Lenny's Podcast · How to become a category pirate | Christopher Lochhead (Author of Play Bigger, Niche Down, more)
Acquired · Jun 4Starbucks (with Howard Schultz)
Grew from six stores to about 39,000 by selling the third place, using a 2:1 sales-to-investment model, roughly 80% gross margin and stock options for all partners. Its mobile app handles about 33% of orders and holds $1.7 to $1.8 billion of float, but Schultz says it eroded the in-store experience.
Tips
- Howard Schultz saw that Starbucks sold romance and community, with coffee only the conduit▶ 29:54A test coffee bar inside the Starbucks store at Fourth and Spring took the store from 200 to 300 customers a day selling beans to 500 in a week once lattes and cappuccino arrived.
- Schultz gave stock options to every employee, including part-timers, a year before the IPO▶ 1:05:10The $6 strike price grew roughly 800x including splits, and Starbucks employee tenure ran about 2x the industry, with turnover about half.
- Schultz refused to franchise because he believed culture could not survive franchisee subcultures▶ 2:12:40About half of the roughly 39,000 stores are licensed through country partners, with no individual franchisees.
- Schultz pushed expansion hard because Starbucks' brand was bigger than its store count▶ 12:15Starbucks reached 2,000 stores by 1999, beating its goal of 2,000 by 2000.
- Starbucks built a store economic model of 2:1 sales to investment and 20% operating profit▶ 43:50New stores paid back their cost in about two years, sometimes a year and a half, and the most loyal customers came about 18 times a month at the Northwest peak.
- Schultz expanded one market at a time, only after the last was working▶ 1:14:35Chicago did not work at first, and Behar stayed through the winter to recalibrate it.
- Schultz won the LA argument by trusting brand halo over operator readiness▶ 59:20The halo from Seattle, Vancouver and Chicago was nothing compared to LA, where celebrities embraced Starbucks.
- Schultz built the brand through Costco, United Airlines and Barnes & Noble instead of paying for marketing▶ 1:09:40Starbucks measured higher volume in its eastside Seattle stores near Costco, as bean buyers became beverage customers.
- Schultz initially dismissed Frappuccino and customization, but customers pulled Starbucks toward what it became▶ 1:22:30About 100,000 beverage variations are now made, and customization lifts ticket size because the customer sets the price increment.
- Schultz avoided debt at Starbucks because the old Starbucks was cornered by a 6-to-1 debt load▶ 40:20The original owners sold the company for $3.8 million in 1987 after the Peet's deal strained their finances.
- Schultz returned in 2008 and told 10,000 managers Starbucks had seven months before insolvency▶ 1:46:00Profit rose from $315 million in 2008 to $945 million in 2010, and the stock had fallen below $6 at the low.
- Schultz let the mobile app grow without a governor and it eroded the third place▶ 2:03:00About 33% of orders are mobile, roughly $4 billion a year is loaded onto gift cards, and about $1.7 billion to $1.8 billion sits as float.
- Schultz says ubiquity is the enemy: Starbucks must get smaller as it gets bigger▶ 1:02:50Worn-down details, like diluting brewed coffee to maximize yield, helped drive the 2008 crisis.
- Schultz admits he failed at succession and left the company leaning on its founder▶ 2:59:40He has stepped away and returned as CEO three times, including as interim CEO in 2022.
