Starbucks (with Howard Schultz)

Starbucks. You’d be hard pressed to name any brand that’s more ubiquitous in the world today. With nearly half a billion global customer purchases per week across its stores and 3rd party retail channels, a significant portion of the human population gets their daily fix in the green and white paper cup. (Including our own Ben Gilbert who famously enjoys his daily spinach feta wrap. :) But it wasn’t always this way. Long before the frappuccinos and the PSLs and the cake pops, Starbucks was just a small-time Seattle roaster that only sold beans — and was started not by Howard Schultz but rather the guys who later ran Peet’s (!). Starting from six tiny stores when Howard took over in 1987, this quirky coffee company named after a character from Moby Dick has scaled to nearly 40,000 locations worldwide. Today, in a first for Acquired, the protagonist himself joins us as a third cohost to tell the whole story of Starbucks. And Howard is in the perfect moment to do this — after three separate stints as CEO he’s now retired, off the board of directors, and in his own words “not coming back.” So place a mobile order (or not! as you’ll hear Howard speak about), sit back with your own favorite Starbucks items, and enjoy. *Links:* - Howard’s letter “The Soul of a Brand”: https://www.linkedin.com/posts/howardschultz_the-soul-of-a-brand-activity-7169073767615332352-ONbX/ - Worldly Partners’ multi-decade Starbucks analysis: https://worldlypartners.com/starbucks/ - Starbucks S-1: https://www.scribd.com/doc/11801030/Starbucks-IPO *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  All right.

• 0:01David Rosenthal?

  We're rolling.

• 0:01Ben Gilbert?

  We're rolling.

• 0:02Speaker 02

  We get to see how you guys do this. It's kind of interesting.

• 0:05David Rosenthal?

  Usually a pump up music.

• 0:07Ben Gilbert?

  I feel pumped up.

• 0:08Speaker 02

  We can do that.

• 0:09David Rosenthal?

  We've got this.

• 0:10Ben Gilbert?

  Turntable.

• 0:10David Rosenthal?

  Oh, I saw your turntable. That's beautiful.

• 0:13Speaker 02

  What do you want to hear?

• 0:15Ben Gilbert?

  Now we're starting.

• 0:17David Rosenthal?

  Ben's keeping us on track.

• 0:34Ben Gilbert?

  Welcome to season 14, episode five of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 0:43David Rosenthal?

  I'm David Rosenthal.

• 0:44Ben Gilbert?

  And we are your hosts. Seven years ago, David and I did an episode on the Starbucks IPO, just the IPO. That episode was a mere one hour and 24 minutes and Starbucks is a $90 billion institution in our world that deserves the full acquired treatment.

• 1:02David Rosenthal?

  Who, what were we thinking?

• 1:04Ben Gilbert?

  Well, it actually was amateur hour back then, David.

• 1:07David Rosenthal?

  Got to start somewhere.

• 1:08Ben Gilbert?

  Well, today we have a very special third co-host to discuss this third place, Howard Schultz. Howard started working at the small chain of three Starbucks stores in 1982, eventually buying it and becoming CEO. As you probably know, he is effectively the founder of the Starbucks we know today that exists on every corner of the earth. I come to you, David, and listeners as an unabashed Starbucks fan. In this tumultuous time for the company, I am absolutely pulling for them in every way possible, and that is going to come through in our conversation. You may have seen the news recently that they had a very rough last quarter with a key metric that you may remember from previous episodes as same-store

• 1:50Ben Gilbert?

  sales. These dropped and their stock price plummeted as a result. This is on top of a tumultuous pandemic era and some of their stores unionizing and a change in leadership. We thought that this would be the perfect time to sit down with Howard and unpack, why did Starbucks work in the first place? And how did it work at such grand scale? What can other founders and business leaders learn from what got them here? And although he is no longer CEO, where do they go now?

• 2:19David Rosenthal?

  It really is incredible. One of the very, very small number of food and beverage establishments that has scaled to the entire world.

• 2:29Ben Gilbert?

  Yeah, most of those types of concepts do not work in different countries and continents. But Starbucks is different. Today, they're in over 80 countries with 39,000 stores across the world. They're even huge in China, a country that didn't consume very much coffee until Starbucks arrived. They are a bank-scale financial institution as well. At any given time, Starbucks holds $1.7 billion that customers have loaded onto gift cards, but not yet spent. So how did they go from one store selling beans, not even drinks and cups, just beans, to the default meeting place in communities everywhere? Today, we tell that story. And listeners, this episode has video. We recorded it in person in Seattle at the Schulz Family Foundation, and you can watch it on YouTube.

• 3:14Ben Gilbert?

  And if you want more from David and I, you should check out our second show, ACQ2, where we interview founders, investors, and experts, often as deeper dives into topics that we covered on the main show. Recent episodes have been awesome, with the CEO and the founder of Synopsys of Starfish Space further exploring the space industry. And we've got some great stuff in payments coming up next, too.

• 3:35David Rosenthal?

  We do.

• 3:36Ben Gilbert?

  All right, so with that, this show is not investment advice. David and I may have investments in the companies that we discuss, and this show is for informational and entertainment purposes only. Onto our episode with Howard Schultz. Well, I do have to tell you, and I think I've told you this off-camera, for the last almost 10 years, every single day starts with a spinach and feta wrap. I assume there are other people like me in the world, but it's always an iced almond milk latte with whipped cream and a spinach and feta wrap. And so, thank you for powering approximately a third of the cells in my body.

• 4:11Speaker 02

  That's a great start.

• 4:12Ben Gilbert?

  I also, here's another stat that David. You've done the math on. I have done the math. I exported all of my credit card transactions since 2011.

• 4:21Speaker 02

  Of course you did.

• 4:22Ben Gilbert?

  And I wish I had more history than that, but that was the oldest I could get. I've spent $23,000 at Starbucks since 2011.

• 4:29Speaker 02

  Oh, God.

• 4:31Ben Gilbert?

  So, we want to start with Starbucks 1.0. And listeners may know that there were three founders of Starbucks.

• 4:41Speaker 02

  Yes.

• 4:42Ben Gilbert?

  None of which were named Howard Schultz.

• 4:44Speaker 02

  Correct.

• 4:45Ben Gilbert?

  So, take us back, you know, in the Starbucks pre-history before you arrived.

• 4:50Speaker 02

  Yeah.

• 4:51Ben Gilbert?

  How did the company start?

• 4:53Speaker 02

  Well, since I wasn't there, this is what I know. There were three founders, Jerry Baldwin, Zev Siegel, and Gordon Belker. And the story that was told to me is that one or both of them were going to school in California, in the Bay Area, and they became enamored with Pete's Coffee Company, uh, which.

• 5:14Ben Gilbert?

  Alfred Pete?

• 5:14Speaker 02

  Yeah, Alfred Pete was, you know, more than anyone else in the history of coffee in America was the true pioneer. He brought specialty coffee, Arabica coffee, to Northern California. And Jerry Baldwin and Zev became so interested and intrigued with what Pete's was doing, and given the fact that they were from Seattle, decided they would try and bring Starbucks Coffee in the form of Starbucks to Seattle, Washington. Now, what is not known is that when Starbucks opened in the Pike Place Market in 1971, they were using Pete's Coffee.

• 5:55Ben Gilbert?

  Really?

• 5:55Speaker 02

  No one knows that. That's new. Because they were not roasting coffee. So, they were bringing coffee from San Francisco to Seattle. They were not calling it Pete's. They were calling it Starbucks.

• 6:07Ben Gilbert?

  So, it was Pete's Coffee in Starbucks bags?

• 6:08Speaker 02

  Yeah, yeah. Again, I wasn't there, but that's kind of the folklore. After the three founders built that store, opened that store, uh, I get the sense that there was some kind of fallout between the three of them, and Zev Siegel eventually left the company.

• 6:27Speaker 02

  That brings us to 1979, 1980, around that time, when I came to Seattle, Washington for the first time. So I was working for a Swedish housewares company based in Sweden called Hammerplast. That company had a beautiful, non-electric coffee maker, kind of a thermal unit. And we had a big customer in Macy's in Northern California. And I was in California on a sales call, and I had heard that there was a small company in Seattle, Washington was buying a lot of this product. So given the fact I'd never been to Seattle, I was already in the West Coast. I figured I'd come to Seattle and see what was going on.

• 7:11David Rosenthal?

  Was Starbucks buying it for use in their?

• 7:14Speaker 02

  They were selling it in their store. Now, but here's the thing.

• 7:16David Rosenthal?

  Because this was a consumer device.

• 7:18Speaker 02

  Yeah, yeah, but you have to remember, Starbucks Coffee Company from 1971 until around 85, 86 only sold pounds of coffee. There was no beverage. That's, you know, we're going to get into the epiphany of that. Yeah, of course. And so I walked into the Pike Place store for the first time on a beautiful day, just like this. The sun was out. There was snow on the mountains, the clean, fresh air. And I walked into the Pike Place Market and I walked into the Starbucks store. And I was blown away by the experience, the romance of coffee, the education. And it just spoke to me. I had never met Jerry Baldwin, the founder,

• 8:03Speaker 02

  who was the CEO at the time. And I became interested and intrigued with what Starbucks was doing and asked if I could meet Jerry. One thing led to another. I met Jerry Baldwin. We really hit it off and we established kind of a vendor customer relationship over a course of a year or so. Starbucks had three stores at the time, only three. And over the course of the next year or so, I became more and more interested and intrigued with the possibility of leaving New York City. Sherry and I were dating, we're not married. And I kind of maneuvered my way into a job working for Starbucks.

• 8:47Speaker 02

  And so Sherry and I drove to Seattle, Washington on Labor Day weekend in our old Audi car with a golden retriever. And we came here because I was offered the job as the head of marketing for Starbucks when they were getting ready to open their fourth store in 1982.

• 9:05David Rosenthal?

  Still just selling beans?

• 9:06Speaker 02

  Only beans. That's the whole, yeah, still the beans. The interest that the company had in me at the time, I think, was they were really interested in expanding, but their, their dream or, or the plan at the time was, could we expand to Portland, Oregon? Remember, so it was a tiny company.

• 9:23David Rosenthal?

  It was a grand ambition.

• 9:24Speaker 02

  Yeah, and I never had any idea, of course, that what was about to happen and unfold over the subsequent years, but that was, I arrived in 1982 as the head of marketing.

• 9:36David Rosenthal?

  So when you and Sherry arrive here, like, what was the coffee landscape? I mean, there were these three, soon to be four Starbucks bean stores here in Seattle. Alfred Pete was down in the Bay Area. But what was coffee culture? I mean, it was, it was like Folgers and Maxwell House, right?

• 9:54Speaker 02

  Yeah, it was, uh, it was de minimis. There was another coffee company, which was Seattle's Best Coffee, which was another retailer that was kind of at the same size and scale as Starbucks, both equal at the same time. But you couldn't even get a New York Times in Seattle in 1982, 83. It was not, no good food to speak of, and Starbucks was a true pioneer where they were educating customer after customer about what good coffee tastes like. And the Pike Place Market gave them an interesting vehicle because of, of the tourists. And so Starbucks actually started establishing a mail order business as a result of all the people who were coming into Seattle.

• 10:36Speaker 02

  And I think, if I remember, there were so many points that I can remember where people were talking about Starbucks way outside of Seattle, as if it was some kind of iconic big company. I think people came to Seattle, is this it? This is, you know, the 800, 900 square foot store in Seattle, Washington, in Pike Place Market? This is the Mecca?

• 10:58Ben Gilbert?

  And so tourists would come, they would buy a bag, and then they would fill out some kind of information and say, I'd like to, I'd like to have this mailed to me.

• 11:05Speaker 02

  Yeah, and Starbucks had a growing mail order business.

• 11:07Ben Gilbert?

  In my city.

• 11:07Speaker 02

  Yeah, that's what happened. And because coffee has a shelf life of basically a week to 10 days, and we didn't have a vacuum bag at that time. We were shipping small amounts because to Jerry Baldwin's credit, he had such a fastidious point of view about quality and freshness. And I think that had a huge impact on me.

• 11:30David Rosenthal?

  But this couldn't have been like a great business. You're shipping small amounts.

• 11:35Speaker 02

  No.

• 11:35David Rosenthal?

  The logistics costs, you know, the scale like.

• 11:40Speaker 02

  This was a small business, but the equity of the brand even back then was much larger than the size of the business. And the opportunity that I saw, even when we had four or five stores, was well beyond Portland, Oregon. And I was always kind of pushing, we could do so much more. And then the whole thing blew up for me when I went to Italy in 83.

• 12:03Ben Gilbert?

  Okay. So before the Italy trip, I just want to

• 12:06Speaker 02

  Yeah.

• 12:06Ben Gilbert?

  really contextualize coffee in America.

• 12:10Ben Gilbert?

  I think coffee had been declining since like 1940. It's still part of the American culture, but it's not that it's on the way out, but there's nothing new or interesting, except for this little segment of

• 12:22Speaker 02

  Specialty coffee, which was tiny. And I think what you've just described, the reason for that is that coffee was terrible. It was instant coffee, stale coffee, and primarily robusta beans, which is the low-grade coffee that Starbucks was never involved in.

• 12:38David Rosenthal?

  Yeah. Walk us through the two types of beans.

• 12:41Speaker 02

  There's mainly two types of agricultural coffee grown for commercial use. Robusta beans, low-end coffee, primarily in instant coffee, and high-grade arabica coffee. But even within the arabica coffee, there's significant segments of quality and integrity. And Starbucks has always played from 1971 to today at the highest level.

• 13:05David Rosenthal?

  And my understanding from our research is that the robusta market really developed, as you say, with the instant coffee market. And that was kind of a product of World War II, right? It was like, hey, we got to get the troops this product to survive. And so we just need a lot of beans and we need to ground them up and create this instant product. I believe Maxwell House was involved in inventing.

• 13:25Speaker 02

  Yeah, you're exactly right. I mean, it was just fuel and bitter, acidic. And yeah, and that's, I think, World War II and the GIs were kind of the impetus for that kind of quality coffee, or not quality coffee, to exist and have any kind of run after the war.

• 13:44Ben Gilbert?

  So you show up at Starbucks, you know, you know, a little bit about the market because you've been a supplier of theirs, but you happen to be a pretty talented salesman from your, your time at Xerox.

• 13:55Speaker 02

  Yeah.

• 13:56Ben Gilbert?

  And I want to make a tie here. Our previous episode was the Microsoft episode, or at least Microsoft, volume one. You were selling word processors made by Xerox. Tell me what word processors were in the mid 70s.

• 14:08Speaker 02

  Yeah. So my territory was 42nd to 48th street, from 5th Avenue to the river. And I had to make 50 cold calls, physical cold calls a day. That was a job. The Xerox job taught me incredible amounts about not only selling, but humility. Humility. Because the rejection every day was so significant. And you put on your suit and tie and you go in an office building. There's no security at that time. Just go in and you go from the top floor to the bottom. And then there are other people selling other products who are doing the exact same thing. And you had to get by the receptionist.

• 14:53Speaker 02

  I was making a thousand dollars a month and living at home when I started. Okay. The word processor was a big machine in which you are editing on that machine to basically create a letter.

• 15:07Ben Gilbert?

  And does it have a screen or is it like a typewriter?

• 15:10Speaker 02

  No, it's a typewriter, no screen.

• 15:11David Rosenthal?

  It's like a typewriter with like a, with a little bit of cash, right?

• 15:15Speaker 02

  Yes, yes, exactly.

• 15:16David Rosenthal?

  So that you could like fix mistakes for one line, right?

• 15:18Speaker 02

  Yeah. The job at Xerox at the time was like working for Google. Xerox and IBM were the two pillars of technology and high tech companies. You told somebody you're working at Xerox, you had a whole different patina that you were, wow, that's working for Xerox. Wow.

• 15:34Ben Gilbert?

  And so you quitting, well, hammer plas, but you know, quitting what seemed like a

• 15:38Speaker 02

  I hated it.

• 15:40Ben Gilbert?

  Stable of pretty good jobs to drive across the country to provincial little Seattle. I mean, that's, that's nuts.

• 15:45Speaker 02

  I knew after a couple of years, if I stayed at Xerox for a longer period of time, I was going to be locked in there. But I'll tell you the story that got me to realize I've got to get out of here. At the end of the year, the performance appraisal at Xerox was basically a scorecard from one to five. So you'd have a qualitative discussion with your manager and then he would give you a number.

• 16:14Speaker 02

  And when I got a three, I said, I was just saying to myself, I worked all year. I just had a performance appraisal from my manager and I'm a three.

• 16:24David Rosenthal?

  This is amazing. Howard Schultz got a three.

• 16:26Speaker 02

  I got a three.

• 16:26David Rosenthal?

  This is inspiration for all entrepreneurs out there.

• 16:29Speaker 02

  And as soon as I got the three, I swear at that moment, I knew I've got to get out of here. And that's when I started putting myself in a position of meet other opportunities. And by and large, I was able to get the hammer blast job, which was the general manager of the company, which was based in Sweden in the US. But I was a three.

• 16:51David Rosenthal?

  Do you think having that background at Xerox, did that give you a piece of perspective that helped build StarX to what it is today?

• 17:03Speaker 02

  When I hear the question, I have to go back to my childhood and think everything that I've experienced growing up in the projects in more or less a dysfunctional family because of the pressure of money. Getting the Xerox opportunity and having some level of success, but realizing I wanted more. The humility which came with rejection, the shame I had as a poor kid living in the projects. All of that, I think, crystallized in me. And I give Sherry so much credit in realizing that together we wanted to build a different kind of life.

• 17:46Speaker 02

  And it gave me the courage, the conviction and the drive to try and do something that I felt I was destined to do. I didn't know what it was. I certainly didn't know moving to Seattle was going to create the opportunity of a lifetime. But I always felt I had to get out of that station in life where I was positioned not to get to the level that I thought I deserved to be.

• 18:14Ben Gilbert?

  I don't think it is common with someone for your background, poor kid in the projects, coming from nothing, to get a great job, two great jobs and be wildly dissatisfied and not feel like I've made it, but rather no, there's got to be something more than this. There's something deep inside you that caused you to be willing to take a risk.

• 18:38Speaker 02

  I was really insecure about not succeeding.

• 18:44Speaker 02

  And I didn't view what I was doing as the success that I was not destined for. That's that sounds wrong, that I had the appetite for.

• 18:55Ben Gilbert?

  All right, so we're getting to the big risk. So the year ticks over to 1983.

• 19:00Speaker 02

  Yeah.

• 19:01Ben Gilbert?

  You are sent, or maybe you asked to go to an international housewares conference in Milan.

• 19:07Speaker 02

  Yeah.

• 19:08Ben Gilbert?

