Starbucks (with Howard Shultz)
With nearly half a billion customer purchases per week across its stores and 3rd party retail channels, a significant portion of the human population gets their daily fix in the green and white cup.
Starbucks. You’d be hard pressed to name any brand that’s more ubiquitous in the world today. With nearly half a billion global customer purchases per week across its stores and 3rd party retail channels, a significant portion of the human population gets their daily fix in the green and white paper cup. (Including our own Ben Gilbert who famously enjoys his daily spinach feta wrap. :)
But it wasn’t always this way. Long before the frappuccinos and the PSLs and the cake pops, Starbucks was just a small-time Seattle roaster that only sold beans — and was started not by Howard Schultz but rather the guys who later ran Peet’s (!). Starting from six tiny stores when Howard took over in 1987, this quirky coffee company named after a character from Moby Dick has scaled to nearly 40,000 locations worldwide.
In a first for Acquired, the protagonist himself joins as a third cohost to tell the whole story of Starbucks. And Howard is in the perfect moment to do this — after three separate stints as CEO he’s now retired, off the board of directors, and in his own words “not coming back.” So place a mobile order (or not! as you’ll hear Howard speak about), sit back with your own favorite Starbucks items, and enjoy.
Kyle’s Rating: 8/10
This represents, in my humble opinion, the best interview Ben and David have ever conducted, showcasing a format that typically isn't their greatest strength but works well here. Howard Schultz brings an intensely personal dimension to the show that transforms it from business analysis into something deeply human, with his genuine emotion and vulnerability shining through every story. You can feel how much he truly cares about Starbucks' culture and people - it's not corporate speak but authentic passion from someone who still bleeds green after decades away from daily operations.
Company Overview
Company Name: Starbucks
Founding Year: 1971
Headquarters Location: Seattle, Washington
Core Business: Starbucks is a global coffeehouse chain and coffee company, renowned for its premium Arabica coffee beverages, food offerings, and the creation of a “third place” community space between home and work.
Significance: With nearly 40,000 stores across 86 countries and a $90 billion market cap, Starbucks has redefined coffee consumption, transforming a commodity into an experiential, premium brand that fosters human connection worldwide.
Narrative
The Starbucks story chronicles the improbable rise of a single Seattle coffee bean store to a global icon.
Jerry Baldwin, Zev Siegl, and Gordon Bowker founded Starbucks in 1971 as a modest roaster in Seattle's Pike Place Market. They sold Peet's-sourced beans under their own name. By 1982, the company ran just three stores but attracted tourists and mail-order fans, building outsized brand equity despite its small scale. Howard Schultz, a Hammarplast supplier to Starbucks, joined as head of marketing. The romance of coffee and its community potential captivated him.
Howard Schultz grew up in Brooklyn's projects, marked by poverty. His father faced disrespect in low-wage jobs, and bill collectors constantly pressured the family. This upbringing profoundly shaped Starbucks' ethos. Schultz adopted a no-debt philosophy, vowing to avoid the financial burdens that plagued his family and later constrained Starbucks' original owners. He built his mission around creating a "performance-driven company through the lens of humanity." He prioritized employee welfare with groundbreaking benefits. These benefits, inspired by his father's struggles, cut employee turnover to half the industry average, elevated the barista role beyond a menial fast food job, and enhanced customer experiences through personalized service.
Schultz's 1983 Milan trip revealed Italy's vibrant coffee bar culture—espresso, lattes, and communal spaces. He saw this as Starbucks' future, but the founders rejected the vision as too restaurant-like. Frustrated, Schultz launched Il Giornale in 1985. He raised $1.6 million despite 217 investor rejections, then proved the coffee bar model with three successful locations in Seattle and Vancouver.
In 1987, Starbucks acquired Peet's, creating financial strain with a 6:1 debt-to-equity ratio. Schultz seized this opportunity to buy Starbucks for $3.8 million. He overcame a competing bid with Bill Gates Sr.'s intervention. Schultz merged Il Giornale's model with Starbucks' brand and roasting expertise, then set a blistering expansion pace. He doubled stores annually, reaching 55 by 1991.
