scott Bedbury, a former Starbucks marketing director who also guided Nike’s legendary “Just Do It” campaign in the 1990s. “It’s just not that hard. The coffee wasn’t the hard part.”

If it wasn’t advertising, value, or even the main product that ensnared so many customers, then what was it? The secret behind Starbucks’ magnetic pull on consumers lies in the extraordinary amount of control it exercises over its image. At Starbucks, nothing is accidental. Everything the customer interacts with, from the obsessively monitored store environment down to the white paper cups, is the product of deliberation and psychological research. The coffeehouse as we know it is a calculated creation, tweaked and refined in large part by Schultz and his army of designers. In an age when homogenous ad campaigns cover every surface that can be bought, Starbucks chose a novel marketing approach: It transformed into an ad for itself. No longer would consumers just grab coffee; now they would come for the “Starbucks Experience.”

Schultz often insists that his company attained its current cachet almost by accident, just by being nice. "We never set out to build a brand," he wrote in Pour Your Heart into It. "Our goal was to build a great company, one that stood for something." In reality, however, Schultz had obsessed over the company's image since the beginning, supervising everything from the typefaces on coffee bags to the wording of phrases in company literature. "He signed off on everything—everything," Bedbury said. "Nothing went out without his approval."

Schultz considers himself the guardian of the Starbucks brand, and as such, he’s very careful about the ideas he associates with the company and its core product. For one, you’ll never see Starbucks drinks discounted in any way; Schultz wants you to view his product as the epitome of opulence, and would you ever see a “buy one, get one free” deal at a Jaguar dealership? On national issues, the company stakes out its positions with brand enhancement in mind. Its print ads usually “thank” customers for helping Starbucks provide some humanitarian service like tsunami relief funds, thereby aligning itself with the righteous cause in the consumer’s mind—in effect, making customers feel that buying a Starbucks latte is a form of global altruism.

Another area Starbucks has monitored with particular vigilance is its movie and television cameos. The company received cartloads of Hollywood scripts in the '90s, and in order for one to get authorization to use the siren logo, it had to reflect especially well on the brand. So when the director David Fincher approached the company with the screenplay for the Brad Pitt vehicle Fight Club and asked for permission to destroy a Starbucks with a wrecking ball-sized metal globe, the request got a thumbs-down. But a suggested scene for TV's Ally McBeal, wherein the title character and a costar would slowly and sensually savor their first sip of the day—as Bedbury put it, "Ally and her friend basically had oral sex with a Starbucks cup"—won enthusiastic approval.

In the cafés, on the other hand, Schultz was far less stingy with the company emblem. “It was all about the brand,” Harry Roberts, a longtime Starbucks marketing executive, told me. “We would put a dozen logos inside each store. They were everywhere.” The more logo sightings, the merrier. The cups in particular were devised with brand exposure in mind; Starbucks intended them to be handheld ads. “Over the years, we’ve had a lot of arguments about the design of the cups,” said Terry Heckler, who shaped the look of both the cups and the logo. “We agree now that the Starbucks cup is probably the most effective piece of media that Starbucks has. Lots of people have wanted to change the design, but Howard’s taken a strong stance on it. I mean, 40 million people a week—that’s a lot of billboards.”

The divergence in fortunes between coffee growers and coffee roasters over the last 20 years has been nothing less than staggering. In the late 1980s, as global coffee sales hovered at around $30 billion, farmers earned a steady $10 billion or so of the pie. The market has more than doubled since then—soaring to well over $70 billion on the strength of the designer coffee boom—yet according to the International Coffee Organization, growers have received an average of just $6.2 billion a year since the turn of the millennium.

The past few years have featured the lowest inflation-adjusted coffee prices in history—as low as 41.5 cents per pound, which is far below the growers’ cost of production—and the World Bank has estimated that 600,000 coffee workers are now out of work in Central America alone. In response to the terrible market conditions, farmers have undertaken desperate measures. In 2002, growers in Acapulco, Mexico, amassed an 8.4 million-pound hill of coffee beans—enough to brew more than 200 million cups of the stuff—and crushed it into fertilizer. The following spring, London’s Financial Times reported that the skies over vast areas of Guatemala were black with smoke from farmers torching their own coffee plantations. From Colombia to Ethiopia, farmers razed their coffee trees and replaced them with coca plants, opium poppies, and qat—a euphoria-inducing stimulant popular in Eastern Africa. When the cost of raising and harvesting a pound of beans far exceeds the market price, the coffee trees just aren’t worth keeping in the ground. If the farmers go hungry, their cash crop won’t help. You can’t eat coffee.

The great irony of it all is that this disastrous slump for growers has occurred in an era when coffee has enjoyed its highest profile in history, thanks to gourmet roasters like Starbucks. Many farmers find this discrepancy infuriating, even when they received a price deemed “fair” from companies that like to boast about their support of progressive causes. As one frustrated plantation owner put it in the journal World Coffee and Tea, “From the producer’s point of view, it seems truly ironic that a product that takes a year to grow, and that requires thousands of worker hours of difficult, delicate, and often dangerous work, should be so remarkably inflated by someone who simply cooks and displays the coffee.”

