The Starbucks Story: From Beans to Billions

1 minutes reading time
Published 7 Jun 2024
Reviewed by: Kasper Karlsson

In the heart of Seattle, near the smell of fresh coffee and the busy Pike Place Market, a small coffee shop opened its doors in 1971. Named after a character in Herman Melville's book "Moby Dick," Starbucks aimed to provide top-quality coffee to Seattle's coffee lovers. What started as a small retail venture has since grown into a global phenomenon, transforming the way the world drinks coffee. This is the story of Starbucks.

Key Insights

  • Global expansion: Starbucks started as a small coffee bean retailer in Seattle in 1971. Over the years, it has grown into a global brand with over 38,000 stores in 80 countries.

  • Innovation and customer loyalty: Starbucks has continually innovated its offerings, from introducing the popular Frappuccino to developing the Starbucks Rewards program, relentlessly pursuing its vision.

  • Stored card value: The stored card value system, where customers preload money onto Starbucks Cards, both enhances customer loyalty and provides Starbucks with upfront cash flow. Continuously praised by former CEO Howard Schultz, this system is comparable to Warren Buffett's concept of "float".

  • Global presence with local touch: Despite its extensive global reach, Starbucks maintains a local identity in each of its stores by integrating regional design elements, sourcing local ingredients, and tailoring menus to local tastes.

A Cup of Innovation

Our story begins in 1971, amidst the charming cobblestone streets of Seattle's historic Pike Place Market. It was here that Starbucks opened its doors for the first time, enticing customers with the aroma of freshly roasted coffee beans, exotic teas, and spices from around the globe. This small store quickly became a haven for coffee enthusiasts eager to take home the best beans.

That's right, Starbucks actually began its journey as a retailer of coffee beans and equipment, founded by Jerry Baldwin, Zev Siegl, and Gordon Bowker. Driven by a simple yet profound vision, they aimed to offer the world's finest coffee. However, it was about a decade later that the first seed of what we today recognize as Starbucks was arguably planted.

In 1981, a young New Yorker named Howard Schultz wandered into the original Starbucks store in Seattle. Completely captivated by the rich, aromatic coffee, he joined the company the following year. Schultz's journey then took a pivotal turn during a trip to Milan, Italy, in 1983, where he fell in love with the country's vibrant espresso culture. Inspired by the sense of community in Italian cafés, he envisioned bringing a similar experience to the U.S., with Starbucks becoming a "third place" between work and home – a place where people could gather, relax, and enjoy a premium coffee experience. The Starbucks founders were initially resistant to this idea, preferring to keep focusing solely on selling high-quality coffee beans and equipment. This led Schultz to leave Starbucks in 1985 to start his own coffeehouse chain, Il Giornale, which became an immediate success.

In 1987, Schultz had achieved such success with Il Giornale that he seized the opportunity to purchase Starbucks for $3.8 million, merging it with his own company and beginning the rapid expansion of the Starbucks brand. Interestingly, Bill Gates Sr. played a crucial role in the funding process. Without his belief in Schultz, there might not be a Starbucks today. After the acquisition, Starbucks embarked on aggressive growth, expanding from eleven stores in 1987 to over 38,000 globally today.

With Schultz's vision guiding the way, Starbucks began its rapid expansion beyond Seattle, reaching Chicago and Vancouver, and soon after, California, Washington, and New York. By 1996, Starbucks had crossed the Pacific, opening its first store in Japan, followed by Europe in 1998 and China in 1999. Over the next two decades, Starbucks' green siren logo increasingly became a familiar sight, welcoming millions of customers each week across the globe.

One of the major keys to Starbucks' success has been its relentless pursuit of innovation, which often ties back to the culture the company has built around its employees. The company has consistently pushed the boundaries of what a coffee shop can be. From the introduction of the Frappuccino in 1995 – a blend of coffee, milk, and ice that has become a summer staple – to the development of the Starbucks Rewards program, which has revolutionized customer loyalty, Starbucks has continually evolved to meet the changing tastes and preferences of its customers.

