How Howard Schultz Shaped Starbucks

Starbucks CEO Sees Marketing as Establishing Trust

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It hit like a jolt of double espresso of Gold Coast coffee brewed in a French press pot.

Howard Schultz, street-wise from his days in Brooklyn's Canarsie housing projects, was wandering through the piazzas of Italy more than a decade ago. Then director of marketing and retail sales for a small Seattle coffee roaster, Mr. Schultz saw the proliferation of coffeehouses, 1,700 alone in Milan, a city of the size of Philadelphia. These were not the smoke-, poetry- and politics-filled hangouts of the Kafka crowd but places where neighbors started the day and gathered later to chat.

"As soon as I saw it, I knew we should be doing this, " Mr. Schultz says.

His epiphany has changed the way millions of Americans start their day. Instead of grabbing a cup of instant each morning, they queue up at espresso machines ordering designer concoctions with foreignnames like caffe latte and macchiato. Not coincidentally since that 1983 trip, industry estimates say sales of gourmet coffee beans and drinks have been hot stuff, increasing fivefold to $1 billion in 1992. On the other hand, sales of regular grinds have dissolved for the big three coffee purveyors, Procter & Gamble Co., Kraft General Foods and Nestle Beverage Co.

Mr. Schultz's coffee-into-gold vision wasn't an easy sell, but he turned a small chain into a national brand while spending a relatively tiny amount on advertising. Today, Starbucks Coffee Co. wants to grow dramatically, to 6,000 outlets in the U.S. And it has put EvansGroup, Seattle, on notice it must grow, too, or Starbucks will put its account up for review.

Mr. Schultz got his start with Starbucks Coffee & Tea, which doled out popular free samples of coffee brewed and sold at a shop in Seattle's touristy Pikes Place Market. It took him a year to convince the owners to charge for the samples.

Starbucks was founded in 1971 by three academics, English teacher Jerry Baldwin, history teacher Zev Siegel and writer Gordon Bowker, who had become enamored of the Berkeley, Calif., food scene. There, they met an old Dutchman, Alfred Peet, who ran a coffee shop that was a focal point for the emerging cuisine.

The academics-armed with beans from Mr. Peet-moved into Seattle, opened a shop named Starbucks after the coffee-loving first mate in Herman Melville's "Moby Dick."

"We didn't set out to build a business," says Mr. Baldwin, who now owns Peet's. "We were enthusiastic and energetic, but not very focused." Mr. Schultz more than made up for that lack of focus when he joined in 1982. In building the company that has become to coffee what Haagen-Dazs was to ice cream, he brought the concept of integrated marketing to Starbucks.

"Marketing, in my view, is the ability to deliver, over and over, a strong level of trust and confidence that the customer comes to expect," Mr. Schultz says.

Customers "must recognize you do stand for something." What Starbucks was going to stand for was a good cup of fresh coffee, an affordable luxury that put America's usual cup of morning swill to shame.

In August 1987, Mr. Schultz and investors bought the whole of Starbucks, 11 stores with fewer than 100 employees, from the three founders for $4 million. The operation lost money for three straight years.

But Starbucks stuck to its low-key approach, and Mr. Schultz refused to franchise or go into artificially flavored beans. Step by step, he set out to hook the nation on his brew.

Starbucks chose the Roberts Group, Portland, Ore., in 1988, for the company's early advertising. That included the "Familiarity breeds contentment" campaign, which began with transit and outdoor boards and consisted of pictures of drinks with architectural drawing lines to illustrate ingredients, later developed into brochures and point-of-purchase displays.

Roberts also did catalogs, packaging, coupons, direct mail and POP advertising. (The agency later merged with EvansGroup, which moved the business to its Seattle office.)

Starbucks' Specialty Sales & Marketing Group began cultivating a taste for the stronger, dark coffee blends by distributing beans and equipment to restaurants and cafeterias. The mail-order business, advertised through The New Yorker, also began waking up the national taste buds.