The stores thrived on customization. Customers ordered lattes and cappuccinos that grew order sizes, showcasing a high-margin business. The company achieved 80% gross margins, 2:1 sales-to-investment ratios, and 20% operating profits. Stores paid back their costs in under two years.
Schultz targeted high-traffic urban corners and co-tenancies with grocery stores for his real estate strategy. He ensured visibility where "every store is a billboard." Despite capital pressures, he chose not to franchise, preserving cultural consistency and avoiding the subcultures that franchisees create at companies like McDonald's. Strategic partnerships amplified the brand: Costco sold their beans, United Airlines served their coffee, and Pepsi bottled their Frappuccinos. Organic placements in movies like You've Got Mail boosted brand awareness without marketing spend. Cups became badges of "affordable luxury."
The 1992 IPO at a $250 million market cap validated this model. Schultz envisioned a national coffeehouse chain—unheard of at the time—propelled by a "third place" community ethos. The 1994 Coffee Connection acquisition for $23 million brought the Frappuccino. Schultz initially dismissed it, but the reformulated drink drove 7% of revenue by 1996. By 1995, Starbucks operated 500 stores.
International expansion began in Japan in 1996, defying predictions of failure when 200 people lined up in Ginza. The company reached 2000 stores by 1999. China, starting in 1999, struggled until Belinda Wong's leadership decentralized operations. The market grew to 7000 stores by 2024, contributing 18% of revenue through culturally resonant moves like parental health insurance.
The 2008 financial crisis tested Starbucks hard. Same-store sales declined and insolvency loomed seven months away. Schultz returned as CEO, closed 1000 underperforming stores, and rallied 10,000 managers in New Orleans. He turned profits from $315 million to $945 million by 2010. However, he warns that "growth covers mistakes, success breeds hubris." Overexpansion and diluted quality—such as reduced coffee in brews—nearly derailed the company.
In 2009 they launched the mobile app which revolutionized convenience and customization and now handles 33% of orders. However, it became Starbucks’s "Achilles heel." Transactional congestion eroded the "third place" atmosphere.
Schultz's 2022 interim CEO stint addressed post-COVID drift. He suspended $2 billion in stock buybacks to reinvest in employees, but he critiques 2024's struggles—declining sales and stock price.
He urges a coffee-forward revival in his "Soul of the Brand" letter. Starbucks' success blends scale with humanity and remains resilient, but it demands constant nurturance to avoid mediocrity.
Timeline
1971: Starbucks founded by Jerry Baldwin, Zev Siegl, and Gordon Bowker in Pike Place Market, selling Peet’s beans.
1982: Howard Schultz joins as head of marketing; three stores operate in Seattle.
1983: Schultz’s Milan trip sparks coffee bar vision, rejected by founders.
1985: Schultz founds Il Giornale, opening three coffee bars in Seattle and Vancouver.
1987: Schultz acquires Starbucks for $3.8 million, merging with Il Giornale; 11 stores by year-end.
1988: Expands to Chicago, facing challenges; introduces comprehensive health insurance, including for part-timers and domestic partners.
1989: Howard Behar joins, embedding servant leadership; 33 stores.
1990: Orin Smith joins, bringing operational rigor; 55 stores.
1991: Beans Stock equity program grants stock options to all employees; 130 stores.
1992: IPO at $17/share, $250 million market cap; $93 million revenue.
1994: Acquires Coffee Connection for $23 million, gaining Frappuccino trademark and Boston presence.
1995: Partners with Pepsi for bottled Frappuccino; reaches 500 stores.
1996: Opens first Japan store in Ginza, a joint venture; Frappuccino drives 7% of revenue.
1998: Partners with United Airlines and Costco, boosting brand visibility.
1999: Opens in Beijing; reaches 2000 stores globally.
2000: Schultz transitions to Executive Chairman; Orin Smith becomes CEO; 3500 stores.
2006: Jim Donald becomes CEO, succeeding Smith.
2008: Schultz returns as CEO amid financial crisis, closing 1000 stores; mobile app development begins.
2009: Mobile app launches, enabling order-ahead and payment.
2010: Profits rebound to $945 million from $315 million.
2011: China reaches 500 stores under early partnerships.
2014: First roastery opens in Seattle, elevating brand experience.
2017: Kevin Johnson becomes CEO; China grows to 3000 stores under Belinda Wong.
