Starbucks IPO with Dan Levitan
Ben & David "pour over" the 1992 IPO of the legendary Seattle coffee company with the help of Dan Levitan, who served as lead investment banker on the IPO.
Company Overview
Company Name: Starbucks Coffee Company
Year Founded: 1971
Headquarters Location: Seattle, Washington, USA
Core Business: Starbucks is a global coffeehouse chain specializing in roasting, marketing, and selling high-quality specialty coffee. It is renowned for its unique store experience, emphasizing community, quality, and customer loyalty through programs like Starbucks Rewards.
Significance in the Context of the Episode: The episode centers on the 1992 IPO, a transformative event that provided capital for rapid expansion and elevated Starbucks’ national visibility. Hosts Ben Gilbert and David Rosenthal, joined by Dan Levitan, explore Starbucks’ journey from a small Seattle-based coffee bean retailer to a global brand. They highlight Howard Schultz’s vision, the company’s employee-centric culture, and its evolution into a consumer company that leverages technology effectively. The episode underscores Starbucks’ ability to combine aggressive growth with a relentless focus on customer experience, setting it apart in a competitive industry.
History and Facts
Key Dates and Events
Company Origin and Evolution
Starbucks was founded in 1971 by Jerry Baldwin, Zev Siegel, and Gordon Bowker, who met as students at the University of San Francisco and were inspired by coffee roasting entrepreneur Alfred Peet. Initially, Starbucks operated as a roaster and retailer of high-quality coffee beans and equipment, not brewing coffee, as coffee shops were not yet a common concept in the US. In 1982, Howard Schultz joined as director of marketing and, during a 1983 trip to Milan, Italy, was captivated by the city’s coffee bar culture, where cafes served as social hubs. Schultz envisioned bringing this experience to the US but faced resistance from the founders, who were focused on acquiring Peet’s Coffee. In 1985, Schultz left to start Il Giornale, a coffee bar chain modeled after his Italian experience. Two years later, in 1987, he acquired Starbucks’ Seattle retail locations for $3.8 million, merging them with Il Giornale to form the Starbucks Coffee Company. This marked a pivotal shift, transforming Starbucks into a retail-focused coffeehouse chain.
Under Schultz’s leadership, Starbucks pursued aggressive expansion, growing from 11 stores and $1.2 million in revenue in 1987 to 165 stores and $74 million in revenue by 1992. The 1992 IPO was a defining moment, raising $40 million and enabling Starbucks to accelerate its store openings across the US and internationally. The episode emphasizes Schultz’s vision of Starbucks as a “third place” between home and work, fostering community and customer loyalty. Post-IPO, Starbucks faced challenges, including copycat competitors and periods of declining same-store sales, but its focus on quality, employee investment, and technological innovation allowed it to maintain its market leadership. By 2017, Starbucks operated over 26,000 stores worldwide with a market capitalization of $83 billion, reflecting its remarkable growth trajectory.
Notable Facts
Employee-Centric Culture: Starbucks was among the first companies to offer health insurance and stock options (referred to as “bean stock”) to part-time employees, a policy rooted in Schultz’s personal experience with his father’s lack of benefits. This commitment, including perks like a free pound of coffee per week, fostered a loyal workforce that enhanced customer interactions.
Technological Innovation: Starbucks pioneered the use of technology in retail, with innovations like mobile ordering, payment systems, and loyalty programs, which strengthened customer engagement and convenience.
Customer Loyalty: The episode notes that the average engaged Starbucks customer visited 18 times per month in 1992, a frequency comparable to modern social media apps, highlighting the company’s ability to build a loyal customer base.
Resilience Through Challenges: Starbucks faced “oh crap moments” and periods of declining performance but consistently rebounded through strategic initiatives, such as acquisitions and technology adoption, demonstrating its adaptability.
Cultural Impact: Starbucks redefined coffee consumption in the US, introducing the “second wave” of coffee as an experience, distinct from the “first wave” of home-brewed coffee like Folgers and Maxwell House.
