Starbucked Read online

  Sometimes, the company’s strategies for shaking extra cents out of customers’ pockets can seem a bit shifty. Take the “venti” cup. When Starbucks adopted the twenty-ounce size and bumped the eight-ounce “short” from the menu, it effectively killed off what was once America’s standard coffee serving size — and it helped itself to an extra twenty-five cents per “tall” drink for just two cents’ worth of added product. (Don’t even get coffee snobs started on the atrocity of the twenty-ounce cappuccino, a drink intended as a five-ounce jolt, not a lake of milk.) Then there are the promotions done in the name of “fun,” such as customer “conga lines” where everyone tries a sample of a drink, that Starbucks puts on knowing every fifth sample leads to a sale.

  But mostly, you have to at least chuckle at the incredible amount of thought that goes into even the smallest decision at Starbucks today, like the new summer Frappuccino flavors it announces each spring. As you read this, minions in the company’s research and development kitchens are trying to figure out what the hot colors in the fashion world will be a year from now. The flavor they eventually pick will correspond to the color they expect to be trendiest; after all, people want to look good while carrying the product. (For example, Starbucks unveiled vanilla and coconut “Crème Frappuccinos” in 2002 to capitalize on the expected popularity of the color white.) Starbucks also uses the twenty-five hundred employees at its headquarters as guinea pigs for its latest recipes. New hires fill out questionnaires about flavor preferences on joining the company, and they periodically receive a summons to come sit in a small tasting room and register their thoughts on different drink and food formulas. It’s a lot of work just to achieve subtle variations on the theme of “java chip” or “mocha.”

  Sometimes, this development process goes fantastically wrong. In the midnineties, before the advent of the Frappuccino, Schultz wanted to bottle and sell a cold, carbonated coffee beverage called Mazagran, which was based on a concoction the French Foreign Legion drank in Algeria in the nineteenth century to keep cool. As if the name weren’t unappetizing enough, Mazagran was to come in flavors: berry, vanilla, spiced, and “fiery.” The drink went through a brief test run before Starbucks concluded that the world wasn’t ready for spicy, bubbly coffee. (“Mazagran made Mountain Dew look like table water — it was quite a jolt,” Bedbury told me. “It was either the drink of your life or a no-go.”) Another aborted idea was Starbucks brand caffeinated fruit juices; Schultz says someone even suggested producing coffee-flavored tanning lotion. And the misfires weren’t confined to the realm of coffee and caffeine. In an effort to further infiltrate its customers’ lives, Starbucks produced a lifestyle magazine called Joe that lasted just three issues. It built “media bars” with CD-burning stations, which were little more than a waste of cash in the age of the iPod. The company also launched two full-service restaurants: “Circadia,” a bohemian place equipped with a bar, and “Café Starbucks,” a bistro. Both bombed. Even Starbucks employees considered them an embarrassment. “Café Starbucks?” Harry Roberts snickered. “Oh, that place was a joke.”

  Yet it didn’t really matter if Starbucks lost money on these projects, though some lost a phenomenal amount of it. The incredibly lucrative coffee drinks neutralized all of the company’s blunders. “You could make so many mistakes at Starbucks because there’s so much profit in the espresso,” said Engle Saez, a former Starbucks marketing executive. “It covered up everything.” The raw coffee Starbucks buys is cheap, but the lattes consumers find so irresistible are not; for a drink that costs, say, $3.40, at least forty cents of that is pure profit. Revenues pile up so quickly at Starbucks that even a financial catastrophe barely makes waves. In 2000, the company wrote off nearly $60 million in losses because of a slew of disastrous Internet investments (Schultz was trying to make the company into a “lifestyle portal”), but the hit still didn’t cancel out its gigantic profits for the quarter. Having secured the affections of tens of millions of weekly customers, it could do no wrong.

  Starbucks just took the heaps of money it earned from its stores and built new ones. Then it took that money and built more. The more money it made, the more stores it built—and now they seem to be everywhere. But if things go according to Schultz’s plans, Starbucks’s growth has only just begun.