This brings us to an obvious question: If raw coffee is hovering around its all-time low price, why isn’t the slump making a dent in those big numbers on the coffeehouse menu board? Well, because what you’re paying for at a café isn’t the coffee. Take a four-dollar cappuccino, for example. According to statistics from the Specialty Coffee Association of America, only 5 percent of that price (20 cents) is the cost of the coffee itself—and that’s for roasted coffee, which the coffeehouse has already paid to cook, package, and ship. In reality, a nickel more than covers the farmer’s take for that cappuccino; that’s less than the cost of the cup, sleeve and lid (7 cents). At a coffeehouse like Starbucks, you’re paying for dairy products (10 percent, or 40 cents), labor and overhead (71 percent, or $2.84), and, of course, profit (11 percent, or 44 cents). Upping farmers’ rates significantly would cost the consumer virtually nothing—but since that’s not how the free market works, farmers are stuck struggling.

Whenever Starbucks announces plans to enter another thriving community, there's always a subset of alarmed locals who react as though the town were under siege from the Mongol horde. Yet even by these standards, the residents of the Hosford-Abernethy neighborhood raised a considerable amount of hell when the company declared its intent to build a store there in the spring of 2004. As the liberal nerve center of the already hyperliberal city of Portland, the community has long been a tough sell for chains; shortly before the Starbucks revelation, the riled-up citizenry had scored a triumph over McDonald's, which had to scuttle its plans to open nearby because of strong resistance. Now, the locals were fighting Starbucks' occupation of a marquee space on a multipronged intersection known as Seven Corners. This did not fit with the pro-mom-and-pop neighborhood plan, and people let Starbucks know it in a flurry of protests and pickets. To say that relations between the company and its prospective customers were troubled would be putting it lightly. At one demonstration, a 9-year-old girl with a moss-green hat pulled over her ears took the microphone and announced that Starbucks was a "cancer."

The conflict reached its climax one night that May—on the eve of the store’s scheduled debut—when a hooded and masked man, who was later given the folk-hero nom de guerre “The Nightworker,” made a last-ditch attempt to stop the Starbucks from opening: He tossed a Molotov cocktail at the store’s front windows.

When Starbucks first besieged Los Angeles in 1991, Herb Hyman was as alarmed as any local coffee-house owner would be. Though his successful Coffee Bean and Tea Leaf microchain had enjoyed a decades-long relationship with the Hollywood elite, Hyman worried that this juggernaut from Seattle would crush the business he had worked 30 years to build. Starbucks even promised as much. "They just flat-out said, 'If you don't sell out to us, we're going to surround your stores,'" Hyman recalled.

Soon after declining Starbucks’ buyout offer, Hyman received the expected news that the company was moving in next to one of his stores. Instead of panicking, as many have done, Hyman called his friend Jim Stewart of Seattle’s Best Coffee, who had plenty of experience competing with Schultz. He asked Stewart what really happened when Starbucks built a store nearby. “You’re going to love it,” Stewart replied. “They’ll do all of your marketing for you, and your sales will soar.” His prediction proved correct. Each new Starbucks created its own buzz, drawing out people who had never strayed from Folgers to try a latte: After they were hooked, these converts started exploring other coffee houses, and it just so happened that there was another one right across the street. The increased attention to coffee immediately boosted Hyman’s sales. “I told my people to get real estate wherever Starbucks went—it didn’t matter how much it cost,” he told me.

Here’s a statistic that might be surprising, given the dominance of the Starbucks empire: According to SCAA figures, 57 percent of the coffee houses in America are mom and pops.

Even between 2000 and 2005, long after the ascendance of Starbucks, the number of independent coffeehouses in the United States increased more than 40 percent—from 9,800 to just under 14,000. Starbucks’ share of the market keeps inching upward (over the same period, it tripled its U.S. store count, from 2,700 to 7,500), but the proliferation of its stores hasn’t fa zed the mom and pops at all—quite the opposite. The failure rate for new coffee houses is incredibly low—only 10 percent, according to the market research firm Mintel—which means a sizable majority of the independents stay in business regardless of where Starbucks drops its stores.

“This isn’t like the restaurant business, where the vast majority fail,” explained Dawn Pinaud, the early Starbucks employee. “Very rarely does Starbucks ever put people out of business.”

The Java Jolt


Though we often don’t perceive it as such, caffeine is a drug. With 90 percent of Americans taking some form of it habitually, caffeine has become so commonplace in society that food and beverage manufacturers often don’t bother to inform consumers if it’s present in a product. But it’s there, far more frequently than we realize. Here’s an example: We all know that soft drinks like Coca-Cola and Barq’s Root Beer contain enough caffeine to give us a decent jolt, but who would have guessed that Sunkist—an orange soda—has more of it than either of those two? Caffeine isn’t some naturally occurring part of the soda-manufacturing process, nor does it have any noticeable flavor; it’s always an additive, mixed in by beverage companies specifically for its pharmacological effects. What’s more, fully 70 percent of American soft drinks contain it—a fact that has helped make caffeine the most widely used psychoactive drug on the planet.

Which, depending on your opinions about the issue, would make Starbucks the world’s biggest pusher. The stakes are high for Starbucks in the caffeine debate. Several former and current Starbucks executives told me that they could imagine only one thing that might bring Starbucks down: conclusive scientific evidence that caffeine is unhealthy. If that were to happen, the company would bear a heavy burden; thanks to Starbucks, we’re taking in more caffeine than ever. The company serves the most potent brew in the coffee-house world, which, on a strong day, packs nearly as much caffeine in a single grande cup as three maximum-strength NoDoz caplets. And since Starbucks brought coffee back into vogue, we’ve become surrounded with caffeinated “energy drinks” like Red Bull, caffeinated breath mints, caffeinated vodka...the list goes on. —TC

 
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