  What do you discover?

• 19:09Speaker 02

  So I went to a trade show called Macha, which is a big convention center. And it's a giant houseware show with equipment and all kinds of stuff. And I I was staying at a relatively cheap hotel in walking distance to the convention center. I get out of the hotel. I'd never been to Italy before, and I am all of a sudden being intercepted with the physical manifestation of one coffee bar after another in the business that I'm supposed to be in. But it wasn't the business that Starbucks was in. And I walk in like a normal person that's never seen this before. And I am just like, I'm in a black and white movie. And all of a sudden, everything was color.

• 19:54Speaker 02

  And it was so rich. I couldn't get enough of it. And I just went from one to the other, to the other, to the other. And I I was just blown away and more or less raced back to America. Sat down with Jerry and Gordon and said, holy shit. What's happening in Italy is the business that Starbucks has to be in. And they had seen it. They've been Italy. And they said, no, that's not what we want to do. And I just said, seriously? And I banged on the door for two years. And in two years, they finally let me open up a coffee bar.

• 20:37Speaker 02

  On the corner of Fourth and Spring in Seattle, and it was the sixth Starbucks store. And out of about 1,200 square feet, I got 100 feet. And I designed and opened the coffee bar, worked behind the counter as a barista. And Starbucks probably had 200 to 300 customers a day selling Hobing coffee. We were at 500 in a week with introducing lattes and cappuccino to the, and espresso.

• 21:04Ben Gilbert?

  And there's nowhere else in town-

• 21:05Speaker 02

  No one in Seattle had it.

• 21:06Ben Gilbert?

  To get a cafe-

• 21:07Speaker 02

  Cafe Allegro had it, and that was Dave Olson. And after a few months or six months or so, Jerry said, "I don't want to repeat this. I don't want to do it. I don't want to be in the restaurant business."

• 21:20Ben Gilbert?

  Yeah, what was the objection? Was it the stigma of the restaurant business?

• 21:24Speaker 02

  I mean, I don't want to speak for Jerry. I have so much respect for him, but he didn't think it was clean. He didn't like it. Now, between 83 and 85, Jerry Baldwin, because of his love of Pete's and his relation with Alfred Pete, had an opportunity for Starbucks to acquire Pete's Coffee Company. And they did. Unfortunately, Starbucks buys Pete's and they get into financial trouble.

• 21:52Ben Gilbert?

  And so really, at this point, it was like their mentor was retiring. This person who was a steward of the industry, "We're operating six points of retail distribution in Seattle for our beans. Why don't we just buy your effectively the same business, but in Northern California? Keep them separate for now."

• 22:08Speaker 02

  Well, it's important to know that between the opening of the Fourth and Spring Coffee Bar inside of Starbucks-

• 22:15Ben Gilbert?

  Starbucks number six.

• 22:16Speaker 02

  Yeah, and Jerry and Gordon saying, "We don't want to repeat this." I was so frustrated. I said, "I'm going to leave Starbucks." And what did I do? I had no money to open up a coffee store. So Jerry says, "Starbucks does not want to open up coffee bars, but we will invest in Il Giornale."

• 22:40David Rosenthal?

  Which was the company you started to?

• 22:42Speaker 02

  Yeah, so before they get into financial trouble, Starbucks is an investor. I've always thought he did that so I would sell and market Starbucks coffee in the coffee bar, which I would have done anyway. So Starbucks makes an investment, a couple of people that we know make an investment, but I didn't have enough money, so I go to see two Italian companies. I've never told this. One is the espresso company, Fiamma, and one is the large Italian coffee company, Lavazza.

• 23:14David Rosenthal?

  Oh, yeah.

• 23:15Speaker 02

  And I asked them both to invest in my idea, and both of them turned me down.

• 23:21Ben Gilbert?

  So at this point, you're in Italy, you're trying to get ideas and investors for what would become Il Giornale.

• 23:27Speaker 02

  For the first Il Giornale.

• 23:28Ben Gilbert?

  And only Starbucks and a couple other people have committed.

• 23:31Speaker 02

  But I didn't have enough money. I still, I needed more money.

• 23:34Ben Gilbert?

  And you were raising 1.6 million?

• 23:37Speaker 02

  About 1.6, yeah, 1.6, 1.7 million. And they said, you know, no one is going to buy Italian espresso in Seattle or in America.

• 23:46Ben Gilbert?

  Which is stupid, because you watched it happen. Like, I ran this store for six months and like, it was fine, you know?

• 23:51Speaker 02

  Yeah, they didn't want to do it. So they, Lavazza and Fiamma, just to get that on the record, turned me down. Okay? They'll deny it, that's a fact. So then I, you know, go back to the US, I'm trying to raise money, and I, I hit the three titans in Seattle. Jack Benaroya, Herman Sarkowski, and Sam Strong. Three of the leading citizens of Seattle, Washington at the time. And the three of them have a little bit of an investment together in other things, and they say, we're going to believe in you, and they take me over the, the hump.

• 24:30Ben Gilbert?

  Wow.

• 24:31Speaker 02

  Okay, and we opened three Il Giornali's, two in Seattle, one in Vancouver, BC. And all three are doing well, all three. But I didn't have enough money to expand.

• 24:45David Rosenthal?

  And needing the money to expand, just to pause on that for a minute. Business wise, obviously, coffee bars are a much better business long term than coffee beans, but probably more capital intensive, right? Eating more staff?

• 24:58Speaker 02

  Yeah, more labor, yes. But the stores weren't that expensive to open because they were small, less than a thousand square feet. And we understood how to do it. And I was working as a barista with Dave Olson and other people to keep the cost down. We were behind the counter and I had no salary. I had no salary for almost two years.

• 25:15David Rosenthal?

  Wow.

• 25:16Speaker 02

  While Sherry was working and pregnant with our first child.

• 25:19Ben Gilbert?

  So looking increasingly worse from a traditional perspective of leaving a

• 25:23Speaker 02

  Yes.

• 25:24Ben Gilbert?

  high quality job, moving across the country, then just a couple of years later, here you are, not making any money again, while raising millions of dollars to try to start your own business.

• 25:33Speaker 02

  It gets worse. Sherry is six, seven months pregnant, she's working, her parents visit, yeah. They're from Ohio. Father asked me to take a walk.

• 25:45David Rosenthal?

  Oh, no.

• 25:46Speaker 02

  His God is my witness, true story. Take a walk and he says, uh, whatever you're doing, I respect it, but it's not a job. It's a hobby. You need to get a job. My daughter's pregnant, she's working, you're not. I start crying.

• 26:07Ben Gilbert?

  I bet.

• 26:08Speaker 02

  So embarrassed. And I come home at three, four o'clock in the afternoon, whatever it is, I don't say a word, completely shaken by the whole conversation. Her parents go to bed after dinner, I'm sitting with Sherry and I said, I gotta tell you something happened. She was so angry at her dad and so upset. And she said, there's no way we're turning around where we are going. So she is the glue to everything that's happened.

• 26:37Speaker 02

  And I don't know if she'd ever had a conversation with her father. I'm sure she did. I don't. But the whole thing could have been over.

• 26:44Ben Gilbert?

  And that would have been a very understandable response if Sheri had said, I'm, you know, I wasn't going to say anything, but you know, look at our situation objectively here.

• 26:52David Rosenthal?

  Putting ourselves in your father-in-law's shoes. How could you not feel that way for your daughter and her impending family?

• 26:58Speaker 02

  Yeah. And her father was a great guy. And I understood, but I was embarrassed and humiliated. How could I not be?

• 27:08David Rosenthal?

  Well, I guess that's another dimension here, too. This was not 2024. It's not like being an entrepreneur was a glorified profession here.

• 27:16Speaker 02

  In a business that he clearly did not understand. You know, a coffee store.

• 27:21Ben Gilbert?

  The other interesting thing to point out around this time is for the people who were seeking high-risk business investments, you know, this is the late 80s. It's time to look at tech. Like, we're now 12 years into Microsoft, Apple's four years past the Macintosh.

• 27:40Speaker 02

  And I'm trying.

• 27:41Ben Gilbert?

  And you're trying to raise money for a coffee house chain.

• 27:44Speaker 02

  With names that people couldn't pronounce and serving it in a paper cup.

• 27:50Speaker 02

  To go.

• 27:50Ben Gilbert?

  That does not sound innovative to me. I don't know why I'm putting my risk capital into your.

• 27:55Speaker 02

  Yeah. You know, I would bring investors to the two or three stores. And I would make sure there was a fair amount of people in the space. And that's when I started talking about the language of community and the third place. And that's what I saw in Italy. The unlock and the epiphany, of course, it was the romance of espresso. But it was the sense of community. And that is what was happening very early on in the two stores in Seattle and the one in Vancouver. You could see it.

• 28:27David Rosenthal?

  What would people do after they bought the coffee? You said these are very small places.

• 28:31Speaker 02

  They would stand up because the two stores didn't have seating right away. They would stand up at the coffee bar at the window on Columbia Center. And it was at eight, nine o'clock in the morning, they were hanging out there. And then they after in late morning, they were coming back and you could just feel the relationship that people were having with one another around human connection. I know it sounds trite, but I could see it back then. And as I was talking to people about the investment opportunity, I was pointing out, "Look what's happening here. There's something happening. There's some magic going on here. It's not just the coffee. The coffee was the conduit."

• 29:09Ben Gilbert?

  All right, so we're at the pivotal moment.

• 29:12Speaker 02

  Starbucks and Pete's gets into financial trouble. And the debt to equity was north of six to one for a company that was tiny. Jerry comes to me and says, "Jane and I," his wife, "are going to move to California, "and we're going to keep Pete's and I'm going to sell Starbucks." And my heart is pounding. I said, "Okay." And then he finished it and he says, "I think you're the person to buy Starbucks." I said, "That's fantastic, but I don't have any money."

• 29:44Ben Gilbert?

  You're going to give it to me?

• 29:45Speaker 02

  I have no money. "How much is it?" "Three point eight million dollars." Now we're into eighty-six, eighty-seven. Now we get into a story I have told, but not a hundred percent, because I've protected the guy, but I'm going to tell it. I go out to raise money. I'm having a hard time. So Jerry gave me about, I think he gave me ninety days to raise three point eight million dollars. Around the second month, he just came to me and said, "Where are you with all this?" And I think I had about half of it raised. I might have fibbed a bit and said I had a little bit more, but I didn't, I had about half. And he lays a bomb on me and says, "Howard, listen, "we're in a tight situation here,

• 30:30Speaker 02

  "and one of your investors "has put a cash, all cash offer on the table with no due diligence and wants to close right away."

• 30:39Ben Gilbert?

  For him to take it over, not you?

• 30:41Speaker 02

  Yeah, yeah, I'm out. I'd be out. And I said, "Who is it?" And he told me, "I'll save that." And I'm absolutely...

• 30:53Speaker 02

  Annihilated, crushed, because I didn't have the wherewithal. And I could just envision, as soon as I heard that name, I knew it was over. I was in a basketball league at the Seattle club. I'm playing basketball that night. My good friend, Scott Greenberg, who's an attorney at a prestige firm in Seattle, the Gates firm. I'm basically crying to him after the game and telling him the story. And he says, "You've got to come to the office tomorrow and meet our senior partner and tell him the story. Bill Gates, senior." I said, "Well..."

• 31:33Ben Gilbert?

  A Titan.

• 31:34Speaker 02

  Incredible. The other Titan. We foreshadowed this on the Microsoft episode. There were three Titans there, but here is the Titan. And Bill was six foot seven? He's six foot seven, he's a mountain of a man and very imposing. So, nine o'clock in the morning, I put a suit on. I must have been sweating through my shirt. I was just so anxious, so nervous, and at the same time, so scared about what was going to happen. I go in there, and I must have been trembling. I was just so nervous. I tell him exactly what I just told him. And he interrupts me and says, "Howard, I'm just going to ask you two questions. Is everything you told me true?"

• 32:19Speaker 02

  I said, "Mr. Gates, yes. Have you left anything out?" "No." And he says, "Come back in an hour." And I said, "Okay, to do what?" He says, "I'll see you in an hour." And so, we walk out and walking around, I think we probably went to Columbia Center to get a coffee and come back. And go back with Scott, and Mr. Gates says, "Scott, I'm going to see Howard alone." And Scott leaves. Now I'm alone in his office. I hardly sit down, and he says, "We're going for a walk." And I said, where are we going? And he says, we're going to see the man,

• 33:02Speaker 02

  who was Sam Strom.

• 33:05Ben Gilbert?

  Hmm. One of your investors?

• 33:08Speaker 02

  One of the investors. We walk across the street to the Rainier Tower, the old Rainier Tower. I think Sam had one of the biggest offices. We walk in there. And I swear, even though it's so many years later, I have a perfect, vivid account for what took place. Sam is sitting behind his desk. And this is what happened, because it was five minutes. Bill Gates, remember, he's a huge guy, leans over to the desk with his hands on Sam's desk and says, I don't know what you are planning, but whatever it is, it's not going to happen.

• 33:51David Rosenthal?

  Wow.

• 33:52Speaker 02

  And he says, Howard Schultz is going to acquire Starbucks Coffee Company, and he's never going to hear from you again. That was it. And we walk out. That's it. That's the whole thing.

• 34:10Ben Gilbert?

  And so did you hear from Jerry that the bid had been dropped?

• 34:14Speaker 02

  We walk out. And I say to Mr.

• 34:17David Rosenthal?

  There's one little problem. You still need the money.

• 34:18Speaker 02

  Yes. I say, Mr. Gates, what, what, what just happened? And he said, you're going to buy Starbucks Coffee Company, and my son and I are going to help you.

• 34:28David Rosenthal?

  Wow.

• 34:29Ben Gilbert?

  Hmm.

• 34:31Speaker 02

  And we raised the money. And that's the story. I never spoke to Sam Strom again. I've never mentioned his name publicly. I never mentioned his name in his book. And I say it respectfully. I'm not trying to, but that's the story.

• 34:45Ben Gilbert?

  And Sam, I mean, for, for anyone who doesn't live in the Seattle area, his name is on buildings and community centers. I mean, this revered philanthropist, I actually don't know his business background. How did he become the Titan that he was?

• 34:57Speaker 02

  He was involved in real estate and also in those auto stores.

• 35:02Ben Gilbert?

  How did you get him off the Il Journal a cap table? Like, wasn't he an investor?

• 35:06Speaker 02

  Yeah, he was still an investor. He, he was in, he and his family were investors to the end, until they got out.

• 35:10Ben Gilbert?

  Oh, wow.

• 35:11Speaker 02

  Till they got out.

• 35:12Ben Gilbert?

  Wow.

• 35:12David Rosenthal?

  Looking back now. What do you think happened? Did he have any legitimate criticisms of you as running the company?

• 35:19Speaker 02

  No, he had, he had a henchman who was his money guy who figured out we, we could just take this company and what do we need Howard Schultz for? Who is this young kid? And he, and Sam had experience with retail with those auto stores.

• 35:33Ben Gilbert?

  I see. So he could install some professional management from some other venture.

• 35:37Speaker 02

  Yeah.

• 35:37David Rosenthal?

  Run the playbook.

• 35:38Speaker 02

  Yeah, it would have been over. But the thing about Bill Gates is I saw him socially 100 plus times. He never ever said anything public about what he did. He never took credit for it.

• 35:54Ben Gilbert?

  So for listeners, Howard's told this elsewhere, but you spoke at the Microsoft CEO summit. You recounted this story to, you know, the Fortune 500 CEOs and Bill Gates III, you know, Microsoft founder comes up to you afterwards and says, yeah, who was the guy?

• 36:10Speaker 02

  But Bill did not know the whole story. He didn't know any of it. He didn't know what his father had done for me. He's hearing it for the first time.

• 36:19Ben Gilbert?

  And this is, you know, 2015 or something. So Starbucks, like you would think.

• 36:23Speaker 02

  No, he didn't know.

• 36:24Ben Gilbert?

  Someone would want to tell their family, I played some significant role in this, but that's not the type of guy he was.

• 36:29Speaker 02

  Bill Gates senior never told a soul what he did for me. Again, humility. Incredible lesson about humility.

• 36:37Ben Gilbert?

  It's amazing.

• 36:38Speaker 02

  Yeah.

• 36:39Ben Gilbert?

  And so were Bill Gates senior and Bill Gates the third investors in that $3.8 million round?

• 36:45Speaker 02

  Bill senior was, but I don't know if it was part of Bill or.

• 36:48Ben Gilbert?

  But yeah, Microsoft, interesting. So I asked Sherry about this when I was preparing for the episode and her recollection was it was something like one to two weeks before the three month exclusivity for you was going to be up. And so you're basically like this event happens, but now you need to come up with the money. And you have this unbelievably short period of time to do so. And so she said that you were calling everybody you knew. She was calling her clients, because she's a designer, calling her clients, trying to just, you know, find pockets of 50K here, 100K there, anywhere you could.

• 37:22Speaker 02

  Yeah.

• 37:23Ben Gilbert?

  To make it happen.

• 37:24Speaker 02

  But I had another angel.

• 37:27Speaker 02

  Who helped me by the name of Jack Rogers, who became a lifelong friend who passed away a couple of years ago.

• 37:35Speaker 02

  He was part of an investor group and he brought them along.

• 37:38David Rosenthal?

  So the acquisition goes through.

• 37:41Speaker 02

  Yeah. August of eighty seven.

• 37:43David Rosenthal?

  Yeah.

• 37:44Speaker 02

  We bought the six Starbucks stores. We had the three Il Giornale's and there were two stores under construction. So at the end of the calendar year, we had eleven stores and a hundred employees in nineteen eighty seven.

• 37:59David Rosenthal?

  All in the Northwest.

• 38:01Speaker 02

  Yeah.

• 38:02David Rosenthal?

  Meanwhile, the original Starbucks folks, they've now gone down to California.

• 38:06Speaker 02

  They went to California.

• 38:07David Rosenthal?

  When did Pete's open coffee bars?

• 38:10Speaker 02

  Uh, many, many years later.

• 38:11David Rosenthal?

  Ah, so they, you weren't competing right away.

• 38:14Speaker 02

  No, no.

• 38:15Ben Gilbert?

  But this is one of the great observations, David. Il Giornale buys the Starbucks stores, rebrands Il Giornale Incorporated as the Starbucks Corporation.

• 38:23Speaker 02

  Yeah.

• 38:24Ben Gilbert?

  And the original Starbucks buys, you know, had owned Pete's and now needs a new name. So it rebrands the company Pete's. So Pete's was actually Starbucks. Starbucks was actually Il Giornale.

• 38:35Speaker 02

  Yes.

• 38:35Ben Gilbert?

