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May 9, 2021

Starbucks, a Tech Company

Howard Schultz reformed the coffee chain by turning it into a tech company.

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A man took a sip of coffee, and began to speak. 

So, what can I do for you?

Salesforce CEO Marc Benioff, a hulking six-foot-two, skewered a piece of cantaloupe and brought it to his lips. He was supposed to be on vacation. After all, that’s why he came to Hawaii in the first place. 

But he’d gotten a call. 

They day before, on December 23rd, 2007, his friend Michael Dell rang and asked him for a favor: would he speak to Howard Schultz? Yes, that Howard Schultz. He was in Hawaii, too. And he needed help. 

It had been a rough few years for the former Starbucks CEO. Since Jim Donald had taken over in 2005, Schultz had noticed a decline in the company’s service that was only now showing up in the numbers. With Starbucks heading towards financial free-fall, Schultz had decided he needed to take back control. But he knew he couldn’t run the same playbook that had grown Starbucks from a small Seattle roaster into a global phenomenon. The world had changed too much. He would need to embrace technology. 

During a bike ride along the coast of Hawaii’s Big Island, Schultz confided in Dell, and asked for his advice. After all, Dell himself had just returned as CEO of his company after three years away. 

I’ve got an idea, Dell told him. You need to talk to Marc. 

Benioff had proven pivotal in Dell’s return, advising the creation of a new web platform designed to solicit customer feedback and suggestions. That might not have sounded like much, but Dell assured Schultz it had made a big impact, bringing Dell Technologies closer to its customers and inspiring a more responsive organization. 

So, on the morning of Christmas Eve, Schultz sat down to breakfast with Benioff, and answered the bear of a man’s question. 

I want you to help me make a website. Just like the one you did for Michael. 

Just months later, in early 2008, Schultz took the wraps off of “My Starbucks Idea,” a digital suggestion box. Benioff had been a vital advisor on the project. 

The creation of My Starbucks Idea represented a turning point in Starbucks’s story, a division between one era and the next. If mastery over the physical domain defined Schultz’s first act, his second succeeded by conquering the digital. 

Today, Starbucks is a tech company. Other businesses may boast better coffee, tastier food, or more modern ambiances, but none can currently compete with Starbucks’ app, AI engine, or financial features. These sophisticated capabilities arose from the humble roots of that digital suggestion box, the product of a breakfast between two titans of industry. 

Starbucks’ technological lead may not last, however. The last four years have seen an infestation of small-format stores sweep Asia, leveraging tech to increase throughput and improve ROI. Meanwhile, robot-operated kiosks have captured the imagination domestically, and gesture towards an even more automated future. To stay ahead, Starbucks will need to reinvent itself yet again.  

In today’s piece, we’ll explore:  

  1. Starbucks’ evolution from hipster roaster to mainstream sensation
  2. Whether Starbucks is a consumer app, AI platform, or neobank
  3. The chain’s (small) future 
  4. The next frontiers of coffee

Short: Seattle to the World

“Starbo”

The Cascades hug America’s Western Coast. Stretching from the Canadian province of British Columbia down to California, the mountain range epitomizes the stark, lucid beauty that makes the continent’s Northwest such a poetic place to live. 

Dotting the Cascade range, buried between Mount Shasta and Mount Baker, is the town of Starbo. A humble mining community, Starbo is hard to find on a map, though it’s easy to imagine the wild beauty surrounding it.  

That wasn’t why Gordon Bowker liked the name, though. Co-owner of an advertising agency, Bowker had been convinced by his partner that words beginning with “St” possessed a peculiar, evocative strength. And if he and his old college buddies Jerry Baldwin and Zev Siegl were going to make this whole coffee roaster thing real, they needed a good name. 

Fullstop360

The trio had discovered the pinprick of Starbo poring over an old mining map, considering it an instant upgrade over their previous front-runner, “Cargo House.” Still, it wasn’t quite right, the men thought, though that discomfort didn’t last long.

Almost immediately, Bowker made the phonic leap from “Starbo” to “Starbucks,” the name of the first mate in Moby Dick

The character had no connection to the company’s mission, but Baldwin and Siegl liked it, too. The Starbucks Coffee Company was born. 

It fitted that the naming process that led to “Starbucks” was so haphazard; at first blush, the backgrounds of its founders were equally devoid of logic. What business did a history teacher, an English teacher, and ad man have starting a coffee roaster?

But ever since the University of San Francisco alums had learned how to roast beans from the high-priest of coffee himself, Alfred Peet, they could think of little else. With his blessing, they opened Starbucks, intending to use the Dutch immigrant’s techniques to bring high-quality coffee up the coast. (For the first year of operations, Starbucks bought beans from Peet’s Coffee.)

