A Slow Brew: What Starbucks Teaches Us about Innovation and Timing (Part 2 of 2)

In the previously published blog “Not Instant Coffee: What Starbucks Teaches Us about the Importance of Timing and Innovation (Part 1 of 2)”,we discussed the timing lessons that can be gleaned from Starbucks early humble beginnings in 1971 right up until it became a private company in 1987. In this second and final part of the blog, we’ll cover what the Starbucks story—during its private company era (1987-1992), IPO (1992) era, Great Recession era, and its present day status—teach us about the interplay of timing and innovation.

From a Single Bean Grew a Beanstalk: The Private Company Era (1987-1982)

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.[1] 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.[2] 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.”[3]

Timing Lesson No. 1[LSK1] : 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. 2: 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.[4] 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).[5]

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.[6] 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.[7] 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.”[8]

Starbucks began to fail itself. The following are some examples of how Schultz began to fix it:[9]

  • · 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. 3: 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. 4: 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).

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[1] https://www.mhhe.com/business/management/thompson/11e/case/starbucks-1.html

[2] https://www.mhhe.com/business/management/thompson/11e/case/starbucks-1.html

[3] https://www.entrepreneurmag.co.za/advice/success-stories/entrepreneur-profiles/starbucks-howard-schultz/

[4] https://www.investopedia.com/articles/markets/120215/if-you-had-invested-right-after-starbucks-ipo.asp

[5] https://www.investopedia.com/articles/markets/120215/if-you-had-invested-right-after-starbucks-ipo.asp

[6] https://www.investopedia.com/articles/markets/120215/if-you-had-invested-right-after-starbucks-ipo.asp

[7] https://www.investopedia.com/terms/g/great-recession.asp

[8] https://books.google.com/books?id=Dn8xXyvDlSwC&printsec=frontcover#v=onepage&q&f=false

[9] https://www.linkedin.com/pulse/howard-schultz-profile-failure-jeff-stibel

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