Store and Financial Metrics
Competitive Context and Industry Impact
Starbucks revolutionized the coffee industry by introducing the concept of coffee as an experience, distinct from the commodity-driven “first wave” coffee of brands like Folgers. The episode describes this as the “second wave,” where Starbucks created a social and cultural hub, contrasting with the later “third wave” of artisanal, small-batch coffee shops. The company’s focus on customer experience, exemplified by its attention to detail and “earn-it-every-day” attitude, allowed it to differentiate itself from competitors like Gloria Jeans, which emerged post-IPO but failed to match Starbucks’ execution. Starbucks’ strategic acquisitions, such as Coffee Connection in Boston and Seattle Coffee Company in London, enabled it to dominate new markets quickly. The episode highlights how Starbucks’ brand strength and customer loyalty, with 90 million weekly customer visits by 2017, created a formidable competitive moat. Its ability to integrate technology, such as mobile apps and social media, further solidified its position, setting a benchmark for retail innovation.
Transaction
The transaction discussed is the Starbucks IPO, which took place on June 26, 1992.
Date: June 26, 1992
Parties Involved: Starbucks Coffee Company, led by CEO Howard Schultz, with Dan Levitan as the lead investment banker from Wertheim Schroder & Company, alongside co-lead underwriter Alex Brown.
Deal Size: The IPO raised $40 million, including a secondary offering, by issuing shares at $17 each.
Valuation: The market capitalization at the time of the IPO was approximately $225 million.
Strategic Rationale: The IPO provided capital to fuel Starbucks’ aggressive store expansion strategy, enabling it to enter new markets and scale operations. It also increased the company’s visibility, attracting customers and establishing Starbucks as a credible national brand. The episode notes that the IPO was oversubscribed eight to ten times, reflecting strong investor demand.
Immediate and Long-Term Impacts
Immediate Impact: The $40 million raised allowed Starbucks to accelerate its store openings, growing from 165 stores in 1992 to thousands worldwide. The IPO’s success, with shares trading up to $20–$21 on the first day, boosted Starbucks’ profile, driving customer curiosity and same-store sales growth. Dan Levitan recounts how the IPO’s visibility equated to increased customer traffic, as people became aware of Starbucks as a national brand.
Long-Term Impact: The IPO was a catalyst for Starbucks’ transformation into a global coffeehouse chain. By 2017, the company’s market capitalization had grown to $83 billion, representing an 18,000% return since the IPO, as noted by David Rosenthal. The capital and visibility from the IPO enabled Starbucks to dominate markets, acquire competitors, and invest in technology, such as mobile ordering and loyalty programs. The episode emphasizes that the IPO’s success laid the foundation for Starbucks’ resilience through challenges, including economic downturns and competitive pressures, solidifying its position as a cultural and business icon.
Grading
Ben Gilbert and David Rosenthal, both assign the Starbucks IPO an “A” grade, praising its execution and transformative impact.
Ben’s Reasoning: “I’m going to give this an A. I think for the branding event reason, it enabled them to go into markets and that worked. When they spread to these new markets, they were suddenly national news and people understood this wasn’t this little coffee chain in Seattle and on the West Coast. It was an IPO that people knew about and they had a pedigree and they could move to these new markets with that. And then I’m splitting what they did with the capital into idea and execution. The idea of what to do with it to continue this frenzy of opening new stores the right way in new markets and moving in was both the right thing to do with that capital and really well executed.”
David’s Reasoning: “I’m an A too here, and not just because we’re talking to Dan. It’s hard to argue with an 18,000% appreciation since the Starbucks IPO. But for me, the two things, taking away from this conversation, and Dan, your stories and your insights, I’d thought about a lot, but it’s the combination of the two, I think, are so powerful and expressed so beautifully within Starbucks and within Howard. It’s that Starbucks and Howard had these two equal drives within them. And that one was for growth, and the other one was for exceeding customers’ expectations every single time. And I think it’s the marriage of those two things that make for the most powerful consumer companies out there.”