On March 30, 1971, Starbucks opened its first store at 2000 Western Avenue, along Seattle’s waterfront. It bore little resemblance to the living-room lounges the company would later popularize. Starbucks was not a coffee company; it was a coffee bean company. 

It might have stayed that way had Bowker and Co. not met a young man from Brooklyn. 

La Vita Bella

The same year that Starbucks was founded, Howard Schultz graduated high school. He’d grown up in Canarsie’s housing projects, the son of a truck driver. 

Hoping to walk on to the football team, Schultz attended North Michigan University, leaving with a degree in communications, but no appearances for the Wildcats. 

After school, Schultz began a career in sales, first at Xerox, then at Hammarplast, a maker of coffee machines and other appliances. The company sent Schultz to Seattle in 1981, to fill orders for coffee filters. It was on that trip that the eager salesman visited a little roaster along the Seattle shoreline: Starbucks. 

Impressed by the quality of the craftsmanship and sensing opportunity, Schultz decided this was where he wanted to work. Within a year, he’d left Hammarplast to become Starbucks’s “director of retail operations and marketing.” 

Only in 1983 did Schultz’s vision for the future of coffee materialize. 

Like so many before him, Schultz took a trip to Italy and fell in love with the country’s culture. As you might expect, he particularly marveled at the quality of the espresso, and even more importantly, found himself captivated by the “romance” that illuminated Milan’s coffee bars.

Starbucks

This is how coffee should be enjoyed, he thought. This is what Starbucks needed to become. 

He returned to Seattle fizzing with inspiration. But when he tried to convince Bowker and the team to turn Starbucks into an Italian-style cafe, he was rebuffed. 

No, the founders told him. Starbucks was a roaster and always would be.

It was time for Schultz to go solo. 

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The Ahab of Starbucks 

From 1985 to 1988, Schultz and Starbucks progressed along separate paths. 

With a $150,000 investment from Bowker and further seed capital from local investors (he pitched over 240), Schultz launched Il Giornale, the coffee house of his dreams. Along with generous seating, Il Giornale sold gelato and piped opera through its speakers, creating an atmosphere meant to encourage customers to stay. 

It seemed to work. 

Il Giornale added a second store in Seattle, then one in Vancouver. Soon there were five delightful cafes, bringing a touch of Italian elegance to America’s Northwest. 

In a parallel universe, perhaps Il Giornale stores freckle the globe, and Starbucks remains an esoteric local roaster. Schultz certainly started the brand with big ambitions, as shown in an early memo he wrote to employees: 

Il Giornale will strive to be the best coffee bar company on earth. We will offer superior coffee and related products that will help our customers start and continue their work day...Our coffee bars will change the way people perceive the beverage. 

But back in our dimension, in the Year 1987, a unique opportunity presented itself: Starbucks went up for sale. 

The three founders were ready for a new adventure. They’d bought Peet’s Coffee in 1984 and were now prepared to relocate to San Francisco to run the company for which they had such respect. Knowing Schultz’s passion, the founders offered their former protege first dibs: if he could drum up $3.8 million in 60 days, the company, name included, was his. 

There was only one problem: Schultz was broke. He’d poured his money into building Il Giornale and reinvested to maintain growth. While he’d built a solid reputation, he’d still only been operating for a little over a year. Raising that much money would be tough.

As Schultz tells it, only thanks to an “angel” did he succeed in his takeover. After 30 days, one of Starbucks’ founders contacted Schultz to see how he was doing and deliver some bad news: Starbucks had received an unsolicited bid for $4 million. Worse yet, the offer had come from one of Il Giornale’s angel investors.

First stunned, then hopeless, Schultz saw his dream slipping away. He recounted his woes to a lawyer friend one evening, who served as the conduit for Schultz’s salvation. 

Maybe I can help, the friend said. Come by the firm tomorrow, and I’ll introduce you to the founding partner. 

Bill Gates Senior was a titan of a man...

Become a member to keep reading

Leading CEOs, CIOs, GPs, and technologists read The Generalist for practical business wisdom. For just $16.58/month on the annual plan, you'll unlock: 

  • Deeply-reserched briefings like this one, every week
  • Access to a private community of remarkable peers
  • Exclusive fireside chats with top-tier founders and investors
  • Extra analysis of companies heading to the public markets
The Generalist is my number one read. Thoughtful, insightful, and ridiculously consistent. It should be in every investor's arsenal.

- Leif Abraham, CEO of investing unicorn, Public

Join today to begin mastering the future.