The company saturated Washington state with stores, then moved through California and set up beachheads in Washington, Denver and Chicago. In the next 24 months, Star bucks will add 260 new stores to its base of 280.

Today, Star bucks serves 13 million customers a week, with 1993 sales of $163.5 million, making it North America's leading retailer and roaster of specialty coffee.

So far, marketing the perfect cup has been accomplished with minuscule media spending, for example $6.5 million in 1993.

"The marketing of Starbucks is not only what people see on the outside," Mr. Schultz says, adding, "The cost of internal marketing is quite high, but it is the key to our success." He notes that sales total nearly $800 per square foot.

With a target of 35- to 49-year-olds, with higher income and more educated than average and a slightly female skew, Starbucks tried to ease customers into the stronger concoctions and have them graduate to making coffee at home.

"We're trying to appeal to the top and have the market move to us," says former Marketing Director George Reynolds.

But getting consumers to become connoisseurs of the sophisticated alternative was a major task. The typical drill, when the account was handled through EvansGroup's Portland office, was to start with a poster design and extend it to every other medium.

Later work used artistic photographs with a sophisticated, humorous tagline. An illustration of a peacock is labeled "How the tastebuds see Starbucks coffee."

Public relations and promotional efforts were heaped on more traditional advertising. Howard Schultz, offering a cup of coffee to the world, was featured on the cover of Fortune's "100 Fastest Growing Companies" issue. A Newsweek story on the New Age workplace touted the role played by Starbucks' generous employee benefits in keeping sales percolating.

A public stock offering in June 1991 made the company the darling of Wall Street, with Christopher Vroom of Alex. Brown & Sons, Baltimore, putting the company among just a handful of retail businesses with the potential to grow 10 times current size.

But all that was going on while Starbucks was a regional coffee chain. Now, Mr. Schultz's ambitious dream of paving the nation with 6,000 outlets by the turn of the century has made Starbucks consider moving into the marketing big leagues.

Mr. Reynolds, who left in late February, was soft-spoken but with a "barracuda" reputation among agencies. He told EvansGroup it must grow to Starbucks' national ambitions.

Starbucks is looking at TV commercials later this year but Mr. Schultz is concerned the educational message doesn't translate well into traditional 30-second spots. EvansGroup has suggested an infomercial, which the company is considering. Mr. Schultz is fascinated with emerging media and expects to see a foray into the world of interactive as well.

Mike Mogelgaard, executive creative director on Starbucks at EvansGroup, is "concerned about not getting in the way of the mystique. Look what happened to Coors."

Advertising may not be the only trouble brewing. The move into the East Coast markets may prove more expensive and difficult than conquering the Pacific Northwest, where sophisticated coffee drinkers show off their Starbucks cup like a badge of honor.

Even Mr. Schultz's former boss, Mr. Baldwin, has regrouped with Starbucks'original partners and is opening more than a half- dozen shops in the Washington area under the Quartermaine Coffee Roasters name, attacking Starbucks' freshness claim.

Starbucks' legacy is also in the proliferation of espresso machines at fast-food chains.

"There's no secret sauce here," Mr. Schultz says. "Anyone can do it." That explains Starbucks' sense of urgency about expansion.

"The window's closing," cautions Matthew Patsky, VP at Robertson, Stephens & Co., a San Francisco investment company.

Mr. Schultz calls the challenge "the momentum you have in a wind tunnel and you're going the wrong way. The jury is still out on whether we can sustain it."

At the same time, bullish Wall Streeters say Starbucks should move onto supermarket shelves under a dual-brand strategy, but Mr. Schultz says that won't happen because the brand might suffer.

In any event, the national push presents ad challenges, and even Starbucks expects same-store sales, which showed 20% increases in the past five years, to fall.

All that said, the mocha mavens are still hooked on Starbucks.

"They don't market," Mr. Patsky says. "They've established a major presence all through word-of-mouth. They are not a traditional consumer products company. Starbucks could be one of the nation's leading brands of coffee. They can take on P&G."

The proof will be in the cup.

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