Starbucked Page 14
Those who did appreciate the coffee-house’s allure didn’t do much better, though, thanks to a chronic amateurishness that seemed to afflict other coffee chains. Companies like Gloria Jean’s, Diedrich, and Coffee People always struggled just to keep their doors open, whether from mismanagement, disastrous IPOs, or poor real estate selection. (On more than one occasion, Diedrich built a store, only to find out after it opened that the business center in which it stood was closed on weekends.) When I asked Harry Roberts, the former Starbucks marketer, why so many chains struggled just to make money off four-dollar lattes, he simply responded, “It’s harder than it looks.”
Tom O’Keefe, at least, has made the thrashing somewhat entertaining. Though his company, Tully’s, has yet to make a cent of profit from its 110 U.S. stores, O’Keefe has managed to spark an amusing rivalry with Schultz — even if it has the competitiveness of a contest between the Green Bay Packers and your neighborhood Pee Wee football team. One August day, I went to the Tully’s flagship store in downtown Seattle to meet O’Keefe, and after waiting a few minutes I asked a barista if he was somewhere in the store and I just hadn’t recognized him. “Oh no,” he replied. “You can’t miss him. He definitely changes the energy of the place.” When O’Keefe arrived, I understood what he meant. Seconds after walking in, O’Keefe was already careening around the store like an excited puppy — slapping backs, cracking wise, adjusting the volume of the music, and passing out coffee samples. He seems like the type who sleeps about an hour a night, and once he sat down, limbs always somehow in motion, I saw why: he started popping whole coffee beans into his mouth and chewing. “Fabulous, oh god, it’s fabulous,” he raved.
As with almost everyone I spoke to in the coffee industry, merely mentioning Starbucks to O’Keefe was sufficient to trigger a miniature dissertation on the company. “We’re twelve feet higher than the big mermaid,” he told me, referring to Tully’s new central office and roasting plant, which reaches slightly higher in elevation than Starbucks’s nearby headquarters. “We’ve got a big, thirteen-foot-high T.” The altitude advantage is pretty much the only one Tully’s holds in the rivalry, however, save for a few public relations coups. Once, Starbucks offered a guarantee of “Lattes for Life” as a prize at a charity auction, and, to Schultz’s chagrin, O’Keefe put in the winning bid. Now, Schultz’s assistant sends O’Keefe a $100 Starbucks gift card every month, which he’s only too happy to use. “I bought it for $5,000, and I probably got $100,000 worth of publicity out of it,” he crowed. He has also been known to show up at Starbucks company picnics and volunteer for the dunk tank, all in an effort to needle Schultz. “I say it’s a love-hate relationship,” O’Keefe said. “I love him and he hates me.”
Schultz would never put it this way, but his colleagues aren’t as diplomatic about O’Keefe. “Fuck him,” Howard Behar blurted out when I mentioned O’Keefe’s name, quickly adding, “Excuse my language.” Many contend that O’Keefe’s outrageous gestures are only designed to divert attention from the red ink on Tully’s balance sheet. Like many others who have floundered, O’Keefe had no coffee experience before founding Tully’s. “These people don’t have a clear stance,” said Kevin Knox, the former Starbucks roaster. “Look at Tully’s — that guy is just some real estate guy. Another one is Caribou. What do these people stand for? These are just business guys who wanted to make some money.”
The Iron Fist of the Mermaid
Companies like Tully’s didn’t need help from Starbucks to shoot themselves in the foot, but with those that showed signs of promise, Starbucks could be absolutely merciless. If Schultz chafed at losing volleyball games at the company picnic, he grew apoplectic whenever another coffee company outmaneuvered Starbucks. To avoid giving his competitors so much as an inch of ground, he would even pay the rent on a retail space just to keep it empty.
Schultz hired people who shared his distaste for losing, especially in the real estate department, which battled with other companies most directly. The preeminent example of this was Tracy Cornell, a dealmaker who easily matched Schultz in competitive drive. In her decade-plus career at Starbucks, Cornell found and locked up a staggering nine hundred retail sites in North America. “I’m a deal junkie — that’s what I get off on,” Cornell told me. “I think, honestly, that I can sell anything.” Cornell was so aggressive, in fact, that Schultz at first considered her a potential liability and pondered firing her. But she was just too effective to lose. “Tracy is absolutely Attila the Hun when it comes to making deals,” said Art Wahl, the Seattle real estate broker. “She’d run through a wall to talk to someone about putting in a Starbucks.” On one occasion, when Cornell was in San Francisco hunting for sites, the landlord of an attractive retail space refused to talk to her because of his dislike for Starbucks. Cornell soon discovered that the landlord was a physician, so she made an appointment with his office, pretending to be a patient. When he walked in to see her, she went into her pitch. “I got the deal done, I can tell you that much,” she recalled, obviously savoring the memory. “At the end of the day, I got the site.”
Keeping cutthroat agents like Cornell on the payroll certainly helped Starbucks tyrannize the competition, but nothing signaled Schultz’s willingness to win at all costs like the company’s entrance into San Francisco — home of Peet’s, the company’s spiritual father, which was still owned and operated by Schultz’s old mentor Jerry Baldwin. When Baldwin sold Starbucks to Schultz in 1987, the agreement included a noncompete clause that kept Starbucks out of the Bay Area until 1992. As soon as the noncompete expired, Baldwin received an ominous letter from Schultz, offering to buy out Peet’s. “The implied threat was, ‘We’ll crush you,’ ” Baldwin later told the Los Angeles Times of the letter. Baldwin was furious. He’d given Schultz his start in the coffee business, and now the guy was threatening him? Shortly after Baldwin declined Schultz’s offer, he learned just how serious his former pupil really was: Starbucks opened up a store on Chestnut Street in San Francisco, just a few doors down from a Peet’s. “That’s Howard — he’s a streetfighter,” said Dawn Pinaud, the early Starbucks employee. “He and Jerry were friends, but he wanted to take him out by taking away sales. I mean, the store was right across the street. When I first saw it, I said, ‘Oh my god, is he insane?’ ”
It didn’t end there. Since Starbucks considered San Francisco its most potentially lucrative market, Schultz continued the onslaught, to the point where one California real estate agent told Seattle Weekly, “They [Starbucks] seem to have a thing about moving in next door to Jerry.” (Incidentally, Peet’s has thrived despite the clash. Within the coffee-house industry, its profitability is second only to Starbucks, in part because Baldwin expanded very slowly and carefully.) Those who know Schultz insist his actions weren’t malicious, but just business. “I don’t know what Jerry was thinking,” Roberts said. “For us not to open in San Francisco at all would be ridiculous. Did he expect that we would give him that market forever? In Jerry’s mind, Starbucks was still his. We’re talking about emotion here, not logic.” Schultz himself defends aggressive moves like these as an unavoidable reality of the marketplace. “The real estate business in America is a very, very tough game,” he told Business Week in 2002. “It’s not for the faint of heart.”
The Peet’s case notwithstanding, Starbucks was usually successful in its attempts to buy a strong competitor out of the way — an approach that often won the company feelings of undying hatred from devotees of the coffee-houses it purchased and liquidated. The first (and most notorious) instance of this occurred in 1994. Starbucks wanted to break into the Boston market, yet it faced two strong and entrenched competitors: Dunkin Donuts, which was already everywhere in Boston; and George Howell’s Coffee Connection, one of the nation’s most prominent coffee institutions. Fearing Starbucks’s advance, Howell had been rapidly opening stores to defend his territory, yet he was growing miserable; he wanted to ponder coffee’s aesthetics, not build a chain. So Starbucks made Coffee Conn
ection — to use Rubinfeld’s words — “an offer they couldn’t refuse”: $23 million in stock. (If you’re wondering, this would be worth nearly $600 million today.) Schultz hastened to promise Coffee Connection’s loyal customers that there would be “very few changes” in its operations, telling the Boston Globe, “The name will stay the same. And the coffee will stay the same, roasted in Boston and guided by George Howell. We don’t want to create anxiety and tension.” Within two years, however, Schultz flipped all of the Coffee Connection stores into Starbucks outlets, closed its Boston roasting plant, and laid off much of its staff.
Over the next decade, Starbucks repeated this strategy a number of times. It bought and converted the fifty-six-store Pasqua Coffee Company chain, the seventeen-store Torrefazione Italia chain, most of the two-hundred-store Diedrich chain, and — when it wanted to make its entry into the British market with a bang — the sixty-five-store Seattle Coffee Company. About this last move, which made Starbucks a common sight in the UK virtually overnight, Seattle Coffee Company cofounder Scott Svenson quipped, “Better to work with Starbucks than to work against them.” * When Starbucks finally admitted it was hopeless at making tea, it bought the Portland-based Tazo Tea Company. And Seattle’s Best customers thought they’d walked right into George Orwell’s 1984 when they stopped in for a drink one day in April 2003 and noticed a small placard on the counter announcing, “Today we are pleased to announce that Starbucks has purchased Seattle’s Best Coffee.” (O’Keefe claims Starbucks has also offered to buy Tully’s, which several Starbucks sources denied. “He was just trying to get under Howard’s skin by putting his stores in right next to ours, but why would Starbucks want to buy him then?” Cornell explained. “It would just be buying redundant space.”)