Starbucks' Bean Stock program, launched in 1991, lies at the heart of the company culture and was one of the first of its kind at such scale. By granting stock options to employees, known as partners, Starbucks allowed them to become shareholders without purchasing shares. This initiative aimed to align employees' interests with the company's success, fostering a sense of ownership and loyalty. From day one, Schultz believed that satisfied employees are the most crucial building block, as they will improve the customer experience, which in turn will reward shareholders. In hindsight, we can state that he was absolutely right.

It is truly remarkable when you think about it: how did a simple café turn into a $90 billion behemoth? The secret lies in the details mentioned above that might seem small at first, but it all compounds over time.

Visualizing the journey from one store in 1971 to over 38,000 in 2024
Starbucks store growth since inception

A Global Community

Today, Starbucks operates over 38,000 stores in 80 countries, making it present literally all over the world. This global expansion has transformed Starbucks into a cornerstone of the international coffee culture. Yet, despite its immense reach, Starbucks has managed to retain a unique sense of local identity in each of its stores. The company achieves this by integrating local design elements, sourcing regional ingredients, and tailoring its menu to reflect local tastes and preferences.

So, whether you're sipping a latte in Tokyo, enjoying a cappuccino in Milan, or trying a flat white in Sydney, the essence of Starbucks remains the same: a warm, inviting space where people can connect over a shared love of coffee. This balance of global presence and local charm is what Starbucks is all about – a personalized experience for everyone, no matter where you are in the world.

Starbucks (SBUX) store growth by region between 2005-2023
Starbucks store growth by region

As shown in the chart, Starbucks is rapidly expanding globally, with China becoming increasingly important, growing from almost no presence in 2005 to 18% of total stores today. What's perhaps most striking about this is that incredible success is possible even in commoditized industries with standard products if key details are managed well and the company remains true to its vision. Let's investigate this further.

The Starbucks Experience

Starbucks has always been about more than just coffee. It's about creating a sense of community, offering a place where people can come together, share stories, and make memories. Whether it's the barista who knows your name and your usual order, the cozy ambiance that invites you to linger, or the innovative beverages that surprise and delight, the Starbucks experience is designed to be special.

In the words of former CEO Howard Schultz:

"We're not in the coffee business serving people. We're in the people business serving coffee."

This philosophy has guided Starbucks through decades of growth and change, ensuring that no matter how big it gets, it never loses sight of what truly matters: the people it serves.

One of the most touching stories about Schultz's commitment to his customers and employees dates back to the early 2000s. A young barista, Sarah, working at a Starbucks in Seattle, was diagnosed with a serious illness. The condition was critical and Sarah's medical bills began to pile up.

When Schultz heard about Sarah's situation, he didn't hesitate. He not only ensured that her medical expenses were covered but also visited her personally several times to offer support. Schultz's actions went beyond mere corporate responsibility; they were a testament to his belief in the Starbucks mission of caring for people. Sarah's story spread, inspiring countless employees and customers, and reinforcing the idea that Starbucks was more than just a coffee shop – it was a community where people looked out for one another.

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Another example of Schultz's commitment to the grand vision of serving people, creating a global community, and providing a welcoming experience is the introduction of the Coffee and Farmer Equity (C.A.F.E.) Practices program in 2004. This program not only ensured quality coffee but also aimed at improving the lives of coffee farmers around the world, creating a deeper connection between the coffee growers and the customers who enjoyed their labor.

Several times, Schultz has spontaneously sat down and enjoyed a cup of coffee with Starbucks customers. One notable story comes from a visit to a Starbucks in Tokyo. Schultz noticed a group of elderly regulars who gathered every morning to chat and enjoy their coffee. Touched by their fellowship, Schultz sat down with them, listened to their stories, and shared his own. This encounter reinforced his belief that Starbucks could transcend cultural boundaries, creating a universal space where people from all walks of life could find connection and comfort – the Starbucks experience. As Charlie Munger famously said, "Take a simple idea and take it seriously."