As the transaction is an IPO, not an acquisition, acquisition categories (e.g., talent, technology, market expansion) do not directly apply. However, the hosts frame the IPO as enabling Starbucks to “acquire” new markets and customers by expanding its reach and enhancing its brand. The grading reflects the IPO’s success in providing capital, boosting visibility, and setting the stage for long-term growth, connecting directly to Starbucks’ strategy of rapid expansion and customer focus discussed in the Playbook section.
Tech Trends
The episode identifies three key technological waves that have contributed to Starbucks’ success and align with its strategic evolution:
Mobile and App-Based Services: Starbucks pioneered mobile ordering and payment through its app, allowing customers to order ahead, pay with stored value cards, and earn rewards. The episode notes that this innovation, which became a cornerstone of Starbucks’ loyalty program, enhances customer convenience and strengthens engagement. For example, Ben Gilbert shares, “They were one of the first to pioneer putting those gift cards in the app. And now I don’t think I’ve actually used cash or a credit card at a Starbucks to buy anything other than reloading my cards so I can get my stars.” This trend connects to the Playbook’s focus on customer experience, as mobile ordering reduces wait times while maintaining personal interactions.
Social Media and Digital Marketing: Starbucks was an early adopter of social media to drive traffic to its stores and engage with customers. The episode highlights the work of Chris Brizzo, Starbucks’ first social media manager, who recognized social media’s potential to increase same-store sales. Dan Levitan notes, “Chris was kind of before his time at Starbucks and just kept pounding on the opportunity that social media had to be an awareness vehicle and a traffic driver.” This trend ties to the Playbook’s emphasis on brand building, as social media amplified Starbucks’ cultural presence.
Voice Technology and AI: The episode discusses the emerging potential of voice technology and artificial intelligence to facilitate impulse purchasing and personalize customer experiences. At the 2017 Starbucks annual meeting, the company previewed ordering via voice assistants, such as in-car ordering through Ford vehicles. Dan Levitan remarks, “I think you’re going to see voice on ramps adopted within e-commerce situations that are going to change the way and how we buy.” This trend aligns with the Playbook’s technology integration theme, positioning Starbucks to stay ahead in a rapidly evolving digital landscape.
These technological trends have significantly influenced Starbucks’ strategy by creating a seamless omnichannel experience that combines physical stores with digital interactions. Mobile and app-based services enhance customer convenience, reducing friction in the purchasing process, while social media drives brand awareness and foot traffic. Voice technology and AI represent future opportunities to further personalize and streamline the customer experience, reinforcing Starbucks’ competitive advantage. However, the episode cautions that technology must serve the customer experience, not merely exist for its own sake, as Ben Gilbert notes, “Everything has to be in service of creating a superior customer experience.” These trends also pose risks, such as the need to balance technological adoption with maintaining the personal touch that defines Starbucks’ brand, connecting to the Powers section’s emphasis on brand strength.
Playbook
The episode distills five key themes or learnings about Starbucks’ strategy, culture, and industry impact, which form the core of its operational and competitive approach:
Focus on Customer Experience: Starbucks prioritizes exceeding customer expectations at every touchpoint, from high-quality coffee to the store ambiance and employee interactions. The episode emphasizes that Starbucks’ “earn-it-every-day” attitude, with an average customer visiting 18 times per month in 1992, drives loyalty. Dan Levitan shares, “If you know you have 18 opportunities to exceed your customers’ expectations or flub it, everything matters.” This theme connects to the Tech Trends section, as innovations like mobile ordering enhance the customer experience.
Employee Investment: Starbucks invests heavily in its employees, offering benefits like health insurance, stock options, and educational programs, even for part-time workers. This stems from Schultz’s personal commitment to employee welfare, as he notes, “Howard was fortunate enough to have a business model where he invested in his people and his people nurtured relationships with customers.” This investment fosters a positive culture, enhancing customer interactions and linking to the Powers section’s brand strength.
