Mr. Coffee The man behind the $4.75 Frappuccino makes the 500.
(FORTUNE Magazine) – Howard Schultz is blushing. Having just heard that Starbucks, the coffee empire he built, is making its debut on the FORTUNE 500 list this year, the normally unflappable Schultz grins, his eyes dart down, and he gets teenage pink. "Imagine that," he says to himself, as if surprised. A moment later Schultz snaps back into corporate-chairman mode. "It would be very arrogant to sit here and say that ten years ago we thought we would be on the FORTUNE 500. But we dreamed from day one and dreamed very big."
The Starbucks story epitomizes "imagine that" in every sense. When the company went public 11 years ago, it had just 165 stores clustered around Seattle and in neighboring states. At the time coffee was a 50-cent morning habit, and your local diner was the pusher of choice. Skeptics ridiculed the idea of $3 coffee as a West Coast yuppie fad.
Today the company, which does not franchise, has over 6,000 stores in more than 30 countries, with three new stores opening every day. Critics on Wall Street give Starbucks two more years before the market here at home is saturated. Schultz, sitting impatiently in his office with its unscenic views of the Port of Seattle train tracks, scoffs at that interpretation. "Those who talk about saturation obviously don't understand our business strategy," he says.
The strategy is simple: Blanket an area completely, even if the stores cannibalize one another's business. A new store will often capture about 30% of the sales of a nearby Starbucks, but the company considers that a good thing: The Starbucks-everywhere approach cuts down on delivery and management costs, shortens customer lines at individual stores, and increases foot traffic for all the stores in an area. Last week 20 million people bought a cup of coffee at a Starbucks. A typical customer stops by 18 times a month; no American retailer has a higher frequency of customer visits. Sales have climbed an average of 20% a year since the company went public. Even in a down economy, when other retailers have taken a beating, Starbucks store traffic has risen between 6% and 8% a year. Perhaps even more notable is the fact that Starbucks has managed to generate those kinds of numbers with virtually no marketing, spending just 1% of its annual revenues on advertising. (Retailers usually spend 10% or so of revenues on ads.)
Despite the buzz, Starbucks has captured just 7% of the coffee-drinking market in the U.S. and less than 1% abroad. Yes, the market is that grande--coffee is the second most consumed drink in the world, after water. (Schultz himself is a five-cup-a-day man, beginning with an espresso macchiato at home, followed by a double-shot 2% latte on his way to the office.) The goal is to have a minimum of 10,000 Starbucks worldwide by 2005. Starbucks opened its first international store six years ago, in Japan; there are now 1,460 stores outside the U.S., scattered around Europe, the Pacific Rim, the Middle East, and Mexico. That leaves lots of room for growth. "Internationally, we are in our infancy," says Schultz, who took on the role of chief global strategist two years ago. He says he wants to see a Starbucks in every country in the world, although there's one country he really wants: Italy.
Americans hawking espresso in Tuscany may sound about as promising as Italians selling BBQ in Texas, but Italy--motherland of damn good coffee--holds a special place in the heart of this chief global strategist. It was during a trip to Italy in 1983, when Schultz was in Milan sipping his first latte, that he conceived Starbucks as we know it today. Back then Starbucks was a local chain in Seattle. It was known for high-quality coffee, but it had only six stores, which sold just beans--no espresso, no Toffee Nut Creme Frappuccinos, no ready-made coffee, period. But Schultz, the marketing executive for the small company, returned from Milan determined to create an American version of the Italian coffee bar. Four years later, at age 34, he raised $4 million and bought out the owners of Starbucks, who wanted to stick with beans. Schultz's Americanized coffee-bar idea soon took off, a commodity was reinvented, and Starbucks became a cultural icon. Proof of icon status: Playboy magazine is currently working on a Women of Starbucks issue.
Along the way Starbucks created an industry. When the company began its massive expansion in the early 1990s, the U.S. had about 200 coffeehouses--places where coffee was actually the main event, not an aside--according to the Specialty Coffee Association. Today there are 14,000, which means the majority of the coffeehouses are not Starbucks but mom-and-pops that bloomed after the dawn of the $3-coffee era. "We changed the way people live their lives, what they do when they get up in the morning, how they reward themselves, and where they meet," says Starbucks veteran Orin Smith, who helped Schultz take the company public and is now its CEO. "That's more important to me than just building a company."
Schultz says his goal was less to make Starbucks a FORTUNE 500 behemoth than to build the kind of company he wished his father could have worked for. Fred Schultz, who never graduated from high school, had a series of hard, low-paying jobs--from factory worker to truck driver--with few rewards and no benefits. "My father was a broken-down blue-collar worker," says Schultz. "He was not valued and not respected, and it made him very bitter and angry. I wanted Starbucks to be a company that didn't leave anyone behind." Today even part-timers get benefits such as health coverage and stock options.
At the end of a day of chatting, Schultz scolds, "We haven't talked about the quality of the coffee." He grants FORTUNE permission to visit the Starbucks roasting plant--the first time the media have been allowed inside--to see first-hand what it takes to make high-quality coffee. Although we're sworn to secrecy, we're not giving anything away when we say that the Starbucks taste is all about the second pop. The company roasts its coffee longer, past the first pop, which is the signal to stop for most coffeemakers.
It took about a decade for Starbucks to become a FORTUNE 500 company. Ten years from now, Schultz says, he has a much shorter list in mind: "We want to become one of the most respected and recognized brands in the world." Like what, for example? "Like Coke," he says. Imagine that.