2018: Opens Milan roastery, entering Italy after 50 years.
2022: Schultz returns as interim CEO to address post-COVID challenges.
2023: Laxman Narasimhan becomes CEO.
2024: Operates 39,000 stores in 86 countries, with 7000 in China; $36 billion revenue.
Notable Facts
Outsized Early Brand Equity: By 1982, Starbucks’ Pike Place store and mail-order business created a cult following, drawing tourists to its three stores, far exceeding its physical scale.
Pioneering Employee Benefits: Comprehensive health insurance (1988) for part-timers and domestic partners, and Beans Stock (1991) for all employees, halved industry turnover, fostering loyal baristas who personalize service.
Frappuccino’s Unexpected Success: Acquired via Coffee Connection (1994), Frappuccino, initially dismissed by Schultz, drove 7% of revenue by 1996 and launched a multi-billion-dollar bottled business with Pepsi.
Bill Gates Sr.’s Pivotal Role: In 1987, Gates Sr.’s intervention against investor Sam Strum secured Schultz’s $3.8 million Starbucks acquisition, a discreet act until revealed in 2015.
China’s Turnaround Triumph: Belinda Wong’s decentralized leadership grew China from a loss-making market to 7000 stores by 2024, contributing 18% of revenue with initiatives like parental health insurance.
No-Debt Philosophy: Schultz’s childhood aversion to debt, from bill collectors, kept Starbucks debt-free, enabling risk-taking and rapid expansion, unlike its debt-laden pre-1987 state.
Cultural Export to Japan: The 1996 Ginza opening, with 200 people lining up, defied predictions of failure, showcasing Starbucks’ ability to export its “third place” to a tea-drinking culture.
Customization’s Revenue Boost: Customers’ personalization of beverages, creating 100,000 variations, grew average ticket sizes, enhancing margins and loyalty.
Real Estate Strategy: Schultz personally selected the first 500 locations, focusing on high-traffic corners and grocery co-tenancies, turning stores into billboards for visibility and frequency.
Financial & User Metrics
Revenue (2024): $36 billion annually, reflecting global scale across 39,000 stores, with customization driving higher average tickets.
Net Income (2024): $4.1 billion, down from recent highs due to same-store sales declines and operational challenges.
Store Count: 39,000 stores in 86 countries, with ~19,500 in North America and ~7000 in China, half company-operated, half joint ventures.
Employees: ~450,000 globally, with 5 million alumni over the company’s history, reflecting its role as a “first job” leader with halved turnover.
Float: ~$1.8 billion in customer-loaded funds on the mobil app; $14 billion loaded annually, ranking Starbucks among the top 10% of U.S. banks by deposits, reducing transaction fees.
Mobile Order Penetration: 33% of orders via mobile app in 2024, driving convenience but challenging store dynamics, with 70% of sales from app and drive-thru by recent estimates.
China Revenue Contribution: 18% of total revenue, up from negligible in early 2000s, driven by 7000 stores and localized strategies.
Historical IPO Metrics (1992): $93 million revenue, $250 million market cap, with management owning 18% (Schultz ~9%).
Turnaround Metrics (2008–2010): Profits grew from $315 million to $945 million, recovering from near-insolvency through store closures and employee rallying.
Customer Frequency (Historical): Loyal customers visited 18 times/month in the Northwest at peak, per Schultz, though 2024 specifics unavailable; app boosts frequency but risks dissatisfaction.
Customization Impact: 100,000 beverage variations grow order sizes, enhancing margins; iced drinks now 70% of sales, from 0% initially.
Building a Premium Brand in a Commodity Business
Starbucks' transformation from commodity coffee retailer to premium lifestyle brand required meticulous attention to every customer touchpoint. The first critical decision came early when Howard discovered that standard styrofoam cups turned golden after contact with hot coffee, compromising both taste and experience. This led to a partnership with International Paper Company in Chicago to develop now-ubiquitous sip lid and paper cup combination - an innovation so successful that Howard later regretted not securing exclusive rights to the lid design that became the global standard.