  It's amazing. Some stats just for listeners to understand the gravity of this situation. For the initial one point six million that you raised for Il Giornale, you talked to two hundred and forty two investors, two hundred and seventeen of which said no. So anybody who's griping about their fundraising journey, you know, those are rookie numbers.

• 38:55Speaker 02

  But you asked me a question earlier about what did the years at Xerox teach me? So the rejection I was going through, the Italians turned me down. People in the US turned me down. Nobody would believe in the idea. It was like I was cold calling again at Xerox.

• 39:12Ben Gilbert?

  The other thing that is worth pointing out is the Starbucks company with the six stores, when they bought Pete's with that six to one debt to equity ratio, basically backed themselves into a corner where now they had these big debt service payments to make. There was really no. Risk they could take or innovation that they could do because the whole business needed to spit out a certain amount of cash every month so they could pay down the debt. And so when you're in that situation, Starbucks, in the 40 years ahead, from this point in the story, has tried all sorts of crazy things to become the business that it is today. And when you first created this combined company, you were pretty religious about no debt.

• 39:57Speaker 02

  No debt. I didn't want any debt again because of my childhood.

• 40:01Ben Gilbert?

  I was going to ask you, was that informed by the, what you had seen with the Starbucks situation or your childhood?

• 40:07Speaker 02

  No, it was totally my childhood. My parents were always in debt. Bill collectors were always calling. And no, we never had any debt the entire time. Never.

• 40:18David Rosenthal?

  This is probably a good point in time to talk about the business model a little.

• 40:23Speaker 02

  Okay.

• 40:23David Rosenthal?

  You've alluded to kind of a stigma, at least amongst potential investors and the original Starbucks founders of like the restaurant business. What did the economics of the business of the coffee bar business look like?

• 40:34Speaker 02

  Yeah.

• 40:34David Rosenthal?

  When you bought the Starbucks stores?

• 40:38Speaker 02

  So what did we buy? We had the stores, we had the brand name, and we had a roasting facility on Airport Way in Seattle. The ability to source and roast coffee and put that through the supply chain of a beverage gave us probably at the time an 80% gross margin.

• 41:00David Rosenthal?

  Wow. Yeah, that is not the, the quote unquote restaurant business that people are imagining.

• 41:05Speaker 02

  And I could begin to see even early on, the accretive nature of frequency, where I can see what was going on here is people were not coming for coffee in the morning anymore. They were starting. The morning rush was getting bigger, the need for more labor, and I could sense that the business that Starbucks was in was going to be significantly in the back and the beverage and the romance of the theater. And the third place was the hero. It didn't take us long to realize we had the beginning of lightning in the bottle.

• 41:42David Rosenthal?

  Even the best, most successful restaurant you could possibly imagine, how many times are their most loyal customers going to come there in a week?

• 41:50Speaker 02

  Yeah. Well, there weren't, I think, there was a time. In the Northwest, when we were really at our peak, where the average customer was coming 18 times a month. I should rephrase it, maybe the most loyal was coming 18 times a month.

• 42:04Ben Gilbert?

  There's some magic to this idea that it's not a terribly expensive item. I think I saw some research that said that it's, you know, sub 1% of someone's household income and often far less than that. But it is repeat and it is high gross margin. And so when you say lightning in a bottle, there's a cultural lightning in a bottle, but there's also this like ridiculous business model where the way it shows up is your stores, basically from this point forward for all of Starbucks's life, you build a new store and the profits from that store would totally cover the costs within two years and often a year and a half.

• 42:38Speaker 02

  But I'll tell you the economic model that we, we applied to every single store we were opening. You know, by the way, I chose the first 500 locations myself. So I was in it in so many ways, but the, the economic model. And whilst, when we went public in 92, now I'm just, when they, when they heard the model, I said, well, we'd never seen a model like that. And the model basically was a sales to investment ratio of two to one. And a operating profit of 20%.

• 43:07Ben Gilbert?

  So what does that mean, sales to investment ratio?

• 43:09Speaker 02

  So if the sales were a million dollars, the investment was 500,000. Now, just the sales to, had to be a two to one.

• 43:16David Rosenthal?

  Wow. And year one of operations?

• 43:18Speaker 02

  Yeah, yes. And the, and the, the operating profit was, was north of 20%.

• 43:23David Rosenthal?

  Wow.

• 43:23Speaker 02

  So cash on cash return was just...

• 43:25David Rosenthal?

  So yeah, you get that two years of less payback. The retail world had never seen a model like this before. There was no physical storefront that could, had this business model before this.

• 43:34Speaker 02

  Early on, it became clear to us that customers were also starting to customize the beverage on their own. So we were just, the brewster was behind the counter and somebody would say, can I, can you put something else in there? Yeah, what do you want? And then, so that just started, you know, the average ticket started growing as a result of the customers personalizing and customizing their beverage.

• 43:58Ben Gilbert?

  And to be clear, like the era of Starbucks we are in right now, you produce drip coffee and you produce espresso. And you can put that espresso in frothed milk. And those, that's basically your options.

• 44:09Speaker 02

  Yeah.

• 44:10Ben Gilbert?

  Like none of this, you know?

• 44:11Speaker 02

  Yeah, exactly. But can I tell you a mistake I made?

• 44:13Ben Gilbert?

  Please.

• 44:14David Rosenthal?

  Please.

• 44:15Speaker 02

  When Il Drenali was getting ready to open. The standard cup in the world was that terrible styrofoam cup that is used in diners in New York City. Remember that cup?

• 44:27Ben Gilbert?

  Yeah.

• 44:28Speaker 02

  I put boiling water into that cup. Five minutes later, the cup is starting to turn like a golden color because of the chemicals.

• 44:37Ben Gilbert?

  That can't be good for your insides.

• 44:39Speaker 02

  Or the taste of the coffee. And so we had to find, we had to change the cup. This is such a smart move in retrospect, but we were just trying to figure out. Now, no one in America that is in the paper business had any kind of cup or lid that was compatible with what I was trying to do. In fact, they didn't understand it. Why not just use the cup that exists? Because it doesn't taste good and it doesn't feel right.

• 45:09Ben Gilbert?

  Right. Why go to the trouble of, you know, this perfected roast of these beautifully sourced arapica beans from all these farmers if you're going to pour it into styrofoam?

• 45:17Speaker 02

  Yeah.

• 45:18Ben Gilbert?

  Did people think you were a hippie? Like when you were telling these, like, are you on LSD or something?

• 45:22Speaker 02

  They just dismissed me. So we went to Chicago to the International Paper Company and they had a cup, but the cup didn't have a lid, a compatible lid. And so we found, they found a lid, that beautiful SIP lid, which is now ubiquitous in the world. Howard Schultz should have said to them, I want an exclusive on that lid. Because that lid became the standard for the world. If I would have just understood that. The other thing I didn't do is we introduced cafe latte to America. We didn't trademark it. You know, we trademarked frappuccino later on, but we didn't trademark cafe latte. I wasn't thinking.

• 46:07Ben Gilbert?

  You got enough right. You don't need to get them all right.

• 46:09Speaker 02

  No, I just, I missed it.

• 46:11David Rosenthal?

  When, uh, the sizing, grande, venti?

• 46:15Speaker 02

  Oh, that was, uh,

• 46:16Ben Gilbert?

  The hidden treinta.

• 46:17David Rosenthal?

  Yeah.

• 46:18Ben Gilbert?

  Right?

• 46:18David Rosenthal?

  When did that start?

• 46:20Speaker 02

  There was a brilliant, brilliant guy who was the architect of the name Starbucks, named Terry Heckler in Seattle. And he's a fantastic design guy.

• 46:32Speaker 02

  And we're just sitting one day and I just talking about the importance of language. We gotta get the language right. And we got the cup, gotta get the language. And we just started talking about changing it from the pedestrian words of small, medium, large, to what it became, which was short, tall, and grande. People made fun of it, but they loved it.

• 46:55Ben Gilbert?

  Was venti not an original?

• 46:57Speaker 02

  Venti, we didn't have that size when we started. That was later on.

• 46:59Ben Gilbert?

  Wow.

• 47:00Speaker 02

  Who would have thought somebody wanted to?

• 47:02Ben Gilbert?

  This is America.

• 47:03Speaker 02

  Yeah.

• 47:05David Rosenthal?

  So my one more question on this. Writing the customer's name on the cup.

• 47:10Speaker 02

  That didn't come from me. As the stores got busier and busier, the baristas were having a hard time with whose cup is it? What are we gonna do? And someone at Starbucks, I don't know who it was, started writing names on the cup. Writing names. And it just became standard. So much of Starbucks' success came from customers asking for things we weren't doing. And Starbucks employees who became partners in 91, understanding the business better than me.

• 47:43David Rosenthal?

  And this is all like, you know, to my mind, just starting to create this incredible flywheel, right? Of you've got this 80% gross margin business, where the key lever is repeat loyal customer visits. You've got customization that is making customers more loyal and increasing your margin at the same time, because you can charge more for it. You've got the interpersonal relationship with the baristas, sure. But also, even as you scale, I mean, the name on the cup, that's something that scales even as thousands and thousands of people come into the store.

• 48:17Speaker 02

  The intimacy with the customer and the barista became a very powerful component of the equity of the experience. And I've always thought, in so many ways, Starbucks became the first experiential brand at scale. We didn't spend any money on marketing, zero. There was no money for marketing. And the cup, the iconic cup, became a badge of honor. Because people were doing something that was new and novel and walking in the street with it and people, you know, what is that? It was a lot of that kind of stuff.

• 48:53David Rosenthal?

  It's your free billboard.

• 48:55Speaker 02

  Yeah.

• 48:55David Rosenthal?

  That people are proud of.

• 48:56Speaker 02

  Perfect.

• 48:56David Rosenthal?

  Wow.

• 48:57Ben Gilbert?

  All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 49:16David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote "shadow AI" running with no security review at all.

• 49:37Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes and cuts the time that you'd spend on vendor assessments in half.

• 49:59David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 50:17Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off. And just tell them that Ben and David sent you.

• 50:45David Rosenthal?

  So in this era, I mean, you must just be getting more and more excited every day.

• 50:51Speaker 02

  Oh, I was out of my mind.

• 50:53Ben Gilbert?

  So David Howard sent me, there's a 1988, I can't believe this was filmed, but a 1988 shareholder and employee meeting where it's great, the whole thing's like an hour and a half, it's all there and you were using all the same language that you use today back in 1988. We focus on our people, those people delight the customer, the customer, you know, delights the shareholder or satisfies the shareholder. And the conviction that you have, it's like watching a preacher. You're up there, you've got, I think 11 stores or something and you're like, you have no idea what we have here. We are on top of something that is going

• 51:33Ben Gilbert?

  to change and you don't say the world, America. And this thing can become America's coffee house. And it was interesting because I think the whole room was already scared of your ambition of, you know, going nationwide with this thing that there did not exist another example of a national coffee house chain. Everything was just these little cities, these small markets. And there's this great quote that you have at the end of the meeting that says, "The company since 1971 has been growing at a very, very slow pace. As a result of that, you combine Il Giornale and Starbucks together, we're going to take your six stores that you've built in 17 years and we're going to go to 26 in one year and we're going to

• 52:15Ben Gilbert?

  go to over 100 in five years." And that must've just sounded bonkers, but that is literally what happened.

• 52:21Speaker 02

  That's what happened.

• 52:22Ben Gilbert?

  Like the pace of growth, approximately you just doubled stores year over year over year. Was there some moment in 88, 89, 90, where you're just like looking around realizing, "We must expand as fast as we possibly can because this concept is the concept the world needs now. And if we don't pull out all the stops, someone else is going to do it."

• 52:47Speaker 02

  There were regional competitors who were making noise about doing what we were aspiring to do. And I was very mindful because one of them was franchising. That was Gloria Jeans out of Chicago. And at one point, I think they had more stores than we did because of the franchising opportunity. And that's one of the reasons why I went to Chicago as well in eighty seven, eighty eight.

• 53:11Ben Gilbert?

  Because Chicago was the first market outside of Seattle and Vancouver, right?

• 53:15Speaker 02

  Yes.

• 53:15Ben Gilbert?

  Even before LA.

• 53:16Speaker 02

  Yeah, and it didn't work right away.

• 53:17Ben Gilbert?

  Huh.

• 53:18Speaker 02

  Howard Behar should be credited with so much of the cultural texture and the tapestry of the humanity of the company, said, I will go to Chicago and fix it. He went to Chicago and stayed in Chicago through the winter and recalibrated the mistakes we were making. And of course, he and Orin were so instrumental into the loneliness that exists as an entrepreneur and their ability to help me build the company that you know today.

• 53:56Ben Gilbert?

  Yeah, so I have in my script here, this is literally labeled the H two O era.

• 54:00Speaker 02

  Yeah.

• 54:01Ben Gilbert?

  And for anyone who was a partner at Starbucks sort of knows what I'm talking about and anybody else outside has no idea, but there's two Howards, there's Howard Schultz and Howard Behar. And Howard Behar joined in nineteen eighty nine, Orin Smith joined in nineteen ninety. And the way that it looks to me from the outside, and you can tell me if this is right, you were sort of the vision and ambition that would almost like take any ambition that anybody else had and force them to think bigger and faster.

• 54:24Speaker 02

  Okay.

• 54:24Ben Gilbert?

  And then Howard Behar was in many ways the soul, like he brought the idea of servant leadership. He brought the idea of nothing else matters if we aren't people first. And obviously, that became a huge tenet of Starbucks as we knew it through the nineties and two thousands. But that seems like it really arrived with him. And then Orin is like a numbers god.

• 54:45Speaker 02

  No, he was the adult in the room.

• 54:47Ben Gilbert?

  Hmm.

• 54:48Speaker 02

  More than the numbers. He had the style, he was quiet, he was a gentleman, he was the only MBA in the company. But he was the wise man who behind the doors could say to me and Howard, you're both full of shit. We're not doing that. And we listened. More or less.

• 55:09Ben Gilbert?

  And is it true that the three of you had dinner every Monday night for a decade?

• 55:14Speaker 02

  More or less, that is true. Sometimes more than once, if we had a crisis or two, which generally we did, or we had a disagreement. There's a lot of creative conflict, especially between Howard and I. Because he had to operate what we were trying to do. And at times he thought we were growing too fast or ahead of the resources.

• 55:36Ben Gilbert?

  Because he was basically training all these operators, the sort of management fleet of the company.

• 55:42Speaker 02

  Yeah, he was building the operating system for us to be able to open the store, design the stores, which more or less I had done, build them, operate them, train them, and create the system to handle the flow of customers. So he, his job was much harder than mine.

• 55:59David Rosenthal?

  Speaking of system, what did your technology look like at this point?

• 56:02Speaker 02

  Oh.

• 56:03Ben Gilbert?

  Don't embarrass him.

• 56:04Speaker 02

  No, we had, there was no, there was no technology. No.

• 56:08David Rosenthal?

  Were you running like a Oracle system?

• 56:11Speaker 02

  Not at that time, no.

• 56:12David Rosenthal?

  Wow.

• 56:12Speaker 02

  No.

• 56:13David Rosenthal?

  We're talking paper?

• 56:14Speaker 02

  Yeah, it was mostly manual.

• 56:15David Rosenthal?

  Wow.

• 56:16Speaker 02

  Yeah.

• 56:16Ben Gilbert?

  I mean, the, eventually when they did get point of sale terminals, they were DOS based all the way through like 2008, right?

• 56:23Speaker 02

  Yes, yes.

• 56:24Ben Gilbert?

  Like the iPhone was out and you guys had DOS based point of sale systems.

• 56:28Speaker 02

  Sounds right.

• 56:29Ben Gilbert?

  But obviously technology.

• 56:30Speaker 02

  Technology was not the secret sauce.

• 56:32David Rosenthal?

  I'm foreshadowing here of the future of the company.

• 56:35Speaker 02

  Yeah.

• 56:35David Rosenthal?

  Yeah.

• 56:35Ben Gilbert?

  So let's take it forward from this 88, 89, 90, the first market after Chicago, after you sort of righted that ship, that you decided to enter on the West Coast.

• 56:44Speaker 02

  LA.

• 56:45Ben Gilbert?

  Is LA.

• 56:45Speaker 02

  That's the big fight between Howard and I.

• 56:48Ben Gilbert?

  I don't think I realized it was a big fight.

• 56:49Speaker 02

  I just felt in my bones, we had to go to LA. And, and he said, we're not ready for LA. We're going to San Diego. I said, San Diego?

• 56:59Ben Gilbert?

  AAA.

• 57:00Speaker 02

  Who's in San Diego? No, we're not going to San Diego, we're in LA. And I've got the location.

• 57:04Ben Gilbert?

  You wanted to play in the majors.

• 57:05Speaker 02

  Yeah. So we had a meeting about it and it erupted, erupted into a.

• 57:13Speaker 02

  Bad, a bad scene. And one thing led to another. We, we did go to LA.

• 57:20Ben Gilbert?

  I'm shocked.

• 57:22Speaker 02

  We did go to LA and it was fine.

• 57:25Ben Gilbert?

  And your conviction of we have to go to LA, was that for?

• 57:28Speaker 02

  I, the equity of the brand, I could see, I could envision the warm weather and everyone walking around with our cups and the media and the celebrities and just the iconic way. And there was nothing in the market, nothing at all, that even appeared to be in the business that we were in. And anyone who was doing it was not doing it well. We had to go. And even though we maybe were not ready, we just had to do it and we did. And I think Howard would agree today that that ended up being a, the right decision. And LA, the halo on Starbucks from Seattle to Vancouver and Chicago was nothing.

• 58:09Speaker 02

  When we went to LA, it just exploded because celebrities embraced Starbucks.

• 58:15Ben Gilbert?

  Was there an intentional strategy to create sort of a luxury brand out of Starbucks? That like the cool people were carrying the Starbucks cup? It might be a little bit expensive, but you can afford it?

• 58:27Speaker 02

  No, there was no, I can never remember a discussion about segmentation of the brand. Because we, we wanted Starbucks to be accessible to all. You'd have a CEO of a company and the person behind them was a blue collar truck driver because everyone could afford the affordable luxury of Starbucks at the time.

• 58:50Ben Gilbert?

  When you say affordable luxury, what about it was luxury?

• 58:54Speaker 02

  The quality of the coffee, the experience and what it felt like to walk around with that cup at the time. It was a badge.

• 59:04Speaker 02

  It was like you were in the know.

• 59:06Ben Gilbert?

  Yeah.

• 59:07Speaker 02

  It wasn't a badge of luxury. It was just like something new.

• 59:12Ben Gilbert?