A man took a sip of coffee, and began to speak. 

So, what can I do for you?

Salesforce CEO Marc Benioff, a hulking six-foot-two, skewered a piece of cantaloupe and brought it to his lips. He was supposed to be on vacation. After all, that’s why he came to Hawaii in the first place. 

But he’d gotten a call. 

They day before, on December 23rd, 2007, his friend Michael Dell rang and asked him for a favor: would he speak to Howard Schultz? Yes, that Howard Schultz. He was in Hawaii, too. And he needed help. 

It had been a rough few years for the former Starbucks CEO. Since Jim Donald had taken over in 2005, Schultz had noticed a decline in the company’s service that was only now showing up in the numbers. With Starbucks heading towards financial free-fall, Schultz had decided he needed to take back control. But he knew he couldn’t run the same playbook that had grown Starbucks from a small Seattle roaster into a global phenomenon. The world had changed too much. He would need to embrace technology. 

During a bike ride along the coast of Hawaii’s Big Island, Schultz confided in Dell, and asked for his advice. After all, Dell himself had just returned as CEO of his company after three years away. 

I’ve got an idea, Dell told him. You need to talk to Marc. 

Benioff had proven pivotal in Dell’s return, advising the creation of a new web platform designed to solicit customer feedback and suggestions. That might not have sounded like much, but Dell assured Schultz it had made a big impact, bringing Dell Technologies closer to its customers and inspiring a more responsive organization. 

So, on the morning of Christmas Eve, Schultz sat down to breakfast with Benioff, and answered the bear of a man’s question. 

I want you to help me make a website. Just like the one you did for Michael. 

Just months later, in early 2008, Schultz took the wraps off of “My Starbucks Idea,” a digital suggestion box. Benioff had been a vital advisor on the project. 

The creation of My Starbucks Idea represented a turning point in Starbucks’s story, a division between one era and the next. If mastery over the physical domain defined Schultz’s first act, his second succeeded by conquering the digital. 

Today, Starbucks is a tech company. Other businesses may boast better coffee, tastier food, or more modern ambiances, but none can currently compete with Starbucks’ app, AI engine, or financial features. These sophisticated capabilities arose from the humble roots of that digital suggestion box, the product of a breakfast between two titans of industry. 

Starbucks’ technological lead may not last, however. The last four years have seen an infestation of small-format stores sweep Asia, leveraging tech to increase throughput and improve ROI. Meanwhile, robot-operated kiosks have captured the imagination domestically, and gesture towards an even more automated future. To stay ahead, Starbucks will need to reinvent itself yet again.  

In today’s piece, we’ll explore:  

  1. Starbucks’ evolution from hipster roaster to mainstream sensation
  2. Whether Starbucks is a consumer app, AI platform, or neobank
  3. The chain’s (small) future 
  4. The next frontiers of coffee

Short: Seattle to the World

“Starbo”

The Cascades hug America’s Western Coast. Stretching from the Canadian province of British Columbia down to California, the mountain range epitomizes the stark, lucid beauty that makes the continent’s Northwest such a poetic place to live. 

Dotting the Cascade range, buried between Mount Shasta and Mount Baker, is the town of Starbo. A humble mining community, Starbo is hard to find on a map, though it’s easy to imagine the wild beauty surrounding it.  

That wasn’t why Gordon Bowker liked the name, though. Co-owner of an advertising agency, Bowker had been convinced by his partner that words beginning with “St” possessed a peculiar, evocative strength. And if he and his old college buddies Jerry Baldwin and Zev Siegl were going to make this whole coffee roaster thing real, they needed a good name. 

Fullstop360

The trio had discovered the pinprick of Starbo poring over an old mining map, considering it an instant upgrade over their previous front-runner, “Cargo House.” Still, it wasn’t quite right, the men thought, though that discomfort didn’t last long.

Almost immediately, Bowker made the phonic leap from “Starbo” to “Starbucks,” the name of the first mate in Moby Dick

The character had no connection to the company’s mission, but Baldwin and Siegl liked it, too. The Starbucks Coffee Company was born. 

It fitted that the naming process that led to “Starbucks” was so haphazard; at first blush, the backgrounds of its founders were equally devoid of logic. What business did a history teacher, an English teacher, and ad man have starting a coffee roaster?

But ever since the University of San Francisco alums had learned how to roast beans from the high-priest of coffee himself, Alfred Peet, they could think of little else. With his blessing, they opened Starbucks, intending to use the Dutch immigrant’s techniques to bring high-quality coffee up the coast. (For the first year of operations, Starbucks bought beans from Peet’s Coffee.)

