Modern coffee culture is a fixture in many parts of the world. In the UK, it's arguably overtaken the pub as the regular place to meet with friends.
Hard to imagine that 50 years ago, coffee shops and cappuccinos didn’t widely exist in countries like the US and UK. That's not to say that coffeehouses are a new phenomenon. They've been in Europe and North America since the 1600s, but that tradition had disappeared until relatively recently in many places.
This is the story of how Starbucks led the change, reintroduced the coffeehouse in modern US culture, and, more specifically, the marketing strategy behind it.
The growth of Specialty coffee in the 50s and 60s
It's the 1950s, and whilst the US is a coffee drinking nation, the offering is poor relative to the options today. Diners serve cheap, stale coffee that sits on heated plates for hours.
In San Francisco, Alfred Peet believes there's a market for better quality wholebeans. He begins importing Arabica coffee from across the world. At the time, the US is drinking the Robusta bean, a cheaper and bitter coffee. Peet's USP is to import quality coffee and roast it dark, the 'European' way.
Peet grows his customer base through the 50s and 60s and mail orders come from people across the US.
Jerry Baldwin and Gordon Bowker are two of the early converts. They love Peet's coffee but often find that he doesn't have enough supply to fulfil their order. So, based in Seattle, Jerry and Gordon discover an alternative store in Vancouver and occasionally make the three-hour drive to buy their coffee.
A New Store
In 1970, on the way back from one of these trips, Jerry and Gordon asked themselves, why don't we roast and sell coffee in Seattle? Along with a third partner, they decide to invest, take out a loan, and open a store.
The store is created for the founders and others like them. It's for the coffee ‘insiders’, people that like to explore and discuss tasting notes. It's not a product or business built to deliver coffee to the masses.
A trading tradition in the North West
They work with a local designer to develop a brand that reflects the trading culture of the North West, importing goods from across the seas.
A brainstorming session leads to the first mate in Moby Dick (Starbuck). Whilst exploring old marine books, the designer discovers a Sixteenth-century Norse woodcut, a two-tailed mermaid, which inspires the logo.
The store becomes Starbucks Coffee, Tea, and Spice.
Howard discovers Starbucks
Fast forward to 1981, in New York, Howard Shultz is working as General Manager for the US division of Hammerplast, a Swedish houseware manufacturer. He notices an outlier in the sales ledger. A small retailer in Seattle is buying more drip coffeemakers than Macy's! Howard wants to understand why sales are through the roof, so he travels to Seattle to inspect Starbucks close up.
Howard discovers coffee that tastes unlike anything he's tried before. He falls in love with speciality coffee, the roasting, the smells, the process, and the passion Starbucks employees have for their product. He brings coffee back home with him, and his friends agree, it's unlike anything they've tried.
Howard figures that it can't just be Seattleites who would like this coffee, and he wants to be a part of it. After a year of hounding Jerry for a job, Starbucks agree to employ Howard as their Head of Marketing with a slice of equity and he relocates from New York to Seattle.
The Trip to Milan
The idea for what Starbucks would become was born on a trip to Milan in 1983. The company sent Howard to a Houseware tradeshow in Italy. He discovered espresso for the first time, and perhaps more importantly, Italian coffee culture: the espresso bar, the community, and the hive of connection and energy. He witnessed the artistry of a barista brewing with focus and intent.
At that moment, he realised that Starbucks had been missing the romance of coffee. Starbucks was providing a quality roast, but to treat it as a grocery to be enjoyed at home, you were not only missing out on a better beverage brewed by a pro but on the entire experience. He'd discovered a business model that would be huge when exported to the US.
Howard returned home to deliver his findings, expecting a similar reaction. Instead, Starbucks directors felt that this wasn’t their market and would take the business in a direction they didn't want to go. They were happy as a niche speciality coffee roaster and retailer. They didn't want to become restauranteurs with mass-market ambitions.
The Directors were already in the middle of plans to expand as a national coffee distributor. In 1984, Starbucks bought Peet's Coffee and Tea in Berkeley, which would rule out any switch to espresso bars.
Test the concept
Despite this, Starbucks directors agree to trial an espresso bar in a new store. It's their sixth and first in downtown Seattle with a stand-up bar in a small corner of the store. There are no chairs or tables, simply a counter space to provide milk and sugar.