The iconic green and white Starbucks cup became far more than a container - it evolved into what Howard called "a badge of honor" and the company's first billboard. Customers proudly carried their Starbucks cups as symbols of being "in the know," participating in something novel and sophisticated. This visual marketing cost nothing but generated immense brand awareness as people walked the streets advertising their coffee choice. The cup represented what Howard termed "affordable luxury" - a premium experience accessible to everyone from CEOs to blue-collar workers.
Strategic brand extension partnerships amplified this effect exponentially. The Costco relationship, initially met with internal revolt, proved transformational when Jeff Brotman and Jim Sinegal showed Howard a parking lot full of Starbucks customers, demonstrating how grocery distribution could drive retail traffic. The United Airlines partnership faced even greater resistance but surprised customers with quality coffee in unexpected places. Perhaps most serendipitously, Starbucks appeared throughout the movie "You've Got Mail" without any payment or coordination, adding "fairy dust" to the brand at a critical growth moment.
The ultimate validation came with the opening of the first Japanese store in Tokyo's Ginza district in August 1996. Despite consultant warnings that Japanese customers would never walk with coffee cups and couldn't afford the economics, 200 people lined up before opening. When the first customer - a college student who had slept overnight to be first - ordered a "double tall latte" in perfect English, Howard realized Starbucks had achieved true global brand recognition.
The success in Italy, where espresso became the number one beverage in Italian stores decades later, proved that authentic quality and experience could transcend cultural boundaries and transform even the most traditional coffee cultures.
Mobile App: A Blessing and a Curse
The mobile app represents Starbucks' greatest innovation paradox - simultaneously driving unprecedented convenience and business value while threatening the experiential foundation that built the brand. Launched in 2009 with Adam Brotman leading digital initiatives, the app initially seemed like pure upside, creating what Howard called "unbelievable convenience for our customers" while generating superior economics through reduced transaction fees and customer prepayment float.
The business model benefits proved extraordinary. Today, Starbucks holds $1.7 billion in customer gift card funds - making it comparable to a top 10% U.S. bank by deposits. With $14 billion loaded annually onto gift cards, the company enjoys essentially free working capital from customers, similar to Berkshire Hathaway's insurance float. When customers load $25 gift cards instead of paying $6 per transaction, Starbucks avoids credit card fees on most purchases while earning interest on customer prepayments. The app also enabled unprecedented customization, allowing customers to perfect complex orders and driving higher average transaction values.
However, success bred unintended consequences that fundamentally altered the Starbucks experience. As mobile orders grew to 33% of all transactions, stores transformed from community gathering spaces into pickup centers dominated by anxious customers crowding around counters waiting for drinks. Howard described witnessing a "mosh pit" in Chicago at 8 AM as commuters all showed up simultaneously for mobile orders promised in seven minutes. The human connection between baristas and customers - the very foundation of Starbucks' differentiation - deteriorated as staff focused on fulfilling digital orders rather than creating experiences.
Most critically, the app became what Howard termed "the biggest Achilles heel for Starbucks" because "we are an experiential brand" that depends on the "third place" community atmosphere. The convenience proved so seductive that the company failed to implement proper governors on its deployment. Reflecting on this period, Howard revealed he would never have allowed the mobile app to operate "on demand 24 hours a day" and would have "slow-rolled the availability" to understand its impact on store experience before full deployment. The challenge now facing current leadership is rebalancing technological convenience with experiential authenticity - preserving the innovation's business benefits while restoring the human connection that originally made Starbucks special.
Howard’s Take on Starbucks Today
Returning as interim CEO in 2022, Schultz found a company underinvested in stores and people, over-relying on $2 billion stock buybacks to boost EPS, which he suspended to fund employee benefits, stabilizing operations and raising the stock price from the $70s. Under Laxman Narasimhan in 2023, declining same-store sales and a plummeting stock price reflect external pressures (inflation, post-COVID recovery) and internal missteps. In his 2024 “Soul of the Brand” letter he voices concern over Starbucks’ drift toward mediocrity. Schultz, no longer on the board, urges a coffee-forward focus, emphasizing Starbucks as a “coffee company serving people,” not a transactional beverage business. The mobile app’s dominance, creating congestion and eroding the “third place,” demands refinement to restore intimacy.