  4

  Leviathan

  Here’s a little parable about the ubiquity of Starbucks today. Even when I was just beginning to research this book, I already knew exactly how I wanted to open this chapter on the vastness of the company’s domain. In dramatic fashion, making the reader tremble with anticipation, I would reveal one of the great secrets of our time: the location of the single town in the continental United States that is geo-graph-i-cally farthest from a Starbucks. As I envisioned it, the Starbucks-free village would become famous as a pristine spot in a country saturated with chain stores and strip malls. Visitors would flood in; perhaps a university would spring up, or at least a bizarre commune. And if the appreciative locals should wish to erect a statue of me in the town center — clad in a toga, with a falcon perched on my shoulder — how could I stop them?

  Bristling with this civic spirit, I contacted Michael Pilon of Map Muse.com, a Web site built around an interactive U.S. map that shows the retail locations of dozens of companies, including Starbucks. When I outlined the mystery of the nation’s most decaffeinated town for him, Pilon immediately grasped the gravity of the project and agreed to use his mapping software to find the answer. Soon, he had a winner: a farming community in northern Montana called Turner (population 298), which was a full 201 miles from the nearest Starbucks store. I did a quick check of the local businesses — Sunford Grocery, Grabofsky Livestock and Grain, a salon called Image ’N’ That. Perfect. The proprietors of Miles Gun Hut might scare off potential commune members, I speculated, but overall, things seemed ideal. Feeling pleased with my investigative work, I filed the information away and continued researching.

  I should have known better. My strategy had one glaring flaw: between the day I got Pilon’s results and the day I started writing these words, five months passed. In those five months, Starbucks built another six hundred stores. So, when I decided to double-check Turner’s Starbucksless status before calling the people at the local saloon to break the news, I got a shock — not one, but two new Starbucks stores had opened close enough to the town to spoil its possible fame as a chain-free oasis. No problem, I thought; I’ll just go with the runner-up, the town of Eureka (population 974) in the mountains of central Nevada, 198 miles from the nearest Starbucks at the time of Pilon’s analysis. But this one too suddenly had Starbucks outlets in the vicinity. The third-place finisher — Cozad, Nebraska — likewise had a problematic Starbucks close at hand. After spending an amount of time I’d rather not disclose searching for other candidates, I settled on the community of Saco, Montana, as the new champion. But let’s be honest: this answer’s shelf life is probably short. As I write this, Starbucks is likely putting the finishing touches on a store in nearby Malta or Lewistown.

  And that’s actually the point of this whole exercise, anyway: there’s no escaping Starbucks. If your quaint little neighborhood still remains untouched, it’s really only a matter of time before you find yourself standing in front of what was just recently a bank, mouth agape, watching the siren beam that smug, knowing smile down at you. Wherever you go, Starbucks goes — this is the company’s mantra. Its goal is absolute unavoidability. “We want to dominate,” the former Starbucks marketing chief George Reynolds told the Boston Globe in 1994, in a moment of candor that may have contributed to his exit from the company soon thereafter. “We want to reach critical mass. The economics are better for us.”

  Needless to say, Starbucks doesn’t like to frame its omnipresence in terms of dominance or “critical mass.” What the company truly offers its customers, executives say, is convenience. Take just one example of this convenience in action: on a recent spring afternoon in Manhattan, three men in standard office-worke
r attire strode out of the Morgan Stanley building, near Times Square, then paused on the sidewalk, looking pensive. “Should we go to that one or that one?” asked the lead man, gesturing toward both ends of the block with his thumb. Do we even need to ask what he was referring to? The trio headed west and walked into a Starbucks on the corner — and sure enough, another Starbucks stood at the other end of the very same block. As a matter of fact, the men had their pick of twelve different Starbucks stores within a three-block radius. How’s that for convenience? Manhattan is so loaded with convenience, actually — with 170 nuggets of it and counting — that mayor Michael Bloomberg once suggested the borough could build fewer public toilets because “there’s enough Starbucks that’ll let you use the bathrooms.”