Reactions to Starbucks’s cutthroat tactics vary. Some sigh at the futility of trying to battle such a relentless and aggressive heavyweight. Others credit Schultz and Starbucks for doing so much to make coffee a high-profile product; Nick Cho, of the Washington, DC, independent café Murky Coffee, likes to say that Starbucks enabled him to sell four-dollar lattes in the first place. (Herb Hyman, the founder of Coffee Bean and Tea Leaf, goes even further: he cackles with delight when he thinks of all the money he’s made off his Starbucks stock.) And many commend Starbucks for its hard-nosed approach. This is America, after all, where a modicum of ruthlessness in pursuit of success is considered a healthy part of the entrepreneurial spirit.
But a growing number of people, both in America and abroad, are beginning to take exception to Starbucks’s domination of the coffee market and its omnipresence in the urban landscape. Consumer choice keeps dissolving into Starbucks ubiquity, and company spokespeople just smile and cheerily announce that consumers’ lives are becoming more con-ve-nient. It didn’t matter if you liked Torrefazione or Coffee Connection or Pasqua — you would go to Starbucks regardless. By undercutting all challengers and making its stores unavoidable, the company made sure of that. And as I learned from Howard Schultz when we met in his Seattle office one afternoon, this is only the beginning of what he has in mind for Starbucks.
The Belly of the Beast
If you are at all inclined to view Starbucks as a sinister corporate villain bent on global domination, you’ll only become more convinced of this after your first glimpse of Starbucks Center, its monolithic headquarters in an industrial area south of downtown Seattle. From atop a 150-foot-high clock tower, a giant replica of the top of the siren’s head — just the eyes and the crown — peeks out at passersby. She looks eerily sphinxlike up there, her huge, blank eyes gazing off across the city. The image repeats on each of the four sides of the tower, which gives one the impression that the siren has a panoramic view of her domain. And that she’s always watching. Even Chris Gimbl, a longtime Starbucks spokesman, admits the effect is a little unsettling. “Yeah, it can seem kind of ominous,” he told me as we walked through the building’s labyrinthine hallways. “Some Starbucks people have tried to explain that she’s watching over the port — you know, to protect it — but that’s too over the top for me.”
As befits a sprawling international megacorporation, Starbucks Center is an enormous structure of nearly two million square feet, enough to accommodate twenty-five hundred employees and a few big-box retailers. When Sears first constructed it in 1912 as a distribution center for the West Coast, it was America’s largest building west of the Mississippi. Now, it’s just the biggest office building in the Northwest. Some floors in the squat, brick structure have more than three football fields’ worth of space; Sears employees used to transport parcels around the complex on roller skates. The building is, quite literally, a gigantic Starbucks, and for reasons that go beyond the familiar decor and the shiny espresso machines that dot the hallways. Because Starbucks Center is so mazelike inside (Gimbl even got disoriented a few times while showing me around, and we also ran into a veteran employee who greeted us, “Oh hi! Where am I?”), the floor plan is laid out so that each level is exactly the same. That is, the Yukon conference room on floor four is in precisely the same spot as the Yukon room on floor five, which is a clone of the Yukon room on floor six, and so on — which just goes to show that homogeneity and monotony are design directives Starbucks never fails to embrace.
Naturally, reminders of the company’s growth are seldom far from view at Starbucks Center. In one open atrium area, the flags of various Starbucks-colonized nations hang around a garage door–sized black scoreboard that displays the company’s store counts in each of the countries where it operates. When I pointed out that the board was a few hundred stores behind, Gimbl replied, “Well, keeping it up-to-date would be a full-time job.” * On a more symbolic level growthwise, the company maintains several potted coffee trees, which sit in a spacious skylit community area set up exactly like a huge Starb — actually, I’m sure you can guess what it’s set up exactly like. Bright-eyed employees in casual attire, each of them holding a steaming mug, chatted at the tables. “The trees have really thrived in here,” Gimbl volunteered, prompting a cocked eyebrow from me. Coffee plants are typically leafy and lush, but these were yellowed and scraggly, with only a few scattered berries. “I do use ‘thrive’ a little bit subjectively,” he clarified. “I mean, this is not coffee you’d want to process and drink.”