Acquired Universe Crossovers
Jim Sinegal & Jeff Brotman (Costco): Jeff Brotman, a 1987 Starbucks investor and board member, mentored Schultz and introduced him to Jim Sinegal. Their Costco partnership, selling Starbucks beans, boosted store traffic, with Schultz noting measurable volume increases on Seattle’s east side, mirroring Costco’s employee-centric model.
Bill Gates Sr.: In 1987, Gates Sr. confronted investor Sam Strum to secure Schultz’s $3.8 million Starbucks acquisition, a pivotal act kept private until Schultz shared it at Microsoft’s 2015 CEO summit, unknown even to Bill Gates III.
Jeff Bezos & Jim Sinegal: Bezos met Sinegal at a Starbucks in a Bellevue Barnes & Noble, inspiring Amazon Prime, as David noted, highlighting Starbucks’ role as a cultural hub for business innovation.
Microsoft’s Japan Expansion: Like Starbucks’ 1996 Japan entry with 2000 stores by 2024, Microsoft’s first international market was Japan, driven by Kay Nishi’s passion, contributing 50% of early revenue, paralleling Starbucks’ global leap.
Berkshire-Like Float: Starbucks’ $1.8 billion gift card float, with $14 billion loaded annually, mirrors Berkshire Hathaway’s insurance float, providing interest-free capital, as David compared to a top 10% U.S. bank by deposits.
Playbook
Addictive Yet Virtuous Product: Coffee represents the rare legal stimulant that research consistently shows as neutral to beneficial for health, creating a daily consumption habit without the guilt associated with other addictive substances, while caffeine provides genuine cognitive enhancement that customers value and seek repeatedly.
Barista Prestige: Unlike fast food restaurant work, being a barista carries inherent respect and craft elements, creating a virtuous cycle where quality workers are attracted to the role, enabling better customer experiences that justify premium pricing and support higher wages that attract even better workers.
Ubiquity as Competitive Advantage: Rather than cheapening the experience, Starbucks' global presence creates network effects where customers can confidently order their customized beverages anywhere in the world using familiar mobile app interfaces, making switching to local competitors feel risky and inconvenient.
Experience as Product: Recognizing that "product isn't the product, experience is the product" enabled Starbucks to command premium pricing for what could be a commodity, transforming coffee consumption from transaction to ritual through atmosphere, customization, and interpersonal connection.
Scaling Humanity: The fundamental challenge and competitive moat involves maintaining "intimacy and the currency of trust" across 39,000 locations by systematically investing in partner development, cultural consistency, and operational excellence that preserves human connection even at massive scale.
Obsessive Quality Foundation: From premium Arabica bean sourcing across 30 countries to custom cup development to barista training, every operational detail serves the mission of elevating coffee from commodity to premium experience, recognizing that quality shortcuts ultimately undermine brand equity and pricing power.
Inverted Stakeholder Pyramid: The philosophy that "if we exceed the expectations of our people so they can exceed the expectations of the customer," shareholders naturally benefit creates sustainable competitive advantage through employee retention averaging 2X industry standards, enabled by pioneering benefits like Bean Stock equity, comprehensive healthcare, and free ASU college tuition.
Store-Level Economics: The economic model of 2:1 sales-to-investment ratio with 20% operating margins enables payback periods under two years per store, creating self-funding expansion that doesn't require external capital while generating consistent returns that support continued investment in partner benefits and experience improvements.
Every Interaction as Marketing: Recognizing that "every store is a billboard" led to strategic real estate selection in high-traffic areas, partnerships with United Airlines and Costco for brand exposure, and creation of the iconic cup as wearable advertising, achieving massive brand awareness without traditional marketing spend.
Third Place Innovation: Creating community gathering spaces "between home and work" addressed universal human needs for belonging and connection, proving scalable across cultures while generating the frequent visitation patterns (up to 18 times monthly for loyal customers) that enable the high-margin business model.
Additional Notes
Episode Metadata:
Number: Season 14, Episode 5
Title: Starbucks (with Howard Schultz)
Duration: 3:13:18
Release Date: June 3, 2024
Related Episodes:
Starbucks IPO (Season 1, Episode 34, April 3, 2017)
Microsoft Volume I (Season 14, Episode 4, April 21, 2024)
Costco (Season 13, Episode 2, August 20, 2023)
Links: