Business Lessons From Starbucks

Posted in   Investing   on  May 12, 2024 by  Money Bren0

Nothing in this article is financial advice. The writer is not your financial advisor. Investing contains risk and you can lose money. Consult your own professionals before making investment decisions. This article may contain affiliate links. 

I recently finished reading “Onward: How Starbucks Fought For Its Life Without Losing Its Soul” by Starbucks’ founder Howard Schultz.

Schultz had retired as CEO several years earlier, but just before the 2008 recession he felt Starbucks was losing its way. He decided to return as CEO.

So, he fired the then-CEO, whom he considered a friend but had a fundamental disagreement with over the company’s direction, and re-took the helm.

This was the first important lesson – you’re not in business to make friends, you’re in business to succeed. Sometimes you need to make tough decisions, even if it means upsetting people or doing unpopular things.

What follows is how he navigated Starbucks through the 2008 crisis and back to growth and prosperity.

During those years, Starbucks share price hit a bottom of ~$8. Today, it’s at $73, and has been as high as $120.

The book wasn’t the most exciting read, but it did have valuable business insights useful for an investor and life in general.

Three anecdotes stood out, which I’ll summarise below.

Starbucks stopped selling breakfast sandwiches

The backstory required here is the original idea for Starbucks.

It was borne out of a trip to Italy by Schultz, who was enamoured with the many small coffee shops serving freshly brewed coffee. The barista/owner knew all the customers, and they would stand around and chit-chat each morning as they enjoyed an espresso. Schultz fell in love with the small community nature of these little boutique stores that smelled like freshly roasted coffee beans.

At the time, most coffee drunk in the USA was instant coffee. “Real” coffee shops weren’t much of a thing. Yet they could be found on almost every corner in Italy.

Schultz plan was to bring the “real coffee shop” idea back to the USA.

Fast forward a few years and Starbucks has taken hold in the USA. It’s changed the coffee game and now Americans all over the country are stopping at Starbucks each morning for a freshly brewed cappuccino or espresso.

Back then, however, Starbucks was popular for not only its coffee but its food too.

People would come in each morning and grab a coffee and a hot sandwich, known as “the breakfast sandwich”, which Starbucks would serve hot.

When Schultz started visiting stores, he was dismayed that they no longer smelled like coffee! Instead, upon entering a typical Starbucks in the morning, the store smelled like grilled cheese, similar to a burger joint. Despite the breakfast sandwich being one of the biggest profit-makers for Starbucks, he wanted them gone. His vision for Starbucks had been a place where you walked in and the shop smelled like roasted coffee beans, like the shops he had fell in love with in Italy.

Not only that, he hated the new tall coffee machines that were being used. These machines sat on the countertop and were so large that the customer couldn’t see their barista making their coffee. Schultz believed this was one of the key ingredients to the beauty of those small Italian cafes – that the barista could see and talk to the customer while brewing the coffee, building the friendship between the two that he’d found so endearing in Italy.

So what did he do? First, he replaced all the machines in every Starbucks store at a cost of many millions of dollars. He contracted a manufacturer to design a machine for Starbucks that looked stylish and sat low enough on the countertop that customers and baristas could see and talk to each other. Secondly, he removed the hot breakfast sandwich from the menu. Starbucks still sold food, but nothing heated or grilled so that the smell of fresh coffee beans couldn’t be overpowered.

I find this remarkable, and something that only a founder CEO would have the energy and vision to pull off. A corporate CEO, educated at Harvard Business School or Yale, might be good at running models and profit maxing, but only a founder who treats the company like one of his own children can see and nourish the “soul” of a company.

These two tiny details (forgoing millions in profits so shops don’t smell like cheese, spending millions to buy smaller coffee machines so customers and baristas can see each other) wouldn’t have registered on the prior CEOs radar, ever. Yet it’s likely they have been integral to the cult-following of Starbucks in America over the last 20 years.