  One of the truly odd things about Starbucks is that its cafés have always seemed utterly pervasive, even back when they really weren’t. In 1996, when Starbucks had just seven hundred stores, it cooperated with NPR on an April Fool’s Day radio story. “National Public Radio has been able to confirm that Starbucks will soon announce their plans to build a pipeline costing more than a billion dollars,” proclaimed All Things Considered host Noah Adams, “a pipeline thousands of miles long from Seattle to the East Coast . . . that will carry freshly roasted coffee beans.” NPR went out of its way to hint that the story was a joke, even including a reference to a protest group called Mothers Opposed to the Coffee Aqueduct, or “MOCA.” Nevertheless, the story seemed a little too plausible; in fact, I’ve talked to some people who still believe it’s going to happen. Never mind that the idea was patently ridiculous, and that a single Starbucks goes through maybe a few hundred pounds of coffee a day, hardly enough to warrant a multibillion-dollar pipeline. This was Starbucks we were talking about, the company that could put two stores ten yards away from each other and still pack them both. Starbucks already had such an aura of success, people assumed it could do whatever crazy thing it wanted.

  It’s tough to say which boggles the mind more: the sheer scope of the Starbucks empire or the staggering speed with which it arose. From a base of just one hundred stores fifteen years ago, Starbucks has grown into a thirteen-thousand-strong coffee-house armada. It operates cafés in all fifty states and in thirty-seven countries; you can find it in airports, libraries, casinos, hospitals, and even churches. No chain has ever become so ubiquitous so quickly. Sure, Starbucks is no McDonald’s, which serves fifty million customers a day at its thirty thousand restaurants, but give it time. The company now opens more than two thousand coffee-houses per year, an average of six new stores a day. And what’s more, McDonald’s arrived at its current total by selling franchises, which means its franchisees actually built all of those outlets, not the company. But Starbucks doesn’t franchise; the company designs and constructs each store itself, making its breakneck expansion that much more remarkable.

  Achieving this sudden omnipresence was no simple task — after all, dozens of other coffee companies were racing to expand as well — yet Starbucks so thoroughly routed its competition that it now commands 73 percent of the specialty-coffee-house market. And the company is devastatingly efficient; every ten weeks, Starbucks opens as many new stores as its closest competitor, Caribou Coffee, has total. So how did Starbucks pull this off? As we’ve seen, it had an alluring design and great marketing, but plush couches and speeches about the romance of espresso didn’t make the company ubiquitous — it still had to find the right locations for its thousands of stores. Thus, Starbucks owes its dominance of the urban landscape to its incredibly sophisticated real estate machine. Through a combination of cunning store-placement strategy and ruthlessness with competitors, the company attempted to make it so customers couldn’t help but go to Starbucks. As former Starbucks marketing executive Engle Saez explained, “Starbucks doesn’t have a lockdown patent on the environment; it doesn’t have a lockdown patent on the experience; and it doesn’t have a lockdown patent on the bean or the roast. All of those things can be duplicated. So what it comes down to is dominance of real estate. That’s one area where no one can outmuscle Starbucks.”

  Of course, no one really tries to top Starbucks anymore. The company is so good at placing its stores that they almost never fail; of the first thousand coffee-houses it opened, only two closed. “They were just in such a different league, by virtue of their scale and by virtue of their iconic status,” said Tom Danowski, a former executive at Seattle’s Best. “It was almost comical to compete with them. They were just in such a different game.” The only real question left is whether Starbucks will surpass McDonald’s and become the biggest chain on the planet. Howard Schultz has declared that his aim is to reach forty thousand stores, a goal some even consider conservative. Think about it: for McDonald’s, placing two stores on opposite corners of the same street would be pure folly, but for Starbucks it’s routine. Which do you think has more growth potential?

