A Slow Brew: What Starbucks Teaches Us About the Importance of Innovation and Timing

Timing. It can be the impetuous for the greatest, most serendipitous of love stories—the perfect Craigslist Missed Connection “How We Met” story later memorialized in the New York Time’s “Vows” section. Or, the most tragic, ill-timed ones—like all that tragic poison-drinking and dagger-stabbing by star-crossed (and horrifically-timed) lovers in Shakespeare’s “Romeo and Juliet.” It’s not just in the battlefield of love that timing plays a heavy hand in destiny. The same goes for the effect of timing on business innovation. The right timing can catapult your business to great heights; but by the same token, a mistimed venture can turn into nothing but a money-sucking, time-wasting failure.

All we’ve got is the beans! The Humble Beginnings Era (1971-1987)

Long before there was seemingly a Starbucks on every corner and the phrase “Iced Venti Decay Skinny Cinnamon Dolce Latte with two extra shots (please!)” was a part of everyday vernacular, a coffee was something brewed at home or ordered with breakfast at the diner or café. No fuss. No infinite options. Just black, with milk, or with cream. And for typically less than a buck. The commercialized-caffeine juggernaut that we think of today when we think of Starbucks didn’t start out that way.

The Starbucks story began in 1971.¹ Three friends, inspired by a mutual love of fine coffee and another gourmet coffee entrepreneur, Alfred Peet, opened a tiny storefront in the Pike Place Market in Seattle, WA. The first Starbucks store didn’t even sell coffee by the cup, but rather sold only whole-roasted coffee beans. Even though the timing was all wrong—coffee consumption had been on a downward consumption trend since the early 1960s and Seattle was floundering during the Boeing Bust (the tough economic times that ensued after Boeing, Seattle’s largest employer, cut 60,000 jobs and other industries were in similar slumps). Who would have thought nearly 45 years later, Starbucks would boast 23,043 retail store locations in 68 countries² and have a whopping enterprise value of $79.99 billion³ (as of February 10, 2016). Answer: it would take a true visionary to see this future.

(Enter Howard Schultz to the scene; [the] stage [is] right!)

Howard Schultz, current chairman and CEO of Starbucks, had a hunch. Back in 1981, when Shultz was working for a company that made plastic products, he astutely noticed that a small Seattle coffee store was purchasing more of a particular drip coffeemaker than mega-department store Macy’s was. He decided to investigate this anomaly further, even flying to Seattle to meet with Starbucks’ three founders and learning about their passion for coffee. In Schultz’s book, Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time, he describes what he felt flying back to New York after his first visit to Starbucks in Seattle:

“I believe in destiny. In Yiddish, they call it bashert. At that moment, flying 35,000 feet above the earth, I could feel the tug of Starbucks. There was something magic about it, a passion and authenticity I had never experienced in business. Maybe, just maybe, I could be part of that magic.”⁴

Timing Lesson No. 1: Sure, timing is a little part luck a lot part preparation, but at the root of every innovation success story, whether it’s a slowly-brewed success or an instant hit, is an intrepid spirit. You’ve got to believe in the magic of your idea!

A year later, after travelling abroad and falling in love with Italy’s idea of the coffee-bar, with all its ambiance and sense of community, Shultz came back to the states and started working for Starbucks. However, the original Starbucks founders were not similarly captivated by the idea of moving Starbucks from the coffee bean business into the coffee bar business. Accordingly (and in order to stay true to his innovative vision of “what Starbucks could be’), he left the company and opened his own Il Giornale coffee shops. As he immersed himself in the coffee bar business, he became increasingly convinced that he wanted to purchase the original Starbucks company and give the Starbucks name to his growing arsenal of Il Giornale coffee shops. In 1987, he managed to secure enough financing ($3.8 million) to buy Starbucks.⁵

Timing Lesson No. 2: The naysayers and narrow-minded might harp on the point that “timing is everything”; “the current climate isn’t the time to start anything new”; or “this is a been-there-done-that idea; there’s no room in the market for innovation or anything new.” But not Shultz. He knew there were local coffee bars all over the states, but none that offered the coffee-bar experience he’d seen abroad: a special type of gathering place that was neither quite your home or quite your office—the idea of the “third place.” Whereas others would have turned their back on the idea, citing too much commodization or competition in the coffee shop business category, Shultz dared to disrupt (and by disrupt, I mean emphatically shake up) the status quo.