On March 30, 1971, Starbucks opened its first store at 2000 Western Avenue, along Seattle’s waterfront. It bore little resemblance to the living-room lounges the company would later popularize. Starbucks was not a coffee company; it was a coffee bean company. 

It might have stayed that way had Bowker and Co. not met a young man from Brooklyn. 

La Vita Bella

The same year that Starbucks was founded, Howard Schultz graduated high school. He’d grown up in Canarsie’s housing projects, the son of a truck driver. 

Hoping to walk on to the football team, Schultz attended North Michigan University, leaving with a degree in communications, but no appearances for the Wildcats. 

After school, Schultz began a career in sales, first at Xerox, then at Hammarplast, a maker of coffee machines and other appliances. The company sent Schultz to Seattle in 1981, to fill orders for coffee filters. It was on that trip that the eager salesman visited a little roaster along the Seattle shoreline: Starbucks. 

Impressed by the quality of the craftsmanship and sensing opportunity, Schultz decided this was where he wanted to work. Within a year, he’d left Hammarplast to become Starbucks’s “director of retail operations and marketing.” 

Only in 1983 did Schultz’s vision for the future of coffee materialize. 

Like so many before him, Schultz took a trip to Italy and fell in love with the country’s culture. As you might expect, he particularly marveled at the quality of the espresso, and even more importantly, found himself captivated by the “romance” that illuminated Milan’s coffee bars.

Starbucks

This is how coffee should be enjoyed, he thought. This is what Starbucks needed to become. 

He returned to Seattle fizzing with inspiration. But when he tried to convince Bowker and the team to turn Starbucks into an Italian-style cafe, he was rebuffed. 

No, the founders told him. Starbucks was a roaster and always would be.

It was time for Schultz to go solo. 

The Ahab of Starbucks 

From 1985 to 1988, Schultz and Starbucks progressed along separate paths. 

With a $150,000 investment from Bowker and further seed capital from local investors (he pitched over 240), Schultz launched Il Giornale, the coffee house of his dreams. Along with generous seating, Il Giornale sold gelato and piped opera through its speakers, creating an atmosphere meant to encourage customers to stay. 

It seemed to work. 

Il Giornale added a second store in Seattle, then one in Vancouver. Soon there were five delightful cafes, bringing a touch of Italian elegance to America’s Northwest. 

In a parallel universe, perhaps Il Giornale stores freckle the globe, and Starbucks remains an esoteric local roaster. Schultz certainly started the brand with big ambitions, as shown in an early memo he wrote to employees: 

Il Giornale will strive to be the best coffee bar company on earth. We will offer superior coffee and related products that will help our customers start and continue their work day...Our coffee bars will change the way people perceive the beverage. 

But back in our dimension, in the Year 1987, a unique opportunity presented itself: Starbucks went up for sale. 

The three founders were ready for a new adventure. They’d bought Peet’s Coffee in 1984 and were now prepared to relocate to San Francisco to run the company for which they had such respect. Knowing Schultz’s passion, the founders offered their former protege first dibs: if he could drum up $3.8 million in 60 days, the company, name included, was his. 

There was only one problem: Schultz was broke. He’d poured his money into building Il Giornale and reinvested to maintain growth. While he’d built a solid reputation, he’d still only been operating for a little over a year. Raising that much money would be tough.

As Schultz tells it, only thanks to an “angel” did he succeed in his takeover. After 30 days, one of Starbucks’ founders contacted Schultz to see how he was doing and deliver some bad news: Starbucks had received an unsolicited bid for $4 million. Worse yet, the offer had come from one of Il Giornale’s angel investors.

First stunned, then hopeless, Schultz saw his dream slipping away. He recounted his woes to a lawyer friend one evening, who served as the conduit for Schultz’s salvation. 

Maybe I can help, the friend said. Come by the firm tomorrow, and I’ll introduce you to the founding partner. 

Bill Gates Senior was a titan of a man...

Become a member to keep reading

Leading CEOs, CIOs, GPs, and technologists read The Generalist for practical business wisdom. For just $16.58/month on the annual plan, you'll unlock: 

  • Deeply-reserched briefings like this one, every week
  • Access to a private community of remarkable peers
  • Exclusive fireside chats with top-tier founders and investors
  • Extra analysis of companies heading to the public markets
The Generalist is my number one read. Thoughtful, insightful, and ridiculously consistent. It should be in every investor's arsenal.

- Leif Abraham, CEO of investing unicorn, Public

Join today to begin mastering the future.

Unlock the full article by becoming a Member. You'll get access to exclusive briefings and a private community designed to help you master the future.

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