Stored Card Value

Starbucks' "Stored Card Value" refers to the financial value loaded onto Starbucks Cards, which can be physical cards or digital cards within the Starbucks mobile app. This stored value is definitely a more crucial part of Starbucks' business strategy than you might initially think.

For customers, Starbucks Cards offer convenience and promote loyalty. By allowing customers to preload money onto their cards, transactions become quick and easy, encouraging repeat purchases. The Starbucks Rewards program, which is closely tied to the stored card value system, enhances this loyalty. Customers earn points, called Stars, for every purchase made with their Starbucks Card, which they can redeem for free drinks and food items. In other words, this system incentivizes customers to keep money on their cards and use them regularly.

From a financial perspective, stored card value provides Starbucks with several advantages. When customers load money onto their Starbucks Cards, Starbucks receives cash upfront. This immediate cash flow can be used for various operational needs before the products or services are consumed. Essentially, this allows Starbucks to scale more rapidly because the company doesn't tie up cash as it grows. Instead, it creates a negative working capital cycle, providing them with increased cash flow as they expand. Additionally, some loaded money is never redeemed, known as breakage. This unredeemed value represents pure profit for Starbucks, as the company does not need to provide goods or services for this money.

The Starbucks mobile app, incorporating digital Starbucks Cards, is key to driving digital engagement. Customers can reload their cards through the app, place orders ahead of time, and utilize various features for a seamless coffee-buying experience. This digital integration also allows Starbucks to collect valuable customer data, such as purchasing habits, favorite items, and visit frequency. Analyzing this data helps Starbucks personalize marketing efforts, improve customer experience, and develop new products. Financially, the value loaded onto Starbucks Cards is initially recorded as deferred revenue. Revenue is recognized only when customers redeem the value of products or services. This impacts various financial metrics, including cash flow, liabilities, and recognized revenue.

Howard Schultz has often praised the stored card value system, drawing similarities to the concept of "float" that Warren Buffett has leveraged with Berkshire Hathaway. Float refers to the money held by an insurance company that doesn't belong to it yet, collected from premiums but not yet paid out in claims. Buffett uses this float to invest in other ventures, generating returns before the company needs to settle any claims. Similarly, Starbucks benefits from the cash loaded onto Starbucks Cards before customers redeem it.

All this said, Starbucks' stored card value is a very powerful system that not only enhances customer loyalty but also improves cash flow and provides essential data insights. This "float" has grown with a 16.5% CAGR over the past two decades, reaching a staggering $1.6 billion in 2023.

20-year CAGR of Starbucks Stored Card Value
The growth of Starbucks' stored card value between 2003-2023

Interesting Facts About Starbucks

  • Hidden messages in the logo: The iconic Starbucks logo features a twin-tailed mermaid, or siren, inspired by a 16th-century Norse woodcut. The siren symbolizes the allure and mystery of the sea, reflecting the exotic origins of the company's coffee beans.

  • A drink for every taste: Starbucks offers an astounding variety of drink combinations. With the ability to customize beverages, there are reportedly over 87,000 possible drink combinations available at Starbucks.

  • The world's largest Starbucks: The largest Starbucks in the world is the Starbucks Reserve Roastery in Chicago, which spans five floors and 35,000 square feet. This flagship store offers a unique coffee experience, including on-site roasting and plenty of exclusive beverages.

Closing Thoughts

The journey of Starbucks from a small coffee bean retailer in Seattle to a $90 billion global powerhouse is truly remarkable. Howard Schultz's vision of creating a "third place" for people to gather, relax, and enjoy a premium coffee experience, combined with intelligent financial strategies like the stored card value system, has not only transformed the coffee industry but also fostered a global community connected by a shared love of coffee.

In essence, the Starbucks story is about more than just coffee; it's about creating moments of connection and belonging for millions of people every day. As Starbucks continues to grow and evolve, it remains a shining example of how a simple idea (taken seriously), nurtured with relentless passion, can resonate across the globe, making every cup of coffee a part of something much bigger.

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