Timing Lesson No. 3: The right timing won’t just magically “bing” as an appointment on your personal and business calendar. Sometimes you have to create your own “right timing”; see opportunity where others don’t; be a disrupter and make your own time; ignore the cynics; and ultimately create your own business’s destiny. When it comes to innovation in business, this is known as disruptive innovation: “a term of art coined by Clayton Christensen, [which] describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”⁶ This disruptive innovation concept is discussed in both of Robert Brands’s business entrepreneurship books: Robert’s Rules of Innovation: A 10-Step Program for Corporate Survival and the newly published, on December 8, 2015, Robert’s Rules of Innovation II: The Art of Implementation.

From a Single Bean Grew a Beanstalk: The Private Company Era (1987-1992)

As a private company between 1987-1982, Starbucks opened 150 new stores in five years, which surpassed its 1987 business plan objective of 125 new stores.⁷ Schultz’s business plan had predicted that there would be losses in Starbucks early years; and he was right: Starbucks posted losses of $330,000 in 1987, $764,000 in 1988, and $1.2 million in 1989.⁸ In 1990, Starbucks finally boasted a profit. Despite being in the red those initial years, Starbucks was still able to raise the needed funds from venture capital financing. When board members tensely questioned Howard Schultz about the company’s lack of profitability, he had to find a way to justify those losses to the board and prove that they were necessary for an investment strategy.

He told the board, “We’re going to keep losing money until we can do three things. We have to attract a management team well beyond our expansion needs. We have to build a world-class roasting facility. And we need a computer information system sophisticated enough to keep track of sales in hundreds and hundreds of stores.”⁹

Timing Lesson No. 4: Patience. Patience. Patience. You need to patient about seeing profits while you put in the necessary infrastructure to support continued growth well into the future. A “stitch-in-time-saves-nine” philosophy.

Timing Lesson No. 5: Stop watching the clock. Don’t be so short-sighted. A large part of Starbucks success can be attributed to the fact that Schultz was not in it for a short-term profit, but rather took a long-term view of his business and made his business decisions in view of that.

The IPO-Whoa! Era (1992)

The Starbucks Corporation (NASDAQ stock symbol: SBUX) had its initial public offering on June 26, 1992 (initial stock price was $17 per share) and has proved to be one of the most successful examples of a mid-sized, reasonably-priced business coming to the public market and then performing exceptionally well for its shareholders.¹⁰ Amazingly, most of the shareholders’ gains have been through price appreciation since Starbucks didn’t start paying out a dividend until 2010 (although they have had six, 2-for-1 stock splits since its 1992 IPO).¹¹

Imagine this “hit the jackpot” stock investment scenario: on the day of Starbucks June 26, 1992 IPO, you invested $1000 in Starbucks stock. As of October 31, 2015, your initial $1000 investment would be worth $230,845 (this takes into account the six 2-1 stock splits and cumulative cash dividends since 2010). Most likely, this figure will continue to expand as Starbucks expands, raises prices, and buys back stock in the future. This represents an annual growth rate of 26.68 percent, which basically crushes almost everything that has come or gone since this Starbucks IPO.¹² In other words, you would have hit the stock market lottery. Do you know how many $4+ fancy Starbucks latte beverages you could buy with your earnings? How about a “Cheers!” to that giant cup of joe? Or, better yet, to that giant cup of dough you have!

Trouble Abrewing: Starbucks Late 2000s Failures and The Great Recession

In 2007, Starbucks was headed down a slippery path to costly failures, for both reasons of the company’s own doings and outside factors—mainly that the country was about to snowball into a massive economic downtown known as The Great Recession. The Great Recession refers to the U.S. recession, which officially lasted from December 2007 to June 2009, and the ensuing global recession in 2009.¹³ A cup of pricey Starbucks coffee was going to become a luxury many had to nix from their budgets.

But the shift wasn’t all due to the customers tightening their purse strings, there was also a concurrent customer shift in the way customers viewed Starbucks. Many consumers now viewed the coffee conglomerate as a giant, money-hungry company that was putting hardworking mom-and-pop coffee stores out of business and charging too much for their products. Products that, according to their already cash-strapped customers, also tasted sub-par too.