  So it became a trope for decades now that, you know, it's, oh, it's a $6 latte or an $8 latte. Where does that come from? In your mind, is Starbucks premium priced? Is there actually a Starbucks gets to charge a little bit more because the brand has more cachet? Or is that just completely a farce or myth?

• 59:34Speaker 02

  I think the pricing of Starbucks was directly linked to the economic model that I alluded to earlier. And the rising costs of labor, rent, and the fiduciary responsibility that we all felt to achieving the promise we had to our shareholders. And now we're talking about as a public company.

• 1:00:01Speaker 02

  There certainly was a fair amount of discussion all the time about the sensitivity of the price points. And I think in later years, maybe in the last couple of years, given the consumer inflationary time, I think it's become a bit of a, of a problem. And certainly, I've always said, as Starbucks was growing, that the ubiquity of Starbucks was an enemy to the company. And the challenge was we have to figure out a way to ensure the fact that we are getting smaller as we're getting bigger. And specifically, how do we maintain intimacy and the currency of trust with our customers and our people?

• 1:00:47Speaker 02

  That unto itself is kind of the capsule of making sure that the growth doesn't become so intoxicating and so seductive that we lose sight of the really secret of the company, which was the internal culture and values, which built the brand and built the relationship with the customer.

• 1:01:07Ben Gilbert?

  Yeah. Can you tell us about the people? This is such a huge pillar to our minds of building Starbucks.

• 1:01:14Speaker 02

  Again, we started this conversation talking about childhood. I really want to build a different kind of company. And, and how do I do that in a way that provides respect and dignity?

• 1:01:28Speaker 02

  Because I was so imprinted with how my father felt disrespected, devalued, and kind of vilified as a uneducated, blue collar veteran, working in a series of jobs that he just never made it, and living through the dysfunction of a poor family, always under pressure with money. And so, I wanted to kind of crack the code on how do we create benefits that would, in a way, take the company in a direction no one's ever been in before.

• 1:02:09Speaker 02

  And so, early on, we started talking about exceeding the expectations of our people so they can exceed the expectations of the customer. And the first time we actually were able to manifest that was a year before the IPO. And that was an incredible struggle because I had on my board two venture capitalists. And I was proposing something that had never been done before. And that was, I wanted to give equity in the form of stock options to every single employee in the company. And they just said, "What? What are you talking about? We're not doing that." And so, the fight became, ultimately, we gave 14% of everyone's base pay in the form of stock options at the end of the year, based on the strike price.

• 1:02:50Speaker 02

  And I had to do it the year before the IPO, had to, so everyone wouldn't miss it. And I think the turning point of the culture of the company was the day we announced that and we became partners. And to the credit of Craig Foley, who was the VC, and Jamie Shannon, they believed that performance would be enhanced, attrition would be lowered, and that the brand would just elevate as a result of that. And it was true, completely true. That changed Starbucks for decades. And along with some other events, based on doing the right thing.

• 1:03:30Ben Gilbert?

  I mean, the healthcare for part-time workers.

• 1:03:33Speaker 02

  So then, you know, healthcare, I think, 25 years before the Affordable Care Act, what we did was comprehensive health insurance, and that also, I grew up in a family with no health insurance.

• 1:03:44Speaker 02

  And I saw what happened. So all of that is that origin story of mine of and the tragedy is my father passed away and never saw what we were able to do.

• 1:03:56Ben Gilbert?

  Do you want the stats on that initial employee stock grant?

• 1:04:00Speaker 02

  I'd love to hear it.

• 1:04:01Ben Gilbert?

  So the program was called Beanstalk, listeners that

• 1:04:05Speaker 02

  Another great name.

• 1:04:06Ben Gilbert?

  Howard was alluding to, amazing name. So in 1988, the health benefits roll out even to part-time employees, including gay couples in domestic partnerships, I believe the first of its kind. That was a 33-store company at that point. A few years later, you had grown to 55 stores. You did the LA expansion. And then in 1991, which is the year before the IPO, Beanstalk happens. Equity in the form of stock options goes out to everyone working 20-plus hours a week. There were 1,300 employees at the time. And I believe it was the first time in history that part-time employees were offered a program like this. So those initial grants, the strike price was $6 per share. Today, as we speak, the share price

• 1:04:51Ben Gilbert?

  is $77. But there have been six splits since then, which comes out to a 64x. So that initial grant has 800xed, since even the part-time employees and baristas were offered the opportunity to buy Starbucks stock.

• 1:05:06Speaker 02

  Yeah. A lawyer, I think Scott Greenberg at the time, came to me and said, we can't do this unless we get approval from the SEC because we were over 500 shareholders.

• 1:05:18David Rosenthal?

  So, you know, we've studied lots of amazing companies on this show who have lots and lots of different business models. But one thing that just kept striking us as we were preparing for Starbucks are the similarities to your neighbor here in the Northwest in Costco.

• 1:05:34Speaker 02

  Costco, right.

• 1:05:35David Rosenthal?

  And how you treat your people specifically.

• 1:05:39Speaker 02

  That's not by accident.

• 1:05:40Ben Gilbert?

  Both from a it's the right thing to do perspective and the amazing business model benefit of the retaining employees. It's so expensive to train a new employee. It's not expensive to keep an existing employee. And so you can just pay people more if you keep them for longer.

• 1:05:55Speaker 02

  Yeah.

• 1:05:55Ben Gilbert?

  You know, you just basically have extra money lying around is what Costco discovered. There's so much about Starbucks, to David's point, that's similar to Costco. Did you ever speak with Jeff Brodmann or Jim Senegal or any of those guys about this concept?

• 1:06:09Speaker 02

  Do you know the answer to that?

• 1:06:10Ben Gilbert?

  I actually don't.

• 1:06:11Speaker 04

  No, we don't know.

• 1:06:12Ben Gilbert?

  I assume the answer to this, but I don't know it.

• 1:06:15Speaker 02

  First, Jeff Brodmann invested in Starbucks in the round to buy Starbucks.

• 1:06:20Speaker 04

  No way.

• 1:06:21Speaker 02

  Yeah, in that 87 round. That's when I met Jeff for the first time. Jeff became a board member of the early imprinting of Starbucks. And clearly a mentor, mentor of mine. And then he introduced me to Jim Senegal. And so there were many moments of me sitting with Jeff and Jim, including the huge decision to put Starbucks coffee in Costco, which there was a revolt inside the halls of Starbucks saying, no effing way.

• 1:06:59Ben Gilbert?

  Wow.

• 1:07:00Speaker 02

  And we did it. And Jeff and Jim took me to a parking lot in Kirkland when I said, I don't know if we can do this. I don't know if I can sell it inside. I don't know. Okay, meet us on a Sunday morning, whatever it was. Look at the cars. These are your customers. In fact, putting Starbucks in Costco, we were able to measure directly the increase in volume in the stores on the east side as a result of the proximity to the Costco store.

• 1:07:35Ben Gilbert?

  You sold beans.

• 1:07:36Speaker 02

  We sold beans.

• 1:07:36Ben Gilbert?

  In Costco.

• 1:07:37Speaker 02

  Yes.

• 1:07:37Ben Gilbert?

  And that brand awareness of I buy Starbucks beans at home meant that that group of people went to the stores.

• 1:07:44Speaker 02

  Coffee bar business. Because we introduced thousands of beverage customers to Costco through the beans.

• 1:07:52Ben Gilbert?

  Wow.

• 1:07:52Speaker 02

  So Jeff and Jim were instrumental in so many things and were so kind to me as a young kid.

• 1:08:01Speaker 02

  Then we went nationwide with Costco.

• 1:08:03Ben Gilbert?

  So this is a thing that I think many people don't realize now that Starbucks is ubiquitous. We sort of forget about this time when it wasn't and where people had to find some way to experience Starbucks. You know, you only get a few stores in each of these cities. You're only in a few cities, but there are ways to scale brand awareness. And so you can do things like become the official coffee of United Airlines or, you know, be in Costco's all over the U.S. You did this a number of times and I feel like the rest of the world did not catch on to what you were doing, was just finding little billboards everywhere where you could put the Starbucks logo and, and sort of create that ubiquity.

• 1:08:47Speaker 02

  Yeah, if you thought the Costco revolt was high, you can imagine when I said, we have an opportunity for United Airlines. People thought that was absolutely blasphemy. Don't do that. And again, the exposure and the opportunity to surprise and delight customers in places that they'd never had anything close to good coffee. All these things, when you consider, we didn't spend a dollar, a dollar of marketing dollars, ever. And so the, the reputation of the company was built basically word of mouth, both inside our stores and exactly right in places that we could surprise the customer.

• 1:09:28Speaker 02

  And then we also started putting Starbucks coffee in grocery stores, which was the other thing. Cause remember we were building a beverage business.

• 1:09:37Ben Gilbert?

  Right.

• 1:09:37Speaker 02

  And we were then going back to our core business in new channels of distribution.

• 1:09:42Ben Gilbert?

  It's like the ultimate goal is to capture those margin dollars from selling cups of coffees in the stores that you operate. But there's all these other things that you can do that actually might spit off some profit dollars. But at the very least, it's a break even way to do customer acquisition and brand building in the rest of the world.

• 1:09:57Speaker 02

  I don't know what our cost of customer acquisition was back then, but it was low.

• 1:10:02Ben Gilbert?

  Well, you also did.

• 1:10:03David Rosenthal?

  You weren't spending any money on marketing, so.

• 1:10:04Ben Gilbert?

  But United Airlines was paying you for coffee, I assume. I don't know exactly how that went down, but yeah.

• 1:10:09Speaker 02

  They were.

• 1:10:10Ben Gilbert?

  They're, um, I have to assume that Barnes and Noble.

• 1:10:12Speaker 02

  Barnes and Noble was a.

• 1:10:13Ben Gilbert?

  Basically the same thing.

• 1:10:14Speaker 02

  Barnes and Noble was a different deal. I met Len Riggio, the founder of Barnes and Noble. Very interesting guy, very smart guy, great merchant, and we just started talking. He was from Brooklyn. I was from Brooklyn. We had a natural kind of relationship. And I said, what do you think about us opening Starbucks inside Barnes and Noble? Given you are the ultimate third place is what we are. And it just again became a natural extension of our stores.

• 1:10:42David Rosenthal?

  We have a fun piece of trivia that you may know, uh, related to Costco. Do you know where Jeff Bezos and Jim Senegal met for the first time?

• 1:10:53Speaker 02

  Sounds like in a Costco.

• 1:10:54David Rosenthal?

  Not in a Costco, in the Starbucks, in the Barnes and Noble in Bellevue.

• 1:10:59Speaker 02

  Did not know that.

• 1:11:00David Rosenthal?

  And that, you know, led to so many things, Amazon Prime among them.

• 1:11:04Ben Gilbert?

  Yeah.

• 1:11:05Speaker 02

  Did not know that. And I still am friendly with Jim Senegal today.

• 1:11:10Ben Gilbert?

  I mean, your companies rhyme in so many ways. It's, it's, uh, that's not surprising at all. I want to talk a little bit, um, before we get to the IPO here about what the strategy was when you expanded market by market. Did you try to sprinkle a few stores in and see? Did you try to move into a market with force and be the dominant coffee house chain in that city? And in particular, it could be worth talking about Boston.

• 1:11:36Speaker 02

  Well, Boston's an anomaly because of the acquisition, but BHR was so strident in not expanding to multiple markets at once. And he was a hundred percent right. And so we didn't, we went to Chicago. Went to LA and we stayed there for quite a while, went to Portland. We weren't ready for New York City in terms of the issues there, but we were very diligent.

• 1:12:02Ben Gilbert?

  You went to DC first.

• 1:12:03Speaker 02

  Went to DC. We were not expanding to multiple markets until we had enough evidence in the existing market that we had success and we weren't going to compound the growth in another market with problems that we're having in the existing one. And I think that's all Beher, because he was managing all the operations. Boston was very different. We had a very strong, high-quality competitor called The Coffee Connection in Boston with a owner-operator in George Howell, who was, not unlike Alfred Pete, kind of a gospel of coffee culture on the East Coast.

• 1:12:45Speaker 02

  And we knew Boston was going to be tough for Starbucks to enter. We also had Dunkin' Donuts there.

• 1:12:51Ben Gilbert?

  Like, a lot of the good real estate was taken by The Coffee Connection, right?

• 1:12:54Speaker 02

  Yeah. And so George and I never saw eye to eye, but it was clear that if we came to Boston in a significant way, we were going to impact his business. And I think to his credit, he was willing to sell. So Coffee Connection was the first acquisition. And we had to tread very lightly after the acquisition because of the loyalty and be careful with the name and solicit George's help and advice and also we needed him to kind of validate for us what we were trying to do. And ultimately, it ended up being a very good strategy.

• 1:13:33Ben Gilbert?

  Well, it seemed like, I think the numbers are, it was a little bit after IPO in 94, $23 million, they had 23 locations, and they were doing $16 million a year in revenue. So if you just look at like the purchase...

• 1:13:46Speaker 02

  I think it was one-time sales, I think.

• 1:13:49Ben Gilbert?

  Maybe a little over one-time sales and the original Starbucks ironically enough was exactly a one-time sales, right? That's what you bought it from the founders for. If they had the lock on all the best real estate and they had burned all the capital figuring out, you know, what stores we should be in, what stores we shouldn't be in. And then you just get to like move into that market for one-time sales, you know, 1.5, whatever it is, with all that already figured out. That's, that's pretty amazing.

• 1:14:13Speaker 02

  It probably seemed high at the time though.

• 1:14:15Ben Gilbert?

  I'm sure it did. Well, isn't that the thing about valuations and they always, it always seemed like in the good old days, you know, everything was undervalued and.

• 1:14:21Speaker 02

  Yeah.

• 1:14:23Ben Gilbert?

  Okay, let's talk about the IPO. So it seems like you knew the moment that you bought Starbucks from the founders, this is going to be a public company.

• 1:14:34Speaker 02

  I thought so.

• 1:14:35Ben Gilbert?

  There was no.

• 1:14:36Speaker 02

  I think it, there was so much about being a public company that meant something to me personally, that it validated the company, it validated me, my own shame and security as a kid. So that was a, I was, I was a driving force all along. Certainly the, the year before with Beanstalk is an indication what I was planning. If Beanstalk was turned down, I would, I would have waited. I just had to, that had to be done. I think we only had a couple of quarters of profitability and I think we had about 130 stores.

• 1:15:12Ben Gilbert?

  And what was the revenue at the time?

• 1:15:13Speaker 02

  Oh, I don't, I remember exactly. I know what the market cap was the day we went public.

• 1:15:20Ben Gilbert?

  I think you, you ended up doing 93 million that year, but the, the year before, you know, it was 50 million or something like that. Like companies went public when they were smaller back then, but.

• 1:15:31Speaker 02

  Well.

• 1:15:31Ben Gilbert?

  You were a small cap IPO.

• 1:15:33Speaker 02

  Yeah, we were. And, you know, we got turned down by Goldman Sachs. You know that?

• 1:15:36Ben Gilbert?

  I did not know that.

• 1:15:38Speaker 02

  I couldn't believe it. I mean, I just, I wanted Goldman Sachs as, as the, I just, you know, they were the. The patina on the prospectus to have Goldman Sachs.

• 1:15:47Ben Gilbert?

  It would be a very Starbucks thing for Goldman Sachs to be the lead left.

• 1:15:51Speaker 02

  Well, Blankfein, I had a good friend who was a senior partner there who's since passed away. I thought I had it locked. I mean, there was just so many things about it, New York, everything. And they said, no, you're too small.

• 1:16:07Ben Gilbert?

  Well, the thing that Dan Levitan told us years ago, when we did an episode on the Starbucks IPO, was that you were really only considering smaller banks because it was going to be a smaller IPO.

• 1:16:17Speaker 02

  Well, I was considering because Goldman Sachs turned me down.

• 1:16:19Ben Gilbert?

  They told you.

• 1:16:19Speaker 02

  I had no choice. I had no choice. And Bratman at the time was not a big fan of Wertheim Schroder, which was Dan Levitan's thing. And so Alex Froun became the lead. But I also, you know, I had my own ego attached to this. I had so much fun on the, you know, on the road show. I was just in my element, you know?

• 1:16:38Ben Gilbert?

  I was looking up, I was trying to figure out, you know, your public comps at the time. I think there were zero publicly traded coffee companies, not bean companies, not retailers, not coffee house chains. I mean, truly unheard of. So when you're going on this road show, I think people, of course, are mystified. There's like, there's literally no public companies like yours. You have a huge investor education problem, right?

• 1:16:58Speaker 02

  Yeah, I think we had to take them through everything. We had the product there, you know, we served coffee, I, you know, gave them the whole show. We had a short video that was probably in black and white. The comp always was a restaurant and I was always fighting. We're not a restaurant. We're a hybrid retailer. I never referred to us as a cafe. It was always a store. We are a store. We are merchants.

• 1:17:22Ben Gilbert?

  Fascinating. I mean, I go there and eat many, many meals sitting in your store.

• 1:17:28Speaker 02

  Yeah.

• 1:17:28Ben Gilbert?

  But, but as we've been talking about, I mean, the economics, you were a store.

• 1:17:31Speaker 02

  We were a store. We were a retail store.

• 1:17:33Ben Gilbert?

  So Howard, I'm going to take us through the IPO. You know, you're the first publicly traded coffee company. You do end up doing 93 million in revenue that year. Do you remember the exact price?

• 1:17:44Speaker 02

  Yes, we were, we went out at $17 and the price was 21. The market cap, I think, was $250 million.

• 1:17:52Ben Gilbert?

  Can you imagine today, a $250 million market cap company going public? And people considering that a success? I mean, this is a great.

• 1:17:59Speaker 02

  At the time.

• 1:17:59Ben Gilbert?

  For your employees, how crazy is that? What, 12, 18 months before? They, I guess 12 months before, they had six bucks a share.

• 1:18:07Speaker 02

  They tripled their money. Yeah.

• 1:18:09Ben Gilbert?

  Fantastic for, and that was when you started calling them partners, right? When they became.

• 1:18:13Speaker 02

  Ninety-one. As soon as Beanstalk was instituted, it was, everyone was a partner.

• 1:18:17Ben Gilbert?

  And is that when you did the lowercase? When titles all became lowercase also?

• 1:18:20Speaker 02

  Everyone was lowercase from the beginning.

• 1:18:21Ben Gilbert?

  Oh.

• 1:18:23Speaker 02

  Out of respect. Everyone's lowercase.

• 1:18:24Ben Gilbert?

  Listeners, when you, when you look up a Starbucks employee on LinkedIn, it always looks like, is that a typo? And then you realize there's a pattern. All employees always put lowercase titles. So another interesting thing about the, I was reading the S1 last night. The management team, inclusive of you, owned 18%, but only 9% to 10% of that was you personally. So the rest of the management team owned just as much as you did as the founder.