Four hundred customers pass through the store on the first day, significantly more than the 250 average of the top-performing roasting store. Customer feedback on the espresso is good, but the directors maintained that this wasn't the direction they wanted to pursue.
Knowing that customers liked the espresso bar, Howard makes the difficult decision to leave Starbucks and pursue his dream to launch an Italian style coffee shop. He envisions not just one store but hundreds across the US. He plans to start with eight locations, but he needs one successful store to prove the concept to get momentum.
Through plenty of hard work, Howard secures the $400,000 investment required to launch the first store. Before launch, he visits nearly 500 espresso bars in Italy, taking notes and photos, observing menus, interior design, and brewing techniques. He wants to capture the ultimate Italian experience for his Seattle based espresso bar, which he'll name Il Giornale.
A different market
The target market is different to Starbucks'. Perhaps drawing from his impressions when first sharing speciality coffee with friends in New York, Il Giornale targets commuters in urban and suburban areas. People that want to pick up a quick coffee on their way into work. Combine luxury with convenience and community.
Il Giornale opens and Howard's forecast is accurate. Customers enjoyed the coffee and experience, and word of mouth spreads. Il Giornale quickly secures the funding for another two locations, albeit with modifications.
With the first store, Howard aimed to recreate an authentic Italian experience. But, customers didn't appreciate every detail. The first location played only opera. There was no seating, menus were in Italian, and staff wearing white shirts and bow ties proved impractical for the local workforce.
Il Giornale would scale back for the second and third stores and introduce inauthentic features (e.g. tables and seating) on the back of customer feedback, but careful not to dilute the original concept so far as to lose the Italian romance.
The second store would open six months after the first (1985) in downtown Seattle and test these modifications. The third (Spring 1987) would be a test of location in Vancouver.
Howard wanted to provide early proof to investors that this wasn't a concept solely for Seattle, despite the logistical challenges it would present.
All three were successfully growing a customer base, and although losing money, were on track to meet their goals.
Then, in March 1987, an unexpected opportunity arose. Jerry and Gordon decided to sell the six Seattle stores, roasting plant, and Starbucks trading name.
Il Giornale would soon need a roasting plant, and the six Starbucks stores were established. It seemed like the perfect fit, but the challenge would be raising capital. Howard had just raised $1.25 million for three Il Giornale stores, which was a slog. He'd need to raise a further $4 million to buy Starbucks. Despite the steep challenge, he achieved the feat within weeks, and Il Giornale acquired Starbucks.
After consultation, the team decide to incorporate the Starbucks name and rebrand the Il Giornale stores because:
- As the business doesn't have Italian roots, they believe there is a certain lack of authenticity to Il Giornale.
- Whilst drawing on Italian culture, what they're building has a US twist. Starbucks feels and sounds American and draws its identity from the local culture.
- Starbucks has built a name and has greater brand value than Il Giornale through more than ten years of trading.
The Starbucks name and mermaid combine with Il Giornale stores' green, contemporary, and Italian themed design.
How do you grow a business that sells a commodity?
Starbucks continues to grow. By the end of 1987, they had 11 stores, and they built a further 15 in 1988.
Convenience and speed were proving to be a big selling point, so the business constantly works to develop systems for reducing the time it takes to brew and serve whilst maintaining quality.
However, as with Silicone Valley startups, they require ongoing investment rounds to fuel growth. Investors regularly raise one objection.
How can Starbucks defend its concept? Coffee is a commodity, and any business can buy speciality coffee from a roaster, set up an espresso bar, and serve cappuccinos. What's to stop other entrepreneurs from building local espresso bars across the US? Worse still, once they become aware of the opportunity, what's to stop industry giants like Maxwell House and Folgers from quickly launching a chain of coffee shops serving espresso?
First to mind
You cannot own the concept of an Italian style espresso bar, but you can hold the IP of a brand.
The goal was to become the first Italian style espresso bar in the mind of the customer (Ries and Trout, The 22 Immutable Laws Of Marketing). Starbucks imported a concept from Italy, tested it, and constantly modified it to fit the US market.
They provided an affordable luxury and experience unlike anything available at the time. Once they'd proven the concept, the goal was to be first to market. It didn't matter whether they were the first Italian style coffee shop in the US. What mattered was that they were the first that their customer knew and liked.
