Howard Schultz (Starbucks’ CEO) has written two books: Pour Your Heart Into It and Onward.
From reading/skimming through the books, here’s my take on why Starbucks is successful.
Starbucks’ competitive advantage
It is clear that Schultz is downright obsessive about quality. Schultz has traveled the world and knew that other countries were doing coffee far better than the US when he got into the business.
- The product. Schultz has always insisted on using the highest quality beans and never sacrificing quality by using slightly inferior beans. Starbucks invests a lot of money into figuring out how to deliver the best product. They have in-house employees to source the best beans from around the world, develop the best roasting methods, and to develop the best blends.
- Theatre. Preparing the coffee is like a sacred ritual. The care and craftsmanship in producing each cup of coffee adds to the experience.
- People. Starbucks pays attention to the human interaction between the barista and the customer. Schultz hated espresso machines that were too tall since the barista couldn’t make eye contact with the customer while preparing the drink. He also works towards having baristas that know their customers.
Lessons about business?
I don’t think that this is a good business book. The only thing I took from the book is that the focus on quality has been highly successful for Starbucks. Other than that, Schultz talks a lot about things that in hindsight are a mistake. For example, let’s look at authenticity. It seems to me that customers don’t really want authenticity (even if they say they do). Starbucks’ predecessor coffee shops (Il Giornale) played Italian opera that customers hated and did not offer certain things that customers asked for (e.g. nonfat milk). Schultz originally fought the idea of nonfat milk as it bastardized the authentic experience and he thought it would hurt the brand. Furthermore, he writes in his first book:
What we won’t do, however, is mess with the real stuff in a way that violates its integrity. The real stuff is the coffee, roasted dark […] We won’t stop roasting dark.
Schultz seems to have reversed course on this as Starbucks developed the Pike Place roast to offer a wimpier mainstream coffee. (This was to compete against fast-food chains who were successfully marketing such a coffee and taking away some of Starbucks’ customers.)
As far as capital allocation goes, the original plan was a little crazy. Schultz’ goal was to position Starbucks for ultra-growth so that it would take over the high-end coffee market before other companies would. Starbucks intentionally lost money in its first three years in setting itself up for explosive growth. It also expanded prematurely into other markets to prove that the concept would work in other cities (Chicago) and in other countries (Vancouver). It actually lost money on its Chicago expansion and closed its stores there while Vancouver was a headache with forex, different laws, etc. Schultz did not try to maximize return on capital. Schultz’ second book talks about how growth was hurting the company and how Starbucks needed to rein in growth to focus on quality.
Howard Schultz as a CEO
I do not believe that Schultz’s main gain is to maximize his wealth. His first book talks about how he took a pay cut to work for Starbucks when it was in the coffee roasting business. From reading Schultz’s book, it seems that key things about him were:
- Quality. He is obsessive about coffee and the coffeehouse experience.
- Building an empire. As Schultz was building the first Il Giornale, he was already trying to raise money for even more shops even though the first was not yet profitable. Later, he positioned Starbucks for hyper-growth at the expense of profitability. This put him into a position where he needed to raise more money from venture capital firms and other sources. In the books he talks about the important of having control over his company (see #1) but that goal is at odds with building an empire. Fortunately for Schultz he has been able to achieve both his goals.
- Workaholism. He does not identify himself as a workaholic but in my opinion he may be. His first book often mentions that there were times when he was sacrificing family for crises at Starbucks. When coffee bean prices skyrocketed due to frosts in Brazil, he canceled his vacation to go back to work. Schultz mentions that Starbucks was hedged against price increases so I’m of the opinion that he may have overblown the crisis.
On the downside, Schultz does some things that likely drive his employees crazy. In Onward, he talks about his crusade against breakfast sandwiches since they would result in burning cheese that would create an unpleasant odour in the shop. He killed the breakfast sandwiches, customers complained, Starbucks reworked the sandwiches to mitigate the odour problem, and then Starbucks brought back the sandwiches. If I were the employee who created the sandwiches, I would be extremely frustrated that he made a dumb move in axing the sandwiches. I believe that this aspect of him as a CEO isn’t that relevant overall to Starbucks’ success.
Are the books worth reading?
Personally, I did not really enjoy them. Things like his insistence on authenticity turned out to be mistakes.
Of the two books, the first one (Pour Your Heart Into It) is the more useful one for investors.