• 1:18:54Speaker 02

  Yeah.

• 1:18:55Ben Gilbert?

  That does feel unusually high. Do you think that that played a role in sort of getting

• 1:19:04Ben Gilbert?

  people's buy-in and getting them to bleed Starbucks as much as you did?

• 1:19:07Speaker 02

  Not intentionally, no.

• 1:19:08Ben Gilbert?

  Okay, not a strategy?

• 1:19:09Speaker 02

  No, that was not a strategy.

• 1:19:11Ben Gilbert?

  Interesting. So then from there, you opened in Washington DC on the East Coast. I think that the reason you picked DC was because your mail order business was strong there. So you sort of had proprietary data to know that that was going to be a good coffee city.

• 1:19:25Speaker 02

  I don't know how you found that out, but that's accurate.

• 1:19:27Ben Gilbert?

  In 1995, you crossed 500 stores. You had just bought the Coffee Connection, as we talked about, in Boston. And they had one asset that was perhaps much more valuable than any of the real estate or any of the sales that you would generate from there. They owned the trademark on the word Frappuccino.

• 1:19:46Speaker 02

  And I'm so smart that I looked at that Frappuccino with disdain.

• 1:19:52Ben Gilbert?

  Really?

• 1:19:53Speaker 02

  I didn't like the name. I didn't like the beverage. I didn't think it was appropriate for Starbucks. And because I just, you know, I just saw Starbucks as such a purity with regard to coffee. And I was wrong, dead wrong, obviously.

• 1:20:08David Rosenthal?

  Putting myself in your shoes back then, now Starbucks and Frappuccino are like, uh, it's like a synonym. It's like you can't disentangle them. But yeah, it's very different than

• 1:20:19Speaker 02

  Completely different, a blended cold drink. That was the first cold drink we've ever introduced. It was not a coffee forward beverage. When we introduced it in Southern California was just, it went crazy.

• 1:20:31David Rosenthal?

  So what changed your mind to green light it?

• 1:20:34Speaker 02

  I didn't have a choice. I mean, it was Coffee Connection had it, then we had it in Boston. People wanted it. Uh, and I just went along.

• 1:20:41Ben Gilbert?

  And you, you ended up like reformulating it, right? It wasn't exactly what the coffee

• 1:20:45Speaker 02

  A store manager in Santa Monica reformatted it and she was on it. I think Howard Behar loved it. People in California loved it. There's a fantastic story about Frappuccino because of what we did with it. Not in its existing form in retail, but what we ended up doing with it in terms of leveraging the brand and distribution. That's another great story.

• 1:21:08David Rosenthal?

  Was that your first bottled drink in retail?

• 1:21:11Speaker 02

  Yeah. So I went to Atlanta and Pepsi in the same day.

• 1:21:17Ben Gilbert?

  Atlanta being Coke.

• 1:21:18Speaker 02

  I went to Coke. I went to Pepsi the same day. The Coke meeting was a meeting lasted less than 30 minutes. I can't, I can't remember who I met with. They dismissed me. Uh, didn't view Starbucks or didn't understand what I was trying to do and didn't give me much time to even explain it. Uh, and then I went to Pepsi.

• 1:21:40Ben Gilbert?

  And this is 95 ish?

• 1:21:41Speaker 02

  Mid 90s.

• 1:21:42Ben Gilbert?

  500 stores, your public company?

• 1:21:44Speaker 02

  But no one, but in East Coast Starbucks wasn't really well known. So I went to Pepsi and purchased New York, met Roger Rico, the iconic CEO and Craig Weatherup, the president of Pepsi. They loved the idea and we started talking about this. Subsequently Craig Weatherup and I on a napkin, I swear, shook hands and created a multi-billion dollar business for Pepsi and Starbucks and a 50 50 JV and bottled Frappuccino. And Craig Weatherup deserves all the credit for that. And then Craig became a board member of Starbucks.

• 1:22:22Ben Gilbert?

  Oh.

• 1:22:24Speaker 02

  And Roger and I were friends until his death. And serves on the Dreamer export together.

• 1:22:30David Rosenthal?

  How did you find yourself at Coke and Pepsi pitching a bottled beverage?

• 1:22:33Ben Gilbert?

  And was there an internal revolt? Because I could imagine people saying, this is a bridge too far.

• 1:22:37Speaker 02

  I don't think people knew what I was even doing. I mean, I think maybe a few people, you know, I just had the thought, we got to put this in a bottle. We have to put this in a bottle.

• 1:22:46Ben Gilbert?

  And this product, if I'm remembering right, was so successful, the instant that it hit store shelves,

• 1:22:52Speaker 02

  we were.

• 1:22:53Ben Gilbert?

  You had to pull it all off because you needed to like, create new manufacturing processes and spin up new factories in order to make enough to actually satisfy demand.

• 1:23:02Speaker 02

  Basically correct. And we also, early on, had a recall where they found glass in the bottle. And Pepsi, to its credit, took all the blame for that and fixed it. But yeah, it was from minute one, the, the power of Starbucks and bottle frappuccino and doing something we had never, no one, it was no bottle of coffee, let alone, and again, just like the Costco story and the United Airlines story, the flywheel of the awareness and people drinking something they could enjoy at home or at work. Again, it just created another level of velocity on the brand.

• 1:23:46Ben Gilbert?

  I mean, I'm just thinking about between the cups, but then United Airlines and Costco and the CPG products, there's got to have been like 50 billion Starbucks logos printed.

• 1:23:59Speaker 02

  I'm sure that was maybe more, maybe more.

• 1:24:01Ben Gilbert?

  I'm just, I'm sure I could estimate it better.

• 1:24:04Speaker 02

  But you can see where the, the, the, the, the size of the equity of the brand was much bigger than the size of the company. Much bigger.

• 1:24:15Ben Gilbert?

  Right. Because at this point, you were like 800 stores.

• 1:24:18Speaker 02

  Yeah. Then something else happened. And that is, we wake up one day and someone says, Starbucks is in a movie. We said, what movie? You've got mail.

• 1:24:30Ben Gilbert?

  That wasn't coordinated?

• 1:24:31Speaker 02

  First of all, Starbucks never paid for placement. Someone must have approved it. I I knew nothing about it. And then someone said, you got to see this movie. Starbucks all over it. What movie? Tom Hanks, You've Got Mail with Meg Ryan. I I knew nothing about it. It was just another thing where it was just like a little fairy dust on the brand.

• 1:24:51David Rosenthal?

  Did you know that it was like the good old days where you're like, this is just like?

• 1:24:55Speaker 02

  We were so in the mud, we were so in it, that we didn't have a time, we didn't have time to look up. And we were just running so fast, so hard. When you're growing at this pace, it's almost virtually impossible to catch the growth in terms of the infrastructure. And so you're constantly back and forth trying to create that fragile balance between the seductive nature and the intoxication of growth and success and the foundation necessary to support it and not falling too far behind where you lose it. But you never

• 1:25:38Speaker 02

  are in a position, at least we were never in a position, we were, we were ahead of it, never. And so there was a constant push, and I think this is where Orin was the wise man in the room to say, how that's, we just can't do that now. It's we don't have the infrastructure, we don't have the people, we don't have the systems. And, you know, I'd be screaming, we, we, we gotta do it. If we don't do it, someone else is gonna do it. We gotta do it. And that takes us to international. We weren't ready for that.

• 1:26:05Ben Gilbert?

  Yeah, so I want to, putting a bow on Frappuccino.

• 1:26:08Speaker 02

  Yeah.

• 1:26:08Ben Gilbert?

  The year after it launched in 1996, Frappuccinos were 7% of revenue, which I can attest to, maybe freshman year of high school.

• 1:26:16David Rosenthal?

  Seven year old Ben is like, hit me with that Frappuccino.

• 1:26:18Ben Gilbert?

  I had my first tall Mocha Frappuccino with whipped cream and a little chocolate drizzle on top. And, and like, now here I am drinking, what are we drinking here?

• 1:26:25Speaker 02

  You're drinking coffee from India.

• 1:26:28Ben Gilbert?

  Yeah, and no, no cream, no sugar.

• 1:26:30Speaker 02

  Only black.

• 1:26:32Ben Gilbert?

  And so, you know, the, the Frappuccino began my journey to the good stuff. So that's the Frappuccino story, 96, 97, 98. I mean, this is, this is the international story. So I love the Japan story. You, you've told this to me before, but I'd love to.

• 1:26:50Speaker 02

  Okay, and there's a couple of things about this. I started taking a couple of trips to Europe and Asia just to get a sense of what the opportunity would be and how would we do it. I quickly wrote off Europe because coffee was there. I didn't think we could possibly enter as an American company. And so we just took Europe.

• 1:27:17David Rosenthal?

  This would be like a American luxury leather goods company coming in and competing with Hermes.

• 1:27:22Speaker 02

  Yeah, not gonna happen. And so we said, we just took it off the map. And then we narrowed our focus very quickly on Japan. Japan had a couple of thousand coffee stores named Dotor. You walk in there and it was smoke filled, mostly men, dark, but they were successful. And so I said to the board, we want to go to Japan. The board was incredibly resistant to the idea. Why? You've got all this white space in America. There's no need to do this at the time. And I just said, okay. And so one thing led to another. And a board member said, if you're gonna, if you're considering this, hire

• 1:28:07Speaker 02

  an outside resource to do a study. I was livid about that, you know?

• 1:28:14Ben Gilbert?

  Aren't there some consultants you could possibly pay to help, you know, this?

• 1:28:18Speaker 02

  And so we hired a consultant who came back with a, you know, big book, presented it to the board. I had a preview and it basically was, this is a nonstarter. You can't possibly succeed there. And in the meeting, I was just, I could feel my blood just boiling because with every statement, it was getting worse. Like, the economics won't work. No one in Japan will ever walk into the street with a cup of coffee. They would lose face. Your no smoking policy, which we had from the beginning, is a nonstarter.

• 1:28:52Speaker 02

  And you can't afford the economics to rent. Don't go. Well, that only made me more furious. It's like they've never met you. And more intentional. And so

• 1:29:07Speaker 02

  we were, we kept thinking about this and then one day we get a handwritten letter from a Japanese company. And the founder of the company, Yuji-san, had a LA restaurant. And he was enamored with Starbucks. We sit down with him, we fall in love with him.

• 1:29:31Speaker 02

  And we weren't ready, but we decided we're gonna give it a shot. We go to Tokyo, we meet him. We ended up forming a JV and you know, the folklore at Starbucks, which is not that unrealistic, is the reason we went to Japan as an international market is because it had a direct flight to Seattle.

• 1:29:55Speaker 02

  That was the extent of our understanding. Now, we open up in August. If you've been to Tokyo in August, it's hot. It's like 95 degree temperature and 100% humidity. It's like getting out of a New York City subway in the middle of August. As soon as you walk out, you need a shower. It's gonna be a tough opening because of the hot weather. I'm very concerned about it.

• 1:30:24Speaker 02

  I get back to my hotel room and I have a message that CNN is covering the opening live.

• 1:30:33Speaker 02

  Or they got cameras. High risk, high reward. Wow. I'm so nervous. At 6:00 AM, we get in the car. It's so hot. My, the tie around my neck, it feels like a noose. We're driving up to the store in the Ginza. And it's like 200 people online. And I turned to the translator and I said, "Did he hire extras?"

• 1:30:59Speaker 02

  I cut the ribbon and a young man who slept over the night before to be the first person as a college student speaks no English. He rushes to the front of the line and I follow him. No English and he says, "Double tall latte." As God is my witness, just like that. And I said, "Holy shit. How did they know?" And Japan was a extraordinary success from minute one. We got 2,000 stores there. I was there a lot two months ago. Incredible. We have a grocery there.

• 1:31:34Ben Gilbert?

  Why were there people lined up around the block? Why did it work so well instantly? Was it a strong coffee culture or?

• 1:31:42Speaker 02

  No, the coffee, no, it was the iconic reputation and anticipation of something that they had convinced themselves was unique, proprietary, not in Tokyo, not in Japan, that they wanted to have. And that cup, by the way, the research, that cup was all over Tokyo in months. Everyone was walking around with that cup.

• 1:32:10Ben Gilbert?

  And this is nine years after you bought the six stores. It has turned into this icon. In all the events we just covered, Starbucks has already become Starbucks. It is already this like globally desirable brand there by 1996.

• 1:32:29Speaker 02

  I honestly haven't thought about it in that way, but.

• 1:32:31Ben Gilbert?

  That's so fast. I mean, to build something that.

• 1:32:34Speaker 02

  Didn't seem fast to us.

• 1:32:35Ben Gilbert?

  I bet.

• 1:32:36David Rosenthal?

  The parallels to the Microsoft story are just like so apt. Japan was Microsoft's first international market.

• 1:32:42Speaker 02

  Did not know that.

• 1:32:43David Rosenthal?

  It was half their business and it started in the same way. Bill and Paul got a cold call from Kenishi, who was a guy in Japan who had somehow gotten a hold of the Basic Interpreter, loved it, and said, "I'm so passionate about this. I want to bring it to Japan." 50% of Microsoft's revenue for the first at least five years.

• 1:33:01Ben Gilbert?

  And they stayed 50% international permanently.

• 1:33:04David Rosenthal?

  And that's what took them.

• 1:33:06Speaker 02

  Right.

• 1:33:07David Rosenthal?

  You know, from Albuquerque to like, "Hey, we're international."

• 1:33:10Ben Gilbert?

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• 1:33:24David Rosenthal?

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• 1:33:37Ben Gilbert?

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• 1:33:47David Rosenthal?

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• 1:34:05Ben Gilbert?

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• 1:34:21David Rosenthal?

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• 1:34:38Ben Gilbert?

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• 1:34:47David Rosenthal?

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• 1:34:58Ben Gilbert?

  So Japan's '96. In '97, you cross 1,000 stores globally. You're getting your feet under you. You're saying, okay, international is going to be a thing. In 1999, you-

• 1:35:09Ben Gilbert?

  2,000 stores.

• 1:35:10Ben Gilbert?

  2,000 stores.

• 1:35:11Ben Gilbert?

  Because we had a goal of 2,000 by 2,000. We beat it by a year.

• 1:35:16Ben Gilbert?

  99, you also open in Beijing. What's the calculus on entering China? And did you realize it could become such a pillar of the company like it is today?

• 1:35:27Speaker 02

  I honestly don't think we had any real understanding of what we were getting into. And we went there with a partner that didn't work out. I should tell you that we had a theory of the case that any international market that we opened that didn't speak English, we needed a partner. And so Japan was a partner, successful. We entered in a partnership in China early on that was not successful, did not share our values, and we got out and ended up going.

• 1:36:01Ben Gilbert?

  So you closed all the stores?

• 1:36:02Speaker 02

  No, no, we got out of the partnership, bought them out and became company owned.

• 1:36:06Ben Gilbert?

  And so that was legal to do that, to be an American-owned company operating in China?

• 1:36:13Speaker 02

  Yeah, but we struggled in China for almost a decade, lost money. There was tremendous pressure inside the company to close China until Belinda Wong, maybe the most valuable person in the company, from my view.

• 1:36:29Ben Gilbert?

  Really?

• 1:36:30Speaker 02

  Yeah.

• 1:36:31Ben Gilbert?

  When did Belinda get involved with Starbucks?

• 1:36:34Speaker 02

  Belinda was working, she started with Starbucks in Singapore, but she was working in Hong Kong. We were open in Hong Kong. And I saw something in her, was just extraordinary operator and had a touch with people. And I said, and we were dying in China, we were really in trouble, would you come to China and run it? And she said, I would do, I would consider doing that, but you've got to decentralize it. And we couldn't do that right away. It was just too much. But she changed the course of history for Starbucks in China.

• 1:37:12Ben Gilbert?

  What year was that? That she took over the role?

• 1:37:15Speaker 02

  I think it's about a decade after we opened.

• 1:37:17Ben Gilbert?

  Okay, well, I

• 1:37:18Speaker 02

  She's still there today.

• 1:37:19Ben Gilbert?

  I ask because I want to come back to it. There's a whole interim, you know, between 2000 and 2008 where you are not the CEO of the company.

• 1:37:28Speaker 02

  Right.

• 1:37:29Ben Gilbert?

  So in 2000, I mean, if you've been listening to this episode, the theme that should be occurring to you is, oh, my God, basically, everything worked. And I know it didn't feel like that on the inside.

• 1:37:40Speaker 02

  No.

• 1:37:40Ben Gilbert?

  But like, you read all those investment banking reports and it's like, hey, Starbucks, here's all these price targets for Starbucks and here's what we think they're going to do in earnings. And oh, they beat it again. And like, I don't know, 30, 40 quarters in a row. It's just like this, I would say perfectly predictable, except you actually kept exceeding the expectations. So it wasn't predictable.

• 1:37:59Speaker 02

  I did 100 quarterly conference calls as CEO. 100.

• 1:38:06Ben Gilbert?

  Yeah.

• 1:38:07Speaker 02

  That's a lot.

• 1:38:07Ben Gilbert?

  I bet. That's a lot of earnings prep because each one of those has, what, two weeks before it of?

• 1:38:12Speaker 02

  The truth is, the majority of those were no script,

• 1:38:16Speaker 02

  which became the lawyers took over after that many years, but no script.

• 1:38:20Ben Gilbert?

  Which is your preferred communication style. I mean, it seems like whenever I see you up speaking, there's no teleprompters. It's from the heart. So at this point, I don't want to say it would be incorrect to say Starbucks is running itself, but like, it's in a great place.

• 1:38:37Speaker 02

  Right.

• 1:38:37Ben Gilbert?

  And you step into the role of, is it executive chairman?

• 1:38:40Speaker 02

  Yes, executive chairman with Orin as the CEO.

• 1:38:43Ben Gilbert?

  In 2000?

• 1:38:44Speaker 02

  Yeah.

• 1:38:45Ben Gilbert?

  What was your?

• 1:38:47Speaker 02

  I was, I was, I think I was physically and emotionally exhausted.

• 1:38:54Speaker 02

  Kids were getting older. I had missed a lot. Just think about all the things we're doing. And I had so much confidence in Orin, so it was no problem. And so that's what I did. But I was still engaged, but I was, you know, not running it day to day.

• 1:39:08Ben Gilbert?

  And at this point, it's 3,500 stores. The company's doing 2.2 billion in revenue. It kind of feels like, okay, I can, I can get some distance. I can do other things in life. It's, it's, you know, it's going to work out. At some point, Orin transitions the CEO role to Jim Donald, which I assume you're also very involved

• 1:39:25Speaker 02

  Yes, yes.