Growth Mindset: Howard Schultz’s relentless focus on growth drove Starbucks to expand rapidly, entering new markets and acquiring competitors. The episode notes, “It’s in Howard’s DNA that growth, growth, growth,” with strategic acquisitions like Coffee Connection in Boston enabling market dominance. This theme ties to the Transaction section, as the IPO provided the capital to fuel this expansion.
Technology Integration: Starbucks leverages technology to enhance customer experience and operational efficiency, from mobile apps to social media. The episode highlights how Starbucks’ early adoption of technology, such as its 2012 Square partnership, set it apart from peers like JCPenney and Sears. This connects to the Tech Trends section, reinforcing Starbucks’ innovative approach.
Brand Building: Starbucks builds a strong brand associated with quality, community, and innovation, allowing it to command premium prices and maintain customer loyalty. The episode notes that Starbucks became “a verb, it’s a noun, it’s on every corner in every city in the entire world,” reflecting its cultural impact. This theme links to the Powers section, as brand strength is central to Starbucks’ competitive moat.
These strategies position Starbucks for future success by ensuring adaptability in a competitive landscape. The focus on customer experience and employee investment creates a virtuous cycle, where loyal employees deliver exceptional service, reinforcing the brand. The growth mindset and technology integration enable Starbucks to scale efficiently while staying relevant, though challenges like maintaining quality at scale and competing with third-wave coffee shops require ongoing vigilance.
Powers
Though not discussed on the episode, among Hamilton Helmer’s 7 Powers (Scale Economies, Network Effects, Counter-Positioning, Switching Costs, Brand, Cornered Resource, Process Power), Brand is the most relevant to Starbucks’ success, as implied by the episode’s discussion. Starbucks has cultivated a powerful brand synonymous with high-quality coffee, community, and a premium experience, enabling it to command higher prices and foster deep customer loyalty. Dan Levitan emphasizes, “The real differentiation in how they have withstood the competition is because of the commitment of the people, which then made Starbucks become, in customers’ mind, something bigger than just buying a cup of coffee.” This brand strength is evident in the episode’s anecdote about customers and hotel staff in Seattle unanimously recommending Starbucks in 1991, reflecting its cultural resonance.
Additionally, Starbucks leverages Switching Costs through its loyalty programs and mobile app, which integrate stored value cards and rewards, making it less likely for customers to switch to competitors. The episode notes, “They have incredible loyalty due to their app or manifested in their app,” highlighting how technology reinforces customer retention. Scale Economies also apply, as Starbucks’ global network of over 26,000 stores by 2017 enables cost efficiencies in purchasing, distribution, and marketing. However, Brand is the primary power, as it underpins customer loyalty and premium pricing, connecting to the Playbook’s brand-building theme and the Tech Trends’ focus on loyalty-enhancing technologies. This combination creates a robust competitive moat, allowing Starbucks to maintain its market leadership despite competitive pressures.
Carveouts
In the episode’s carveout segment, the hosts and guest share personal recommendations:
Ben Gilbert: Recommends Pro Rata (Axios Pro Rata), a daily newsletter by Dan Primack, formerly of Fortune’s Term Sheet. It provides insights into venture capital and private equity deals, helping readers track trends in company creation. Ben notes, “Pro Rata in particular is great because you get some really good insight by Dan, who’s a true journalist.”
David Rosenthal: Recommends The Wizard and the Bruiser podcast, a nostalgic exploration of 1980s geek culture, covering topics like The Legend of Zelda and Sonic the Hedgehog. David describes it as “super fun stuff” and “hilarious,” appealing to listeners of a certain generation, though he warns it’s “not safe for work.”
Dan Levitan: Shares the poem “The Man in the Glass” by Peter Wimbrow, written in 1932, which emphasizes self-reflection and integrity. Dan recites, “When you get what you want in your struggle for self and the world makes you king for a day, just go to the mirror and look at yourself and see what that man has to say.” He highlights its relevance for young professionals navigating their careers.
Additional Notes
Episode Number: 34
Title: The Starbucks IPO with Dan Levitan
Duration: Approximately 1 hour 17 minutes
Release Date: April 3, 2017