If they could get to market first and maintain quality and consistency in each location, they'd become the number one brand and market leader. Unless they mess things up, it was a status they wouldn't lose. It was a position they could defend and own, regardless of whether copycat businesses followed. It was the brand that would become the IP, not the coffee itself.
The next big question
The timing may have seemed unwise to investors, but Howard wanted to prove that the concept stood up when the company moved to an entirely new region with no preexisting dark roasted, speciality coffee market.
Howard wanted to trial stores in Chicago. A cold city with a large downtown population and HQ for several large coffee producers represented a considerable challenge. But, if Starbucks could crack Chicago, it would prove to future investors that it could work anywhere in the US.
In October 1987, Starbucks opened their first store in Chicago, quickly followed by two more. However, for the first two years, these stores struggled. Operating costs were higher than Seattle, and early employees didn't 'get' the concept. Whilst customers loved Starbucks and feedback matched that provided in Seattle, there weren't enough of them. There was no existing market. Growth wasn't quick enough to sustain a store in an area with zero awareness of the Starbucks brand, Italian espresso, or speciality coffee.
The stores turned a corner in 1990. In part, this was down to an improvement in local store management and a rise in prices to cover the higher Chicago costs. But, mostly, it was down to the fact that the customer base was steadily growing. The concept worked, but it wasn't sustainable to build a brand and store in a market from scratch in every city across the US.
Two running strategies from Starbuck's early days stand out as vital for their success. The first is the urgency to address big questions as soon as possible. Starbucks growth relied on regular investment rounds, and investors would always question whether this concept could scale. So, Howard always strived to identify the next big question or unknown around scale and solve it.
The second strategy that would prove vital was the approach to UX. With each new store and location, the company were always eager to gather customer feedback, analyse it, and implement changes where necessary. They held onto a handful of brand values and vision, but if research findings suggested that a change was required, the company acted swiftly. It couldn't have achieved what it went on to accomplish without this approach.
Building advocates before market entry
By the early 90s, the Starbucks brand had been trading for more than twenty years. While many customers were from the North West, they grew the brand amongst speciality coffee lovers across the US through their mail-order business. This would turn out to be an enormous driver for growth.
The business invested in systems and technology to build customer personas and nurture national growth. Essentially, do everything that you would do nowadays with Facebook custom audiences. They found these mail order customers were their best brand advocates.
Moving forward, Starbucks would roll out stores by targeting regions and cities with the largest concentration of these mail order customers. Learning the lessons from the Chicago experiment, Starbucks moved to areas where they didn't need to build an initial customer base, it was already there. In doing so, they'd have immediate advocates spreading the word about the new store.
Beyond the plan to grow in mail order cities, by 1991, Starbucks was eying their next big market entry. They'd opened more than 50 stores until this point, with a handful in Chicago and the rest in the North West between Vancouver, Seattle, and Portland.
The next region would be California. There were several different cities and neighbourhoods across the state and culture for new, innovative foods.
The number one target was Los Angeles. Starbucks wanted to build a luxury brand, and what better shortcut than to become the coffee of choice in Hollywood?
Before even entering the city, the Los Angeles Times named Starbucks as the best coffee in America. Shortly after, Starbucks opened their first store in the area. With this endorsement, Starbucks instantly drew the crowd they were looking for and became the go-to place for the rich and famous.
With the photos and publicity to follow, the opening of a new Starbucks became a big deal across California and the US.
Starbucks had made it. They'd built a brand that would become not just the coffee shop but the place to hang out. That was the IP they were looking for and one they would build an empire on.
Filling a social void
Starbucks made a significant discovery in LA through customer feedback. They'd initially targeted downtown commuters looking for a convenient cup of quality coffee. But the greatest value identified in LA was the provision of a social hub in a country that had lost many of its community meeting places through suburbanisation.
Before the rebirth of coffee shop culture, suburban Americans travelled from their home to the office and spent very little of their time anywhere else. Starbucks was filling a social void in suburbia, even for people that had little interaction in the store besides ordering their coffee. They were getting a sense of human connection purely by being somewhere with other people and conversations happening around them.
This was what Starbucks would lean into and why, now on the front foot as the recognised brand leading the coffee culture charge, they would become a global success.
All Starbucks facts and anecdotes in this article come from:
'Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time', written by Howard Schultz and Dori Jones Yang.
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