• 1:39:26Ben Gilbert?

  in working with him. What was that transition about?

• 1:39:30Speaker 02

  Orin never wanted to be the CEO.

• 1:39:34Speaker 02

  He's not a front guy.

• 1:39:37Speaker 02

  In fact, he's shy and never wanted to be on the stage as a CEO. So he said, I'll do it for a couple of years. But he's always kind of knocking on my door saying, we need a new CEO. And we didn't have anyone internally. BHR didn't want it.

• 1:39:54Speaker 02

  And so we did a search. We met Jim Donald, great, great guy, had all this operational experience.

• 1:40:03Speaker 02

  And then certain things started appearing and we were just weren't hitting our stride the way we usually do. The economic environment was getting tougher and

• 1:40:15Speaker 02

  things just kind of unveiled itself that we, it wasn't going to work out. By the way, but Jim is a great guy, like a really good person, but it just wasn't the right fit.

• 1:40:25Ben Gilbert?

  And so how long had he been in that role of CEO?

• 1:40:29Speaker 02

  I'd say less than three years, two years maybe.

• 1:40:32Ben Gilbert?

  But basically the 2008 happens and

• 1:40:36Speaker 02

  So the cataclysmic financial crisis is unfolding. And that plus the cracks that we were experiencing, board meeting and I don't think the board meeting was set up for me to return, but it just kind of happened in the meeting about, okay, we got all these problems. What are we going to do? Do you want to come back?

• 1:40:58Speaker 02

  Yeah, I'm going to come back.

• 1:40:59Ben Gilbert?

  And that wasn't, that was never your intent. When you stepped away, you thought you were

• 1:41:02Speaker 02

  It was not my intent to come back. It was certainly not my intent that we're going to run into problems. And so in the Christmas vacation of 2007, I knew I was going to return in January. And so I was on holiday and I was starting to think through what I was going to do. On that holiday, a friend of mine Not, I didn't know he was there, but it was Michael Dell was there. And I must have talked to him almost every day about the transformation of Starbucks. And he was going through a similar thing at Dell, almost at the same time. So we had so many things to talk about. And we were comparing notes and everything.

• 1:41:43Speaker 02

  And so, and early 2008, I spoke to Jim and I came back in 2008.

• 1:41:50Ben Gilbert?

  And when you came back in 2008, I mean, this is the whole crux of your book onward. There's an entire book's worth of material here, so we're not going to do it all. But suffice to say, just to put some numbers on it. The market cap had dropped from $30 billion to less than $7 billion. Same Sourcedale's, the comparables number, when you compare the store this quarter last year to this quarter, you know, this year to last year, had dropped. Growth began to slow. And so you come in and you have to make these really horrible decisions. You're faced with two terrible options and you got to make the right decisions for the business.

• 1:42:27Speaker 02

  I, first off, every rock I turned over was worse than I thought. There were a lot of unperforming stores that should have never been opened, that we need to close. I think we closed a thousand stores. And I had a company-wide meeting.

• 1:42:45Speaker 02

  I remember it vividly because I started crying and apologized to everybody that we got to close stores. We got to lay people off. And I mean, just think about, you know, we were on our trajectory for all this time. And all of a sudden, we not only hit a speed bump, but the world, the music was just stopping. The stock price, I think, broke $6. I was so afraid that we were going to get acquired. But the only cover we had is that the world was coming undone. So no one had any resources. But I was terrified. I just stood up and apologized and said, we, we, we've let you down. I promise I'm doing my best, but we're trying to save the company. And literally, we were trying to save Starbucks. Things were that bad.

• 1:43:28Ben Gilbert?

  You say that we were trying to save Starbucks and in my head I always thought, what could have been that bad? This is big, successful company. It's fast growing, it's profitable. And then I read you were seven months from being insolvent.

• 1:43:40Speaker 02

  So we had, we didn't have enough cash. Comps had, we never had negative comps in the history of Starbucks. So negative, I didn't.

• 1:43:48Ben Gilbert?

  Every single quarter was better than 12 months.

• 1:43:50Speaker 02

  Never had, never had a negative comp month in my history of, of the company. I didn't understand how, I didn't understand it. Such an anomaly. So, um, we, we closed all those stores and, um, then you got to decide, okay, how do we, how do we turn it? What, what do we do? And I think going back to your line of questions in the past about the people is, of all the things that I could point to, that demonstrates what Starbucks is, has been and needs to be, it's the humanity and the people of the company.

• 1:44:31Speaker 02

  The company was built on being a performance-driven company through the lens of humanity. That's how it was built. And whenever we've lost our way, we've lost our way because people in power didn't understand that equation. And so I, I just said, we need, I, I need to be in front of every store manager. I need a meeting with 10,000 people.

• 1:45:01Ben Gilbert?

  The big conference room.

• 1:45:02Speaker 02

  And so in 2008, no American company was traveling. And so the municipalities were hungry for Starbucks to potentially have a meeting at a discount. And so we got, we had Detroit come in, we had Houston come in, and then New Orleans came in. What they presented to us was the need for Starbucks to come as a result of Katrina. And when we heard that, we realized we've got to go to New Orleans. And in fact, what we're gonna do in New Orleans is we're gonna have one full day of 50,000 hours of community service in the ninth ward.

• 1:45:42Speaker 02

  Next day, we walked through and we built basically a tutorial on how to restore the business and how people walk through it. And we had classes and we had all these things going on. And the third day was my speech in the basketball coliseum to 10,000 people. About an hour before, I was really feeling the burden of how important what I was gonna say is. And the CFO at the time, who subsequently resigned a week later, wasn't my guy, asked me what I'm gonna say. And I said, I'm gonna tell him the truth.

• 1:46:26Speaker 02

  And he says, you can't possibly do that. You're gonna scare the shit out of them. I went up there and I laid it out, chapter and verse. I think we have seven months left. We are going to be insolvent.

• 1:46:42David Rosenthal?

  I can see why he was freaked out about this. Like, if word got out to Wall Street that you...

• 1:46:46Speaker 02

  Yeah, well, social media didn't exist at that time, but I just laid it out. What if that store was the difference between the food on your table and its success? And then I had this economic formula of how many customers it would take per store to turn comps around. And the number was low. It's like less than 10 per day or 11 per day. And so I said, let's just talk about New Orleans. You know how many new incremental customers it'll take in your store? And it was manageable and tangible. Anyway.

• 1:47:26Ben Gilbert?

  Right, cuz you could actually imagine, okay, if 10 more people walk in the door today and I delight them in a particular way that brings them back tomorrow, like, we're turning this thing around, or we're turning this one store around. And if everybody does that...

• 1:47:38Speaker 02

  And, and the problem when you get this big is you start thinking about large numbers. But if you reduce it to the lowest common denominator, one store, one cup of coffee, one customer, one partner, and what if all of that works? Well, we rushed out of New Orleans like an effing tidal wave.

• 1:47:59Speaker 02

  And we never looked back. And less than a year was turned.

• 1:48:04Ben Gilbert?

  And you did crazy. I mean, the tactics involved in the turnaround.

• 1:48:08Speaker 02

  We closed the stores.

• 1:48:09Ben Gilbert?

  For what? Noon onward, right? For an entire afternoon and evening?

• 1:48:13Speaker 02

  Because the previous administration had done things that diluted the integrity of coffee to maximize yield.

• 1:48:24Ben Gilbert?

  Like what? What does that mean?

• 1:48:26Speaker 02

  Well, let's say you're making a batch of brewed coffee.

• 1:48:30Ben Gilbert?

  Yep.

• 1:48:31Speaker 02

  Well, what if that brewed coffee was based on a number of ounces of coffee? What if you just reduced it just a little bit? No one's gonna know.

• 1:48:38Ben Gilbert?

  Hmm.

• 1:48:39Speaker 02

  Just little things.

• 1:48:40Ben Gilbert?

  Just little, little 10,000 little

• 1:48:42David Rosenthal?

  Sounds good in theory.

• 1:48:43Ben Gilbert?

  Scratches of efficiency that dilute the experience.

• 1:48:46Speaker 02

  Yeah.

• 1:48:47Ben Gilbert?

  Huh.

• 1:48:48David Rosenthal?

  But that does seem like a, reflects a misunderstanding of the fundamental business. That this is a business about a store with high gross margins based on customer loyalty.

• 1:49:02Speaker 02

  But we were beginning to face headwinds.

• 1:49:07Ben Gilbert?

  And what are the headwinds?

• 1:49:08Speaker 02

  Headwinds were the level of attrition of customers.

• 1:49:14David Rosenthal?

  As the financial climate deteriorated.

• 1:49:15Speaker 02

  Yeah, yeah.

• 1:49:16David Rosenthal?

  Spending that $6 on the latte daily habit.

• 1:49:19Speaker 02

  Yeah.

• 1:49:19David Rosenthal?

  Gets harder to justify.

• 1:49:20Speaker 02

  And we weren't as good as we were when we were small.

• 1:49:23David Rosenthal?

  Yeah. Then it makes it easier to give up.

• 1:49:24Speaker 02

  And this goes back to what I said earlier. Growth covers up mistakes.

• 1:49:27David Rosenthal?

  Mm hmm.

• 1:49:28Speaker 02

  And success breeds hubris. And it did.

• 1:49:32Ben Gilbert?

  How could it not? I mean, how could you? Starbucks today is so frickin' ubiquitous, which again is one of the things I love about it. It's consistent. Anywhere I travel in the world, I can count on it. I can mobile order and pay. There's all these wonderful things. But when you become like government level scale in the world, people assume it's a piece of public infrastructure. I assume employees even must feel that way during some periods of time of like, we're so big, we're just

• 1:49:58Speaker 02

  But the worst thing that Starbucks could have become, and the worst thing that Starbucks could become, is a utility.

• 1:50:07Speaker 02

  Scale and ubiquity creates complexity. Complexity demands efficiency. But we are in a business where that touch point between the customer and the barista has to be protected and has to be elevated. Now, then you get stores that are so busy where the barista can't even look up, can't look up. And then you get mobile order and pay, which we haven't even talked about.

• 1:50:35Ben Gilbert?

  Which is, you know, is a thing I love and do every day and depersonalizes the experience by definition.

• 1:50:41Speaker 02

  Yes. Starbucks demands nurturance. It's a company that has to be nurtured like a young child. That is an anomaly inconsistent with scale. And you get people coming into the company with different experience, different language. The immersion doesn't quite hit them in the heart or the soul or the conscience of the company. They feel like they're doing a good job, but it's not the job that's consistent with the integrity and heritage of what the company has been. Metaphorically, let's say that's a giant reservoir. If you're taking a deposit on a consistent basis out of the reservoir and it's getting

• 1:51:24Speaker 02

  dry, you better stop. You better make sure you're making a deposit so they're equal and it's balanced. When you get this, that's when the company loses the plot. And if you get this and you're making a lot of money and the stock price is high, people say, it's okay, we're fine. And that's fool's gold. It's a camouflage because eventually it's going to bite you in the ass.

• 1:51:50Ben Gilbert?

  Have you ever figured out a way to measure these things in a way that like as long as these numbers, that the numbers are a direct tie to our values are good, we can actually put a KPI against them, we know that the core is solid?

• 1:52:06Speaker 02

  I haven't been smart enough to figure that out, but I mean, I think the interesting thing to me today is that the Asian business is operating at a much higher level.

• 1:52:22Speaker 02

  Of the soft side of Starbucks than we are in the US. And

• 1:52:29Ben Gilbert?

  Now I understand your Belinda Wong comment.

• 1:52:31Speaker 02

  That doesn't answer your question about quantifying it. But when I am in Asia, I see things that are very elevated to the brand that speak to the financial performance of those markets, which are very high.

• 1:52:47Ben Gilbert?

  Okay, before we get to today, I want to talk about some other things that happened in 2008. 2008 was a big year. So 2008, 2009, 2010, there's no way to put it other than a wildly successful turnaround. Your low point in 2008 profits were 315 million and by 2010, they were 945 million. I mean,

• 1:53:05Speaker 02

  I don't know how we did that.

• 1:53:07Ben Gilbert?

  Well, we just went through a lot of the ways of how you did that. There's a couple other things here, one of which is technology, but I'm told there's a story you have about Steve Jobs.

• 1:53:18Speaker 02

  Yeah.

• 1:53:18Ben Gilbert?

  Around this point in time.

• 1:53:19Speaker 02

  Yeah, this funny story, another story. And so

• 1:53:24Speaker 02

  in Hawaii, when I was on vacation, I'm talking to Michael Dell and Benioff.

• 1:53:30Ben Gilbert?

  And you're cycling with?

• 1:53:31Speaker 02

  Yeah, cycling with Dell almost every day. And I'm talking to Benny. Michael introduced me to Benioff, didn't know him. And so

• 1:53:40Ben Gilbert?

  It's a pretty good Hawaii crew, eh?

• 1:53:43Speaker 02

  So I get back and Adam Brotman is a key person in all this in terms of mobile order and pay.

• 1:53:51Ben Gilbert?

  Yeah. He ran digital for Starbucks.

• 1:53:54Speaker 02

  Yeah, he ran digital. I'm trying to make sure I got the sequencing of this right. I think there was a

• 1:54:02Speaker 02

  future meeting scheduled for Starbucks and Apple

• 1:54:07Speaker 02

  around mobile order and pay and other things. And I met Steve on a phone call. I never met him, I was talking to him on the phone and I'm telling him what's going on. He said, you should come down and he had a whole thing about walking. He would go out and walk around the building. Have you heard this before?

• 1:54:26Ben Gilbert?

  This is an infinite loop at their old campus?

• 1:54:28Speaker 02

  Yeah, yeah. And so I went down there and basically went down and we took a walk. And I just told him all my problems, everything that was going on. And he just stopped me and he said, this is what you need to do. He just looked at me and he said, you go back to Seattle and you fire everyone on your leadership team. I thought he was joking. I said, what do you mean fire? What are you talking about? Fire everybody? He said, I just told you. F and fire all those people. He's like screaming at me in my face. Fire all those people, that's what I would do. I said, Steve, I can't fire all those people. Who's going to do the work? He said, I promise you in six months, maybe nine, they'll all be gone. He was right, except for one, the general counsel. They were all gone.

• 1:55:12Ben Gilbert?

  Your whole leadership team turned over after?

• 1:55:14Speaker 02

  They were all gone.

• 1:55:16Ben Gilbert?

  Wow.

• 1:55:17Speaker 02

  That's the story about Steve Jobs.

• 1:55:18Ben Gilbert?

  Wow. Did you ever call him back and tell him?

• 1:55:20Speaker 02

  I talked to him since then and we were on stage together at an event. And I told him they're all gone. He said, well, you're six months, nine months late, man. Think about all the things you could have done.

• 1:55:30Ben Gilbert?

  Of course. All right.

• 1:55:33Speaker 02

  That's that story.

• 1:55:33Ben Gilbert?

  So while we're in technology land then, I think today 33% of Starbucks orders are done with mobile order and pay. So obviously this, you know, huge pillar of Starbucks as it exists in our world. How did that start?

• 1:55:50Speaker 02

  Yeah.

• 1:55:51David Rosenthal?

  Yeah. You had been on pen and paper, then you moved to DOS. And now you have the most sophisticated technology platform of probably any retailer in the world.

• 1:55:59Speaker 02

  At the time. So you're talking to a non-tech person. So I'm not focused on anything other than the customer experience.

• 1:56:08Ben Gilbert?

  Yep.

• 1:56:09Speaker 02

  Adam Brodmann, to his credit, along with Steven Gillette, who was at Starbucks very shortly, came to us with the idea of building a mobile app.

• 1:56:24Speaker 02

  I didn't even know what it was. What do you, honestly, we're in a meeting. I'm trying to figure out what, and what are you actually talking about? How are they going to do that? They created.

• 1:56:32Ben Gilbert?

  And apps at this point, I mean, if it came out in 2009, which was the first version, the iOS SDK came out in

• 1:56:40David Rosenthal?

  Summer 2008.

• 1:56:41Ben Gilbert?

  Summer 2008. So it's like, you know,

• 1:56:43David Rosenthal?

  Early.

• 1:56:43Ben Gilbert?

  You're one of the very, if they're having this idea and bringing it to you, it's like months after apps exist.

• 1:56:50Speaker 02

  Well, they're, they get complete credit for assembling the pieces of all this, convincing us to fund it, and we were off and running. I don't think any of us, honestly, for myself, really knew what they were actually going to create. They explained it to us, but I didn't really, I didn't get it until I saw it. And then, holy shit. Overnight, it was just an unbelievable new vehicle. Now, if we fast forward, I don't know if you want to do that here, of what it's become.

• 1:57:31Ben Gilbert?

  Yeah.

• 1:57:32Speaker 02

  It is the biggest Achilles heel for Starbucks.

• 1:57:37Ben Gilbert?

  Really?

• 1:57:38Speaker 02

  And it's not even a close second. And so, the mobile app created unbelievable convenience for our customers. But remember, we are an experiential brand. And so, as this thing was growing, there was never an opportunity, because it, it, it became so seductive for the company.

• 1:58:10David Rosenthal?

  It also created a even better business model for you, right? It was more efficient, and you get the float with customer funds.

• 1:58:17Speaker 02

  All that is true, but, but it was beginning to deteriorate

• 1:58:22David Rosenthal?

  Yeah.

• 1:58:22Speaker 02

  at a rapid rate. The, the third place experience and the sense of community.

• 1:58:29Speaker 02

  And then it became, it overflowed to the point where it disproportionately created an environment in our stores where the mobile app became the primary vehicle, as well as the primary vehicle for dissatisfaction. Because people couldn't get their drink on time, people were confused whether that was their drink, a lot of anxiety. And the thing I remember the most is that we were in Chicago at 8:00 AM because people wanted to show me the problem. And so everyone is getting off the loop, the train, at 8:00 AM, and everyone who ordered on their app, it says the same thing.

• 1:59:13Speaker 02

  Your drink's gonna be ready in seven minutes. And everyone shows up, and all of a sudden, we got a mosh pit. And that's not Starbucks. And so, the company did not do a good job of anticipating the technological refinements that needed to be put in place to avoid what was happening. And I want to be fair to everyone who's managed the company. For about a five-year period, remember, I haven't, I wasn't involved in the company from basically 2018 to 2022.

• 1:59:52Ben Gilbert?

  Yep.

• 1:59:53Speaker 02

  I wasn't, I was not involved.

• 1:59:55Ben Gilbert?

  You stayed CEO from 2008 until 2017.

• 1:59:58Speaker 02

  Then I left. And there were no bad people, and no one had bad intentions, but the heritage and tradition of what I've described, which is so vital to the nurturance, was lost.

• 2:00:13Ben Gilbert?