As Gimbl and I walked through the muffled silence of fields of cubicles — the headquarters follows an “open plan,” which translates as “pretty much nobody gets an office” — a few messengers intercepted us with urgent news: “They’re looking for you. Howard is ready now.”
Schultz is not a man one keeps waiting. Though he is no longer technically the company’s CEO, Schultz is still the undisputed chieftain of the Starbucks tribe. Instead of managing the company’s day-to-day operations, he spends his time trying to “touch as many people as possible” — visiting stores, playing the company’s public face, and calling its branches around the world: Europe in the morning and Asia at night. What’s more, when I visited, he had a professional basketball team to run. With about fifty other smaller investors, Schultz bought the Seattle SuperSonics in 2001; his 42 percent stake set him back $84 million. (Which isn’t necessarily a lot of money for Schultz. He also owns a $14 million vacation home in the Hamptons, and according to Forbes magazine, his net worth exceeds $1.1 billion.)
The Sonics investment has been something of a disaster for Schultz’s public image in Seattle. Before dabbling in sports franchise ownership, Schultz fit in nicely with the city’s pantheon of young male business titans, like Amazon.com’s Jeff Bezos and Microsoft’s Bill Gates. Local newspapers referred to him affectionately as “Mr. Coffee,” and many Seattleites found it hard to understand why anyone wouldn’t adore Starbucks (which happened to have made a lot of them rich). Sure, there was one dustup in 1994, when Schultz rerouted the driveway at his new multimillion-dollar Lake Washington mansion through a small, disused area of adjacent Viretta Park, later nicknamed “Vendetta Park.” The court battle with a group of incens
ed locals over the hundred-foot crushed limestone path took years to resolve. (Schultz had to remove part of the driveway.) “Howard was being stupid,” Roberts explained. “He was full of himself. He came to community meetings about it with two-thousand-dollar suits and five lawyers.”
But Schultz didn’t become truly controversial until the purchase of the Sonics. At first, he tried to Starbucksify the team, even giving players his home phone number “just in case they need to talk.” The franchise lost millions each year, though, and Schultz soon grew unhappy with its lease agreement for Key Arena, the team’s home court. He began acting petulant in public, griping about certain players to the media and throwing now-legendary tantrums during games from his courtside seats. He pouted about the need for a better arena, exhorting the fans, the city, and the state government to pay for a new facility (a suggestion many denounced as “welfare for billionaires”). As I was walking into the executive enclave on the eighth floor of Starbucks Center, Schultz was in the middle of a media firestorm over his threat to move the Sonics out of Seattle — perhaps the most effective means known to mankind of turning an entire city against you. (Indeed, a few months after we spoke, Schultz sold the team to a group of investors from Oklahoma City.) He might as well have proclaimed that he’d peed in everyone’s lattes over the years. “If people want to make me the villain, that’s their prerogative,” he grumbled to the Seattle Times.
So the Schultz I met was subdued, to say the least. After shaking my hand, he slouched so far back in his stuffed armchair that I had to wonder how he was still able to breathe. His eyes flitted listlessly around his office, a cluttered and less majestic place than one might expect, with a bile-green carpet that bordered on the unsightly. Aside from the spectacular view of downtown Seattle and a set of artsy black-and-white photographs on one wall, there was little to indicate that this was the workplace of anyone more important than a moderately successful lawyer — which is just how Schultz likes it. When I pointed out the bottle of Mazagran (the failed carbonated coffee drink) displayed on his desk and the rack of Joe magazines (the failed lifestyle quarterly) in the corner, he explained that they were there to ward off complacency by reminding him of past missteps. “We don’t want to take anything for granted,” he said. “I really believe that our success is not an entitlement, that we have to earn it every day.” But make no mistake: it’s not like Schultz suffers from a lack of self-esteem. Even on off days, Schultz is the consummate top dog. Dressed smartly in a tailored blue shirt and dark slacks, he exuded an air of unshakable confidence, like a man who has come to see it as part of the natural order of things that people jump at his command. Those who know Schultz say he can turn the charisma on and off at will, a by-product of his years as a salesman. Today, the charm switch was definitely off.