  In truth, no one knows when the Starbucks explosion will stop. In 1995, Forbes magazine predicted that the coffee-house boom would die a quick death, with one analyst grousing, “It’s horse pucky, and it’s not going to be around much longer.” That same year, a Washington Post reporter wrote, “Some local executives [have] wondered whether the District [of Columbia] — with fourteen Starbucks bars and outlets owned by numerous other chains — has hit its limit.” There are now over two hundred Starbucks stores in the DC area. Most pundits have learned by now to stop declaring the market saturated if they don’t want to look foolish. Starbucks has to slow down sometime; we know that much. Yet exponential growth defines the company. By design, this machine doesn’t have an off switch.

  The System

  The headquarters of the marketing consultancy Airvision sits atop a modern Seattle high-rise, and from its airy deck, one can take in glorious, panoramic views of the glimmering waters of Puget Sound. This makes sense: the firm’s founder, Arthur Rubinfeld, knows a bit about finding first-rate locations. For ten years, Rubinfeld headed Starbucks’s real estate development division, leaving the company with forty times as many stores as it had when he started. A compact, neatly dressed man in his fifties, Rubinfeld — like his old boss Howard Schultz — is fiercely competitive, and he has an uncanny ability to get under a person’s skin. (When I declined his offer of pretzel rods, for example, he shot me a look that conveyed both shock and disappointment that I would turn down such a golden opportunity.) His was not a job for the polite or the complacent. “I used to always say, ‘Never stop and never settle,’ which gives you a piece of my personality,” Rubinfeld told me. “At Starbucks, you want the most highly visible location that offers the most convenience to your customer. So let’s go get it.”

  Rubinfeld’s former colleagues at Starbucks have often criticized him for taking more than his fair share of credit for the company’s success. In his book, Built for Growth, Rubinfeld tends to portray himself as Starbucks’s one-man executive dynamo, and when talking to me, he occasionally launched unbidden into descriptions of his favorite accomplishments. * But braggadocio aside, Rubinfeld brought a rigid, methodical approach to the company’s expansion that was vital to its future dominance. Years ago, McDonald’s built up its vast kingdom by following the motto, “Put your sugar along the trail of ants, and never make the trail turn.” Under Rubinfeld, Starbucks took that philosophy to its apex, crunching statistics by the dozens to deduce the best sites for its stores. The system he developed turned the company into a nearly infallible judge of retail locations — a machine, as Rubinfeld likes to put it. “There’s nobody near Starbucks’s machine,” he said. “The machine is unstoppable.”

  Back in the company’s early years, however, the Starbucks real estate department was very stoppable — many landlords wanted nothing to do with it. “In those days, people wouldn’t even talk to us,” said Art Wahl, who worked on some of Starbucks’s first real estate deals, in the 1980s. “They’d laugh at us and ask, ‘How are you going to make money selling coffee?’ The landlords would flat tell us we couldn�
�t afford the rent.” Starbucks made up for these disadvantages with tenacity. Yves Mizrahi, Rubinfeld’s pre-de-ces-sor as the company’s development boss, explained that Starbucks had to pick specific targets and work for them relentlessly: “When we were developing Starbucks, we were fighting with the bagel guys, the video guys, and especially with the other coffee guys. Everyone wanted that one corner in Anywhere, USA, and we always got it.” The doggedness of Schultz and his employees often won the day.

  As the Starbucks brand gained cachet, landlords began clamoring for the company’s coffee-houses, allowing it more freedom to place its stores according to strict guidelines, some of them quite shrewd. For example, if you drive toward the downtown core of any major American city, you’ll notice that most every Starbucks you pass is on your right. Why? The company’s real estate team long ago figured out that the hassle of making a left turn across traffic to reach a Starbucks, then another left to get going in the original direction again, could be enough to dissuade a hurried morning commuter from stopping in. By building each store to the inbound driver’s right, the company made that daily latte even more (wait for it . . . ) con-ve-nient. Here’s another one: Why would Starbucks want to locate its cafés next to video stores and dry cleaners? Because they double a potential customer’s contact with a given Starbucks. The company knows that cafés draw patrons in proportion to the number of people who happen to walk by, and unlike other businesses, video stores and dry cleaners require two visits: one to drop something off and one to pick it up. So for every time a prospective customer needed to rent a movie, he would have two chances to buy a Frappuccino.