  Boy, it must have been, it was so seductive.

• 2:00:15Speaker 02

  Yeah, the stock, we were, the stock was at record high, and the company was not investing ahead of the curve, and not paying attention to the velocity of the mobile app and what it was becoming until it was too late. And now, and the company has that problem today, which they will solve, but it's, it's late. And also, everyone has caught up to, we, we were the only game in town. And, and the novelty of that, and the uniqueness of it, especially for our product. And everyone pretty much copied it.

• 2:00:49Ben Gilbert?

  It is interesting to, David keeps saying it's so seductive, to put some numbers for listeners wondering, you know, why is the mobile app such an interesting thing? David pointed out the float. So of course, if you look at Starbucks financial statements, right now, at any given time, there's about $1.8 billion of cash that Starbucks has gotten in the form, effectively of as an advance from customers that Starbucks can use to operate. It's like this amazing-

• 2:01:13David Rosenthal?

  Invest in head of growth, capital, store expansion, et cetera, et cetera.

• 2:01:16Ben Gilbert?

  Right. So it's-

• 2:01:17Speaker 02

  We're not the only one. I mean, everyone-

• 2:01:19Ben Gilbert?

  Right. You know, the, Amazon has this, Apple has this-

• 2:01:23David Rosenthal?

  Berkshire has this, the insurance business.

• 2:01:25Ben Gilbert?

  But it's effectively interest-free loan from customers and a loan that's not all going to get called at once. It's-

• 2:01:32David Rosenthal?

  Some of it will never get called.

• 2:01:33Ben Gilbert?

  Right, the breakage. And so there's this benefit of like, it's a reasonably predictable amount of cash that comes in that you get to use, you know, for your advantage. In terms of velocity, about $14 billion a year gets loaded onto gift cards. That's unbelievable. I mean, that, if you actually like, look at all of the banks in America, if Starbucks were a bank and you treated the gift cards as deposits, it would be in the top 10% by deposits of banks in the United States. It's this like unbelievable business model that happens to exist inside of this experiential business that powers this experiential business.

• 2:02:17Ben Gilbert?

  But to your point, you have to keep it from eating the core.

• 2:02:21Speaker 02

  Yeah. Well, yeah. So let's just go back, not to the economics, but the, the idea itself. And I think whether we talked about bottle for appuccino, the cup, you just thread all these things, there is, there is a common through line. And that is, we took a commodity business and we transformed it into a premium product, brand and experience. But when you are disrupting the market-

• 2:02:51Speaker 02

  There has to be some governor on the disruptive innovation to monitor how was it being used, how was it being abused, and the era of judgment in the period where this was really kind of where we really took hold, this five-year period between 2018 and 2022. The governor didn't exist.

• 2:03:15Ben Gilbert?

  Oh, you feel like it wasn't really taking hold in that whole

• 2:03:18Speaker 02

  It was taking hold.

• 2:03:19Ben Gilbert?

  Run before.

• 2:03:21Speaker 02

  And I'm not criticizing anyone because, you know, we're all, everyone's trying to do a good job. But the result is the runner, the unbelievable success, it disrupted the experience.

• 2:03:36Ben Gilbert?

  Yeah. And now you have stores that are entirely built to just pick up mobile orders.

• 2:03:41Speaker 02

  Yeah. And so, and my view is, we should not succumb to the mobile app.

• 2:03:48David Rosenthal?

  Looking back now, I'm not, when you're in the moment, and you and others in the management team, things happen. But knowing what you know now.

• 2:03:55Speaker 02

  Yeah.

• 2:03:56David Rosenthal?

  Are there a couple of key design decisions or things that you would re-architect differently about the mobile app experience?

• 2:04:04Speaker 02

  I don't think I would have allowed the mobile app to be on-demand 24 hours a day.

• 2:04:13Speaker 02

  I would have slow-rolled the availability of it, and then understood how it was being used, and whether or not it was going to disrupt the experience. But now it's, you know, on-demand, whatever you want it.

• 2:04:28David Rosenthal?

  Right.

• 2:04:29Speaker 02

  And now you can't, you can't shut it off from eight to nine.

• 2:04:31Ben Gilbert?

  Right. The expectation's been set.

• 2:04:33David Rosenthal?

  Dimes out of the bottle.

• 2:04:34Ben Gilbert?

  Whenever I get that message, you know, mobile order ahead is not available at this time. I'm like, oh, but it's available 99% of the time. It's not available now?

• 2:04:42Speaker 02

  And because the store's

• 2:04:43David Rosenthal?

  Yeah, I won't even go to a store if it doesn't have it.

• 2:04:45Speaker 02

  The store's overrun. You wouldn't go.

• 2:04:46David Rosenthal?

  Yeah.

• 2:04:47Speaker 02

  Yeah, that breaks my heart. I hate to hear that.

• 2:04:50David Rosenthal?

  Well, I went to the Presidio store yesterday in San Francisco and I would go there no matter what.

• 2:04:55Ben Gilbert?

  I only agree with you in airports. In airports, I'm so time constrained that I'm like, if mobile order isn't working, the line's too long.

• 2:05:03David Rosenthal?

  Oh, but I've had plenty of times where like, I'm looking at stores in the radius. I'm in, I'm traveling, I'm in a new city and it's like, well, I'm only going to go to the one that's open for mobile order and pay. I'm not even going to try.

• 2:05:13Ben Gilbert?

  Fascinating. I gotta hit one other, Howard, I know you hate it, but one other like amazing business model benefit of mobile order and pay. If I'm buying $6 lattes over and over again with my Visa card and Starbucks is getting hit with 30 cents every time, instead if I'm buying $25 gift cards, well, that's now three out of four times I'm going and buying my coffee and Starbucks doesn't have to pay Visa 30 cents or the bank 30 cents. That's a pretty amazing business unlock. Like, you know, I'm aware it degrades the experience, so you have to find ways to deal with that, but.

• 2:05:49Speaker 02

  I'd be more than willing to sacrifice economics to go back to ways to enhance the experience myself, but I'm uncharged.

• 2:06:02Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 2:06:16David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:06:32Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 2:06:47David Rosenthal?

  And that's how you get features that customers love like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:07:11Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:07:30David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:08:00Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you.

• 2:08:25David Rosenthal?

  Moving on from technology and mobile order and pay, there's one more to my mind key pillar of the Starbucks tapestry, and that's real estate. And maybe this is a good time because I feel like around this era is when people started looking at Starbucks and scratching their heads and being like, there's two Starbucks across the corner from one another. These guys must be insane.

• 2:08:48David Rosenthal?

  Talk to us about real estate.

• 2:08:53Speaker 02

  The, the basic idea early on, given the beverages velocity in AM, was to find a corner location in an urban setting where we could physically see pedestrian traffic in a significant way. And so we would go to cities and count, just physically count, how many people were walking by, what hours they were walking by. And once we had a model of success, it became clear to us what we needed. And also, once we became aware of cotenances, of certain tenants that would be interesting

• 2:09:38Speaker 02

  to us, um, we also were very intrigued with being next to a grocery store early on because of the frequency in which people were buying food.

• 2:09:50Speaker 02

  Anytime we were in an office building where there was three to four thousand people in a building, that was a home run. But then it became very clear that there were locations that we never imagined we could be in, that became wildly successful and just opened up an aperture to us that basically we had opportunities to do things that were not traditional for a retailer. Now, the other thing which we haven't talked about is a decision I made early on, not to franchise, which you haven't, surprised you haven't mentioned that. Oh, well, there were franchises. But I'll, let me explain that if I can, which is all part of the real estate strategy.

• 2:10:32Speaker 02

  I, I never believed that we could build, maintain, and elevate the culture of the company, which I viewed as the thing in a franchise system, where we had individual franchisees who had their own subculture. And so even though there was pressure early on because of the cost of capital, and we didn't have a lot of money to franchise, we'd have no CapEx. I said, no, we resisted that. And I don't think we'd be having this conversation if Starbucks was a franchise system, because McDonald's, extraordinary company, but they're, they're a commodity-based product.

• 2:11:15David Rosenthal?

  Well, as you've been saying, it's from the beginning, it was about elevating.

• 2:11:18Speaker 02

  Yeah.

• 2:11:19David Rosenthal?

  McDonald's great company, but nobody would ever accuse them of elevating, I don't think.

• 2:11:22Speaker 02

  Yeah, and that's why I don't want Starbucks to become transactional. Coffee is personal. The biggest magic and what you know, the lightning in the bottle is when you go to Japan or Shanghai or Malaysia and you see the culture in a way that you just can't believe, like, how did it happen? That we were able to transfer this to another country, different language, different culture, different policy, how did we do it?

• 2:11:51Ben Gilbert?

  That's actually quite befuddling to me because so many food and beverage concepts do not transfer geographies.

• 2:11:57Speaker 02

  And I think it transferred because young people around the world, we all want the same thing. They want opportunity, they want to be respected, they want to be, they want dignity, they want to make their parents proud, they want to work for a company that they believe in. And when I see what we've done around the world, I'm moved emotionally because the humanity I speak of is universal. That's why when I came back from China, what I said was, I just want to say something about China and the US. I know all the rhetoric and the propaganda about our two countries, but what I see is

• 2:12:39Speaker 02

  that we have so much more in common than we have differences. And that should be the theme of the world right now.

• 2:12:47Ben Gilbert?

  I want to pick up the thread on China now that we're sort of into the 2010s.

• 2:12:51Speaker 02

  Okay.

• 2:12:52Ben Gilbert?

  This decade saw huge ridiculous growth in China store openings. So there were 500 stores in 2011, right when you're sort of coming out of that, the rut. By 2017, there were 3,000. Today, there's almost 7,000. And there was a stat that was reported that a new store opened in China every 15 hours in 2017.

• 2:13:12Speaker 02

  True.

• 2:13:13Ben Gilbert?

  Now bring us to that seed that you planted earlier with Belinda being the single most important employee.

• 2:13:20Speaker 02

  China presented the enormity of opportunity with the significant challenge of pioneering.

• 2:13:31Ben Gilbert?

  It's a tea drinking culture.

• 2:13:32Speaker 02

  Yeah, tea drinking culture, no morning business, people eating rice in the morning. We got real estate wrong, we got breakfast wrong, but it was all coming from the control of Seattle.

• 2:13:46David Rosenthal?

  Did you go in with essentially the Starbucks concept?

• 2:13:50Speaker 02

  Yeah, it was exactly what you see right now, there's no, no different. But they didn't know, the Chinese people hardly knew what coffee was, there was no morning traffic. And in the early days of our partner, we didn't see eye to eye, so we cut them out. When Belinda came along, we had a world-class operator who had succeeded in Singapore and Hong Kong. She's a strong person who believed that Seattle, the way we were organized, was not a formula for success. You can't have people in Starbucks in Seattle designing the breakfast menu who have never been to China, who think they're gonna eat blueberry muffins.

• 2:14:32Speaker 02

  And so when she said to me, "I will do it if I'm in control of everything." So I wanted to centralize China. I report to you, it's you and me, and John Culver, who runs international. Take Seattle out of the equation. We were failing. What choice did I have? She turned it. She single-handedly built the China business.

• 2:15:03Ben Gilbert?

  Today, 18% of Starbucks' revenue is China.

• 2:15:06Speaker 02

  Yeah. She deserves all the credit.

• 2:15:12Speaker 02

  John and I have been to China almost every quarter during the building years of turning it with her. And all the government meetings to tell the Starbucks story. And then we did things in China disruptively. Well, Belinda decided that she could go to the government and go to an insurance company and come back to Starbucks and get government approval for Starbucks to do the first, do something that had never been done before and provide health insurance to the parents and grandparents of our partners.

• 2:15:46Ben Gilbert?

  Cool.

• 2:15:49Speaker 02

  So the Chinese government was so intrigued, sitting down with them, saying, can you explain, why do you want to do this?

• 2:16:00Ben Gilbert?

  Right, you don't have to.

• 2:16:01Speaker 02

  Yeah. Because it's the culture of our company. We want to do everything we can to benefit our people. Humanity, and it's universal. But it's so, I think, important to just create some guardrails. So, one day, in the early stages of Starbucks, Howard Bier comes in my office one day, remember, we're small at this stage. And he says, we got a terrible situation. He said, "The manager of the Seattle Trust store on Second and Madison, Seattle, Tom

• 2:16:43Speaker 02

  Carrigan, has AIDS." Now, AIDS at that time was like leprosy. Leprosy. So he, Tom comes in and he says, "I need to resign from Starbucks." And he's crying. "Do you have any health insurance?" "No."

• 2:17:08Speaker 02

  And so we covered Tom Carrigan from that point on. But it was those kinds of imprinting moments. And there were many like that.

• 2:17:19Ben Gilbert?

  Right. I think it's funny. So I have heard that story probably five times. Because I've consumed an incredible amount of Starbucks content over the last couple of months. And I've heard a story about

• 2:17:34Ben Gilbert?

  Starbucks employees wanting to buy a cow for a farmer in Africa. And stories about Flint, Michigan, and stories about the initiative to bring the company together to try to bring the country together when the government was shut down in 2013, whenever that was. And I was getting frustrated watching all these stories because I kept thinking, this is not the answer to why Starbucks worked. These are these one off anecdotes that are, sure, they're emblematic of some broader theme. But at the end of the day, like, the answer to why Starbucks works has to be something about the business model. And every time you walk into the store, XYZ happens and here's the economics. But it turns out there are thousands of these stories.

• 2:18:19Ben Gilbert?

  And it's the humanity seeping through. And it's hard for the company to tell the story because everyone just feels like a random one off example. But they're happening in every community in every part of the country. And I think that is the, for me, as like a business historian, that's been the thing that jumps out is there's no other company that we've studied that has this sort of obsession with people and humanity, the way that Starbucks does.

• 2:18:43Speaker 02

  And we're not perfect. And so we do make mistakes. And when you're, when the brand is being shined so brightly.

• 2:18:51Ben Gilbert?

  It's a high standard to be held.

• 2:18:53Speaker 02

  We live in an environment where if you do make a mistake, and we are human, and we're going to make mistakes. Unfortunately, that becomes the thing.

• 2:19:01Ben Gilbert?

  Yep.

• 2:19:02Speaker 02

  It's tough to fight that.

• 2:19:04Ben Gilbert?

  Are you open? I'd love to kind of flash forward. You know, you were CEO through 2017. Kevin Johnson took over 2017 to 2022. You came back for one year as interim CEO and now Laxman is the CEO and has been in the seat for about a year. You came in after a tumultuous COVID era and tried to basically figure out who the successor was going to be and, you know, patch the ship in the meantime. A lot of stuff has happened in that last five years, notably with labor unions. I don't want to make this a podcast about labor unions, but I do want to ask you, what have you learned from the experience of, you know, having to do a deep dive into how we got here?

• 2:19:46Speaker 02

  That's a very tough, complex question.

• 2:19:53Speaker 02

  I think my personal relationship with the company and how personal it is to me and the things that we, not I, but we have tried to do to build a different kind of company.

• 2:20:14Speaker 02

  When the country started moving in a post-COVID era to a direction that I didn't recognize, very, very hard to understand why Starbucks would be under assault or just being challenged this way.

• 2:20:38Ben Gilbert?

  Particularly when you had built a reputation on a

• 2:20:41Speaker 02

  Very progressive.

• 2:20:42Ben Gilbert?

  pattern in a history of being unbelievably, you know,

• 2:20:45Ben Gilbert?

  Kind to your people.

• 2:20:46Ben Gilbert?

  Yes.

• 2:20:47Speaker 02

  Yeah. I entered Starbucks as the interim CEO when this was already going on. And I think the company made some early mistakes, some of which were COVID related. Again, no textbook how to deal with COVID issues, health issues, safety issues.

• 2:21:08Speaker 02

  And then I think underestimated the groundswell of public sentiment

• 2:21:18Speaker 02

  for this movement in America. And

• 2:21:24Speaker 02

  Then became vilified for trying to defend the company in a way that I thought was appropriate.

• 2:21:31Speaker 02

  I think what's lost in all this is the percentage of stores that have been petitioned and the number of people is very small in relationship to the to the whole. And then all of the people in Starbucks who were depending on me to defend the company. And trying to do that in a world of disinformation is very difficult. At the time when I was trying to restore the company back to health. Clearly mistakes were made. This story is still unfolding and my heart's with the company. And but the thing that I think was lost in the story is the shareholder is not the primary

• 2:22:16Speaker 02

  person. It's the Starbucks partner in the green apron, which is the cloth of the company. And if we exceed the expectations of the cloth of the company and our people, shareholders and customers are going to win. That's been my whole life story.

• 2:22:30Ben Gilbert?

  And that's basically worked for decades and decades. It also seems like when you Starbucks has become such an institution in our society that leading a small disruptive organization, everyone gives you the credit for all the positives and all the exciting things you're doing. And you sort of get a pass on anything that didn't work. Move fast and break things. When you're at this scale, everyone expects you to be wildly successful all the time because you always have been. But anything that's misaligned, that is where 100% of the focus is.

• 2:23:04Speaker 02

  Well, I think if you take a step back, not from Starbucks, but if you say to yourself, what company has gotten big in the food business and stayed true to its core purpose and reason of being and then stayed positively inclined to its customers?

• 2:23:23Speaker 02

  What are you gonna name? And so the odds on getting this big and still being revered for who you once were is very, very difficult. And I would argue, in so many ways, we are better today than we were when we were smaller. That is expected of us. But I don't think we get much credit. Maybe we shouldn't. Maybe this is our responsibility. The elements, the characteristics that built the Starbucks business, the culture, is compassion, empathy, and love. Those are not just words. It's like real things that are not, they're not being taught in business schools. And people on the outside view it as not true.

• 2:24:08Speaker 02

  Well, I'm telling you, the reason we've succeeded is because the underpinning of the company's purpose has been just that. And it's much harder today to execute that because you're dealing with cynicism as the first order of defense that you have to overcome. But the responsibility as leaders is to do just that.

• 2:24:34Ben Gilbert?

  All right. I'm gonna take us to Starbucks today. I'll kind of map that out and give you the stats. And then we're gonna go into playbook where we basically try to take all the lessons we just learned over the last few hours and figure out why did Starbucks work? And at such a grand scale that it did. So to catch listeners up on the business today, Starbucks does $36 billion in revenue, 4.1 billion in net income. There are 380,000 employees. You gave me a stat.

• 2:25:05Speaker 02

  I think over 450,000.

• 2:25:07Ben Gilbert?

  450,000 now.

• 2:25:08Speaker 02

  Globally.

• 2:25:09Ben Gilbert?

  I must be using an old number. And over the lifetime of the company, has employed over 5 million.

• 2:25:14Speaker 02

  Yes. 5 million alum.