Later in the book, when Starbucks is forced to close some 600 stores due to the recession, Starbucks is inundated with letters from customers pleading to keep their local Starbucks open. They say things like “the staff are like family / they know our names / we’re best friends” etc etc. Do you think those relationships could have been built if the staff and customers never spent that sixty seconds talking over the coffee machine each morning?

These tiny details make the difference between a good business and a timeless business – and it’s often only a founder CEO who can see them.

The Sorbetto Flop

Starbucks is big on innovation, and during that period they were always talking about the “next Frappuccino”.

Why?

Well, because the Frappuccino was a juggernaut.

Since its release, it had become one of Starbucks most profitable and popular products, turning into a $2 billion brand on its own.

So the talk became, what’s going to be our next Frappuccino?

On a trip to Italy, Schultz finally thought he hit the jackpot.

He tasted a creamy, fruity drink that wasn’t like your typical smoothie. It was developed quickly and prepared for rollout in 300 stores in California. He named it Sorbetto and was convinced it would be a hit. This was the next Frappuccino.

In mid 2008, Sorbetto released in three flavours – a yogurt based Tangy Sorbetto, a slushy Citrus Sorbetto, and a mixed product, the Tangy Citrus Ice Sorbetto.

The product itself was well received and customers liked it.

However, it was a total flop and was soon discontinued.

Why?

Well, it was no Frappuccino. The Frappuccino is easy to make. It’s sugar, cream, coffee, flavouring, blend it up and bam. A fancy milkshake with 70% margins that everybody loves.

The Sorbetto was not so simple.

First, the base ingredient needed to be shipped in from Italy. To get the right consistency for the beverage, hundreds of new machines needed to be delivered to stores so they could mix the drink properly. While they had initially expected 70% margins, those quickly fizzled down to about 24% with these costs. Third, because of the way the Sorbetto was made, it produced a lot of waste, meaning lots of Sorbetto was going down the sink rather than being sold to customers. Fourth, the new machines required 1.5 hours at the end of each day to clean – something that annoyed store managers and required increased time/cost. Finally, the Sorbetto was very high in sugar, which didn’t fit the emerging trend for healthy options at the time. On top of all that, sales were lower than expected.

The decision was made to cut losses and abandon the product.

Why is this story important?

It shows the importance of being able to take losses on the chin. If a good idea turns out to be not good, a CEO needs to be able to admit he was wrong. It also shows the importance of taking the chance in the first place. Money is made through innovation – a good CEO is never afraid of taking that risk, but always willing to say “no we got this one wrong”.

Interestingly, it was another product that launched around the same time as Sorbetto that turned out to be a winner – the Vivanno.

Its Not What You Know, Its Who You Know

Consider these casual name drops in the book:

“One of the most important pieces of advice I’d heard upon my return was from a dear Seattle friend and one of the country’s best retail executives, Jim Sinegal, co-founder and CEO of Costco…”

“I spent time in Hawaii with Michael Dell, founder of PC company Dell Computers, who was spending his holidays nearby. Michael and I had been friends for many years…”

“Michael emiled Marc Benioff, founder and CEO of Salesforce. Marc was also vacationing in Hawaii and the next morning, I met him for breakfast…”

“The Limited’s CEO Les Wexner, a trusted friend, reminded me of the fact whenever we talked…”

“I shared the ad with Norman Lear, the revered television writer and producer who is also a good friend and had joined me in New Orleans…”

“Bono, lead singer for US, global activist, and someone I consider a friend, had joined me onstage….”

An experienced CEO, who has been on the scene for a long time, and is well respected, is no less than a superpower. Imagine at the drop of a hat you can call some of the richest and most successful people on the planet to help you out of any snafoos you find yourself in. That’s the reason a CEO with a good track record is so essential.

Warren Buffett continually harps on about the importance of a good manager in any business he buys. Whenever investing in stocks, always background check the CEO. They’re the one driving the ship, which is often more important than the ship itself!

Interested to read more? Click here to get your copy of Onward: How Starbucks Fought For Its Life Without Losing Its Soul.

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