(FORTUNE Magazine) – Taking charge of an iconic company is a grande--no, make that a venti--challenge for the new CEO of Starbucks, Jim Donald. After a career in the supermarket trade (starting at 16 as a bagger), he joined Wal-Mart in 1990, the last executive Sam Walton recruited. Donald, 51, built Wal-Mart's fledgling supercenter business to 147 stores before he left in 1992. A stint as CEO of Pathmark followed, and then came the call from Howard Schultz, chairman of the coffee giant. For the past three years Donald has run Starbucks' North American operations under Schultz and CEO Orin Smith. When Smith, 62, retires at the end of March, Donald steps up. He recently talked with FORTUNE editor at large Patricia Sellers about how he'll lead, how he plans to sustain 20% annual growth, and why he's eating Texas barbecue for breakfast.

What's your main message to your employees as you take over?

I want to grow big and stay small at the same time. We want to run the company just like we did when we were one store on Pike Place Market in Seattle.

You are the third CEO since Howard Schultz bought Starbucks in 1987. What do you bring to the job?

I come from a retail operations background. Orin came from finance. Howard is an entrepreneur. I have a tendency to get into the field, into the roasting plants. By the way, I'm celebrating my CEO-ship in a roasting plant on the third shift at three in the morning. We're having Texas barbecue for breakfast.

Why Texas barbecue?

Because breakfast is their lunch. And because I like barbecue. So do they.

Doesn't every retailer hit a wall at some point, hurting growth?

Oh, yeah, but we're bullish about our growth. We've pushed our long-term goal from 25,000 to 30,000 stores. We have 9,200 and change now. We're going to open 1,500 this year. We're looking at top-line growth of 20% annually in the next three to five years--and bottom line, 23% to 25%.

Why should we believe you can do that?

Our success comes down to the way we connect with our customers, our communities, our farms--with each other. We just had a four-day leadership conference. The theme was human connection. We didn't once talk about sales and profits. We talked about how we continue to grow and how we connect. You know, Howard has always said that we're not in the coffee business, serving people; we're in the people business, serving coffee.

At a Starbucks in Times Square. I was told I could walk two blocks in any direction and find another one. How close is too close for new outlets?

We're not seeing the cannibalization effect that you might think. Over the past three years our first-year volumes have ramped up dramatically. Our store with the highest returns is right here in Washington state--our most mature market, where we continue to add 25 to 30 stores a year.

Where can you significantly add new stores?

We're just now getting to smaller cities. And there are 165,000 miles of U.S. roadway that we haven't tapped. I just got back from a four-market tour--Spain, Germany, Amsterdam, and Zurich. We're just scratching the surface in China. We have 150 stores and the potential for more than 2,000 there. We're not in India, but we're looking at it.

How do you think about reinventing Starbucks, at least around the edges?

We have emerging growth businesses like the Hear Music platform [which includes media bars in stores, where customers can download songs]. We're just scratching the surface of consumer packaged goods. That includes whole-bean coffee in supermarkets and bottled Frappuccino in our joint venture with PepsiCo. We just announced the launch of Starbucks coffee liqueurs.

A few years ago, Wal-Mart expressed interest in putting Starbucks inside their stores. Any chance you'll do a deal?

We'd love to be in Wal-Mart parking lots with company- operated stores.

What advice has Howard Schultz given you?

He told me, "We're different from other retailers. You have to understand the DNA. So take your time, and land softly." ■