In addition to mediocre, overpriced coffee beverages, Starbucks had become offering an increased number of non-coffee product offerings (i.e., music CDs) and got mixed in with the entertainment business as studios would pay Starbucks to promote their new releases. Schultz, as he discusses in his book Onward: How Starbucks Fought for Its Life without Losing Its Soul, would ultimately see that this foray into entertainment industry as such: “while it had its upside [looked great on company’s Profit and Loss statements; large gross profit margin]”, he ultimately recognized that it “was another side of hubris born of a sense of invincibility.”¹⁴

Starbucks began to fail itself. The following are some examples of how Schultz began to fix it:¹⁵

• A 180^◦ shift in priorities; had to completely rework its business growth strategies
• Recognized that the massive number of stores was causing cannibalization; made the difficult decision to shut down 600 underperforming stores
• Fixing the coffee-taste problems: on one day, he closed 7100 stores to retrain baristas
• Improved the customer experience by focusing on the customer; launched Facebook and Twitter profiles and a site where customers could submit and vote on ideas
• Acquired public goodwill when it held its 10,000 person leadership conference in post-Katrina New Orleans, bringing badly needed revenue into the dilapidated city
• Taking pundits by surprise, Starbucks finally recorded growth in earnings in Q3 of 2009, earned the Zagat rating for best tasting coffee, and had one of the most popular corporate Facebook pages of the time period

Timing Lesson No. 6: In order to succeed, you have to be open to trying new things and sometimes failing so that you can learn from your mistakes and ultimately get stronger for the future. This idea of failing can be analogous to the concept of antibodies and adaptive immunity in the body. Put a little bit of the bad germs in the body and then give the body time to adapt and remember these germs that have previously infected the body. When they try to infect the body again, the body’s next trained response is rapid, accurate and effective.

Present Day Status

Starbucks used to be considered an upscale brand; now it’s considered too popular to be cool as its biggest competitors are the pedestrian Dunkin’ Donuts and McDonalds/McCafé. Despite its high price point, many tastemakers believe Starbucks beverages and the surrounding company image are too “basic”, meaning they are too closely associated with mass consumerism. A much cooler, hipper coffee brand would be Blue Bottle Coffee, which just raised $25 million for expansion. Since widespread popularity can be the kiss of death for a brand that wants to be perceived as unique and upscale, Starbucks has had to be aware of its place in the market and make cultural relevance their priority. Starbucks has tried to increase their cultural relevance with cold-brewed coffee and almond milk offerings, a partnership with hipper Evolution Fresh cold-pressed juices, special reserve coffee beans, and revamping their food offerings through their acquisition of the La Boulange bakery.

Timing Lesson No. 7: As times and tastes and “what’s hip” changes, a company has to be willing to innovate within their brand proposition. Innovation in business means you are willing and able to try new things knowing full well that sometimes there will be failure, but overall these failures will teach you something and leave your company stronger than before.

The Starbucks story shares lessons in the power of innovation built on best practices and a hefty respect for the interconnectedness of timing and innovation in business. As innovation coach Robert Brands says, “the difference between a great idea and a so-so concept” is in the timing. To learn more about the importance timing plays in the innovation and implementation process, check out check out the innovation books Robert’s Rules of Innovation: A 10-Step Program for Corporate Survival and Robert’s Rules of Innovation II: The Art of Implementation (available since December 8, 2015).

Notes:
1. K. Klyver and M. Rostgaard Evald; Entrepreneurship in Theory and Practice: Paradoxes in Play
2. https://news.starbucks.com/uploads/documents/AboutUs-Company_Profile-Q42015.pdf
3. https://finance.yahoo.com/q/ks?s=SBUX
4. Schultz, Howard. Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time
5. http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html
6. http://www.claytonchristensen.com/key-concepts/#sthash.Pj9tflCh.dpuf
7. http://www.mhhe.com/business/management/thompson/11e/case/starbucks-1.html
8. http://www.mhhe.com/business/management/thompson/11e/case/starbucks-1.html
9. http://www.entrepreneurmag.co.za/advice/success-stories/entrepreneur-profiles/starbucks-howard-schultz/
10. http://www.investopedia.com/articles/markets/120215/if-you-had-invested-right-after-starbucks-ipo.asp
11. http://www.investopedia.com/articles/markets/120215/if-you-had-invested-right-after-starbucks-ipo.asp
12. http://www.investopedia.com/articles/markets/120215/if-you-had-invested-right-after-starbucks-ipo.asp
13. http://www.investopedia.com/terms/g/great-recession.asp
14. https://books.google.com/books?id=Dn8xXyvDlSwC&printsec=frontcover#v=onepage&q&f=false
15. https://www.linkedin.com/pulse/howard-schultz-profile-failure-jeff-stibel

Editor’s Note: This article is an edited compilation of posts originally published on Innovation Coach, republished on CustomerThink with author’s permission.