• 2:25:16Ben Gilbert?

  At a scale right there. 39,000 stores globally in 86 countries, almost half of which are in North America, 18% in China. And about half of those are licensed franchise and half are company operated. And so while we're not, you know, you mentioned we don't franchise in the traditional McDonald's sense. You do these joint ventures and you do this, this way of entering countries where you don't need to own and operate the entire store yourself.

• 2:25:47Speaker 02

  They're not franchises in the typical sense.

• 2:25:50Ben Gilbert?

  Yeah, so tell us about.

• 2:25:51Speaker 02

  And I think we should talk about that.

• 2:25:52Ben Gilbert?

  Yeah.

• 2:25:53Speaker 02

  The joint venture relationships that we've established, and some goes back almost 30 years, in the Middle East, in Latin and Central America, now in Italy, in the EU, in India.

• 2:26:09Ben Gilbert?

  And what does it mean to be your partner?

• 2:26:11Speaker 02

  So, every country is different depending on the economics of that country, the political issues. Some countries have been an 80/20. Starbucks owns 80, they own 20. Some are 50/50. Some of the 80/20 started out as 80 for us and they bought it in over the way. It depends. But the key thing is, whether it's Alberto Torado in Latin and Central America, Mohamed El Shaif in the Middle East, the Tata Group in India, the Precasi family in Italy, they understand the culture and values of Starbucks.

• 2:26:50Ben Gilbert?

  And so tactically, you know, you said it's not a franchise in the traditional way. What are Starbucks responsible for and what is the partner responsible for?

• 2:27:01Speaker 02

  Starbucks is responsible for roasting the coffee, for all the recipes which are consistent with Starbucks worldwide, a co-design of the store where we're designing the store with the JV or the licensed partner, and they control all the operations.

• 2:27:19Ben Gilbert?

  And so all of Starbucks' franchise or licensed stores are done in this way where there's a partner in a country?

• 2:27:27Speaker 02

  Yes. They're not, no individual licensed franchises of any kind unless it's certain real estate that we can't get that we want access to, like a roadway on a highway in Switzerland, or something odd.

• 2:27:43Ben Gilbert?

  I see. And airports are this way, right?

• 2:27:45Speaker 02

  Airports are master licensed with the master licensee, like whoever has it, like Marriott or whoever has it.

• 2:27:53Ben Gilbert?

  I gotcha.

• 2:27:53Speaker 02

  Or Target that has 2,000 Starbucks stores.

• 2:27:56Ben Gilbert?

  And those are Target operated?

• 2:27:57Speaker 02

  Yes. Yeah.

• 2:27:59Ben Gilbert?

  I see.

• 2:28:00Speaker 02

  And great partner. And Brian Cornell, great guy.

• 2:28:03Ben Gilbert?

  And it's interesting, the, basically, you know, half of Starbucks stores look like the platonic ideal of coming out of the Starbucks HQ. Here is how we imagine this, this store to be. And half of them are, there's some reason why we alone can't do this and need a partner. And you, you know,

• 2:28:22Speaker 02

  Yeah.

• 2:28:22Ben Gilbert?

  you spend a lifetime building this.

• 2:28:23Speaker 02

  I mean, ideally, you want the customer experience to be the same worldwide, regardless of the shape and size of the store, where it's located.

• 2:28:30Ben Gilbert?

  Makes sense.

• 2:28:31Speaker 02

  Which is not always the case. I admit that.

• 2:28:34Ben Gilbert?

  So one market that we haven't talked about that I, I want to ask you about while we're in this, and then we'll get to playbook, is Italy.

• 2:28:41Speaker 02

  Yeah.

• 2:28:42Ben Gilbert?

  The whole thing came out of Milan.

• 2:28:45Speaker 02

  Right.

• 2:28:45Ben Gilbert?

  And yet, for decades,

• 2:28:47Speaker 02

  Fifty years.

• 2:28:48Ben Gilbert?

  No Starbucks, fifty years, no Starbucks in Italy. And the belief, at least as I see it, is they've perfected the coffee house concept. Don't bring imitation in here.

• 2:29:00Speaker 02

  Okay, yeah.

• 2:29:01Ben Gilbert?

  But it's worked. It's, it's working phenomenally well. Why is Starbucks being so well received in Italy?

• 2:29:07Speaker 02

  So I, I know I'm going to be chastised for what I'm about to say, but it's true. The, by and large, coffee in Italy is not as good as it once was. There are certain coffee companies that have maintained the standard, but by and large, the coffee is not as good. I'm going to be killed for that, but that's, that's, that's my truth.

• 2:29:32David Rosenthal?

  If you don't believe you have a better product, who does?

• 2:29:35Speaker 02

  Yeah, but I, I didn't think we earned the right to go to Italy until we were really ready to present ourselves in the best possible way. Because I knew the knives would be out for us in ways that we couldn't even possibly imagine, given the, the history and the cultural relevance of espresso in the coffee bar. And so we waited and waited and waited until the Roastery. And so, before we get to Italy, I have to explain the roastery for you. Please. I mean, the first time I went in there, you know, candy store, wide eyes. So there are six roasteries, starting in Seattle, Chicago, New York, Tokyo, Shanghai,

• 2:30:17Speaker 02

  and Milan. The roastery itself is probably the most entrepreneurial, creative project that I could recall in my history of Starbucks. What is the experience we could create that just absolutely blows people away? So what did I do? As a kid, I've loved this movie. And so I invited the most creative people in the company to my house. And I said, we're gonna watch a movie. Of course, they thought I was nuts. And I turned on Willy Wonka. I was gonna say, that has to be it. Turned on Willy Wonka with Gene Wilder. And we went to work, starting to design

• 2:31:01Speaker 02

  a space. Now, we realized early on. And this was what, 2013, 14? Eight years ago. Now, we realized economically, this is a tough business model. So what are we trying to do? We're trying to create an experience that is accretive to the brand and significantly elevate Starbucks, which is fighting ubiquity all the time, every day. And so, we created this 30,000 square foot space in Seattle, which we opened seven years ago, which is the most dynamic, entertaining vehicle of theater, romance, seduction. And

• 2:31:45Speaker 02

  we opened it to rave reviews. And we're manufacturing, like Willy Wonka did, we're manufacturing and roasting coffee in the space. Which makes the smell of the... Yeah, it's just amazing. So we opened it up, and then, over time, we started opening a couple more. We got approval from the Chinese government to manufacture in the center of Shanghai. We opened up a 40,000 square foot in Shanghai. We opened up an incredible space in Tokyo. We opened up in the old Crate and Barrel space in North Michigan Avenue in Chicago. We opened up in the meatpacking business in New York. But the shrine has to be Milan. This is the way to go back. And this is the way we open on Italy. Now...

• 2:32:28Speaker 02

  Our partner in Italy is the Precassi family, fantastic people who are in the real estate business. And they are showing me, I'm going back and forth to Milan like all the time because they've got real estate and I gotta see it, I gotta touch it, I gotta smell it. I keep going back and back and back. No, not the right site, not the right site. And I'm standing on the corner of Cardozo Square and I look at this face and I say, "What about that?" And he says, "That's the post office. You can't get the post." I said, "Well, it's empty. It's empty. You can't get it." So I said, "Can I meet the landlord?" He said, "Howard, it's the government." I said, "Well, who's responsible for it?"

• 2:33:11Speaker 02

  So they arrange a meeting for me. And I meet the broker who's involved in this, but it's empty space. And I find out the story is that these government buildings during the financial crisis were sold to private equity. So I said, "Who's the landlord?" "I'm not, I can't tell you." "You have to tell me you're the landlord."

• 2:33:33Ben Gilbert?

  Private equity that's letting real estate sit empty?

• 2:33:35Speaker 02

  I know where this is going. Okay, it turns out, I know I'm gonna get killed for this story, you're gonna have to fix this. Turns out, the owner of the space is Blackstone. I knew it, I knew it. Of course. Of course. So I said, "Why am I in Italy?" I called John Gray. You gotta go to New York. Called John Gray, a friend of mine. No way! I said, "John, I'm in Milan. Do you realize you own this space in Cardozo Square that used to be a post office?" He said, "I don't know, let me check." I said, "John, I'm coming to see you tomorrow." I'm on the next flight. We do the deal with John Gray. Amazing.

• 2:34:14Ben Gilbert?

  Unbelievable.

• 2:34:15Speaker 02

  John Gray, of course, being the number two person at Blackstone. So, uh, and John's a big fan of Starbucks. He had previously been in Seattle for a wedding or a bar mitzvah or something and saw the roastery. So he knew exactly what I was talking about. And so that is how we entered in Milan. Now, we have 30 stores, we have 30 traditional stores in Italy. Did they already exist before the roastery opened? No, Milan opened first. First the roastery. Then 30 stores, we're in Milan, we're in Rome, we're in Florence, and, um...

• 2:34:52Speaker 02

  Two, three years later, what do you think the number one beverage is? It's espresso. For Starbucks.

• 2:35:01David Rosenthal?

  Yeah.

• 2:35:01Speaker 02

  Straight espresso. Espresso is the number one beverage.

• 2:35:04David Rosenthal?

  Wow.

• 2:35:05Speaker 02

  And so we're, I don't take the success in Italy for granted. We've got to continue to earn it. But what I'm most proud of is that we've respected the Italian people and coffee culture for 50 years and they embraced us.

• 2:35:19Ben Gilbert?

  And so the implication of espresso being the number one beverage is it's not tourists. It's the Italians coming to Starbucks.

• 2:35:25Speaker 02

  There's a lot of tourists coming into the roastery, but yes.

• 2:35:27David Rosenthal?

  And that they're choosing to get their espresso at Starbucks, not it?

• 2:35:31Ben Gilbert?

  Yeah.

• 2:35:32Speaker 02

  So, you know, Italy, I'm going to Italy, I think next week, but just for me, the gratification, the satisfaction of, you know, complete full circle from 1983 is just beyond belief for me.

• 2:35:49David Rosenthal?

  I'm wondering, another backdrop to the roastery and really throughout all the 2010s, must've been third wave coffee. And I'm sure it was on your radar screen.

• 2:36:02Speaker 02

  Yes.

• 2:36:03David Rosenthal?

  At the same time, it doesn't seem like it's ever made a dent in Starbucks.

• 2:36:08Speaker 02

  There has always been stories that all these competitors were going to steal business from Starbucks, but from 1983 to all the way today, the consumption of specialty coffee is still a small amount relative to the macro opportunity. So all those people have expanded the market with and for Starbucks. Now, we created an industry that didn't exist and they have followed us and done really good things, but we're not threatened by that.

• 2:36:36David Rosenthal?

  Interesting. So you think third wave coffee brought consumers into the coffee culture market?

• 2:36:43Speaker 02

  Yes.

• 2:36:44David Rosenthal?

  That have then also become Starbucks consumers and maybe they wouldn't have been coffee culture consumers at all?

• 2:36:49Speaker 02

  Yes.

• 2:36:50Ben Gilbert?

  Hmm. How do you define third wave coffee? Actually, Howard's probably the best person to ask.

• 2:36:54Speaker 02

  I mean. It's a very intentional, independent coffee store that is small enough that they're roasting their own coffee, or getting coffee from a small proprietary roaster.

• 2:37:10Ben Gilbert?

  Mm-hmm.

• 2:37:11Speaker 02

  And creating a very unique, handcrafted experience that in many ways Starbucks can't do in scale.

• 2:37:21Ben Gilbert?

  Right.

• 2:37:22Speaker 02

  And so I tip my hat to them, but there's no coffee experience in the world that comes close to the roastery, any of them.

• 2:37:31Ben Gilbert?

  And do those roasteries break even, or are they this like, marketing showpiece?

• 2:37:35Speaker 02

  Some are making money and some aren't.

• 2:37:38Ben Gilbert?

  Wow.

• 2:37:39Speaker 02

  But I don't, I don't, I've never viewed it that way. It's like the billboards. It's, you can't, you couldn't put a price on the hundreds of thousands of people that come into this roastery and have an experience of a lifetime. And I took Mr. Arnault to the roastery.

• 2:37:54Ben Gilbert?

  Really?

• 2:37:55Speaker 02

  I did, yeah.

• 2:37:56Ben Gilbert?

  In Milan?

• 2:37:57Speaker 02

  In Seattle.

• 2:37:58Ben Gilbert?

  In Seattle?

• 2:37:59Speaker 02

  He and his son, yeah.

• 2:38:00Ben Gilbert?

  Wow.

• 2:38:01Speaker 02

  Yeah, I spent a good amount of time with him. I've taken a lot of, of retail CEOs and iconic business people to the roastery.

• 2:38:10Ben Gilbert?

  I bet.

• 2:38:11Speaker 02

  Who have, who want to see it.

• 2:38:12Ben Gilbert?

  Wow. What was Bernard doing in Seattle?

• 2:38:15Speaker 02

  I don't know what he was doing in Seattle, but I spent a fair amount of time with him and his son, and his son now runs Tiffany.

• 2:38:20Ben Gilbert?

  Oh, great.

• 2:38:21Speaker 02

  Wow. And he, his level of curiosity was very high. I remember, he was, he kept looking at the leather railing and the stitching, and I just said, he's spending a lot of time on the leather.

• 2:38:33Ben Gilbert?

  I bet he was.

• 2:38:35Speaker 02

  Maybe there's a partnership to be done.

• 2:38:36Ben Gilbert?

  Okay, so now the question sort of becomes, what are the set of circumstances that had to be true in order for Starbucks today to exist? And the one thing we haven't talked about, or one of the things, is how much of what Starbucks has accomplished could have happened if it wasn't an addictive substance? Like, it's kind of this incredible thing that it's a legal drug, that all the research anyone's ever done into caffeine is, by and large, it's neutral to helpful. And like every other drug that, you know, at some point, people have enjoyed, whether it's smoking or drinking, and more as research comes out over time,

• 2:39:21Ben Gilbert?

  we find out, shoot, that wasn't good for us. That's not the case for coffee.

• 2:39:25David Rosenthal?

  No.

• 2:39:25Ben Gilbert?

  What an amazing thing to get to build a business on this delightful thing. We have to consume every day because we're addicted and it's pretty good.

• 2:39:32David Rosenthal?

  And it gives you superpowers.

• 2:39:33Ben Gilbert?

  Yeah.

• 2:39:34Speaker 02

  I'd like to believe it's not based on what you are characterizing as an addictive beverage. I'd like to believe it's the experience that has been created around the enjoyment of the coffee and the experience that happens. I also think, and we haven't really spoke that much about it, is I can't state enough over the last two decades, what customization meant to the company.

• 2:40:08Ben Gilbert?

  Hmm.

• 2:40:08Speaker 02

  And how customers created a personal beverage well beyond what the menu was. And I don't know any other business.

• 2:40:18David Rosenthal?

  Yeah.

• 2:40:19Speaker 02

  In which the incrementality of the price has been dictated by the consumer. The base price is X, but most people are doing something.

• 2:40:31David Rosenthal?

  X plus Y.

• 2:40:32Ben Gilbert?

  I have a very specific drink that I like. And when I go to coffee shops that are not Starbucks, I can't get it because it feels taboo to order. Like I like an iced almond milk latte with whipped cream. And when I go to most coffee houses.

• 2:40:46Speaker 02

  They don't want to give you whipped cream.

• 2:40:47Ben Gilbert?

  I'm like, I can't ask for whipped cream on top of that. But Starbucks, they're like, of course, that's what we do here.

• 2:40:53David Rosenthal?

  This is something that I think has translated incredibly well to the mobile app.

• 2:40:56Speaker 02

  Yes.

• 2:40:56David Rosenthal?

  And that no other.

• 2:40:58Speaker 02

  Yeah.

• 2:40:58David Rosenthal?

  Food company has really the level of customization.

• 2:41:02Speaker 02

  And I think the mobile app actually added velocity to customization. It powered customization.

• 2:41:11Speaker 02

  And I think the Starbucks barista deserves so much credit because they are dealing with so many different variations of beverages, some of which they're making for the first time on the fly. Hard to do. It's a hard work.

• 2:41:30Ben Gilbert?

  It has to be a good number because there's, I don't know if it's, I haven't done the math, billions, trillions of combinations of possible drinks. And so it has to be every single day as a barista, you're making something for the first time.

• 2:41:43Speaker 02

  Yes. I think the number that people use inside the company is 100,000 different variations of beverages that are being made consistently. 100,000 different beverages.

• 2:41:58David Rosenthal?

  This is actually a really interesting way to lead into playbook because on the surface, it's like an obvious question, right? Like, yes, it's an addictive substance, caffeine. Of course. On the other hand, you're in a highly competitive market.

• 2:42:14Ben Gilbert?

  Right. Selling a commodity.

• 2:42:16David Rosenthal?

  And the market actually is not just coffee. It's, let's stick with this theme, it's caffeine broadly, of which there's Coca-Cola, there's Pepsi, there's, you know.

• 2:42:26Speaker 02

  Well, not only that, but every food company, every retail food business from McDonald's on, took a page out of Starbucks, went to school on us, put espresso machines in their stores and started doing coffee beverages. That also expanded the market.

• 2:42:40David Rosenthal?

  And I think the real question is, for us here, nobody has built Starbucks despite decades in a highly competitive market with, whether it's third wave or competitors in other geographies, or domestic competitors, or McDonald's getting into the business, or Folgers and Maxwell House. There is a unique tapestry that we've been weaving throughout this episode that, you know, in Hamilton Elmer's terms, has power here.

• 2:43:10Ben Gilbert?

  Yes. Coffee. So here's my second one in addition to the, it's addictive but delightful. It is perceived to be virtuous to be a barista, or it is not perceived to be virtuous to flip burgers. And I don't know if that's something Starbucks created. I don't know if that's something inherent to the product. I don't know if that's because it has this Italian lineage, but there's all these incredible benefits that Starbucks and any other coffee house chains get to enjoy

• 2:43:47Ben Gilbert?

  because it's respected to do that work. And I'm curious, why do you think that's respected when similar ways of spending your hours in restaurant work isn't?

• 2:44:02Speaker 02

  First of all, I've never heard it quite like that. And I think that's a very interesting insight. There is craft and art to the expression of making the beverage. I also think the intimacy of the relationship with the customer is so different. And baristas know the names of their customers. They know their dog's name. We have a drive-through and I saw a video where the barista knows the name of the dog and knows that it's just the whole thing. It's just like a magical dance that happens when the cars pull in and all of a sudden, it's

• 2:44:46Speaker 02

  not a transaction. One of the beauties that we've been, we have been able to do is elevate the experience at the drive-through, not all the time. So I think your question is steeped in, one is a commoditized environment and the other clearly is not.

• 2:45:05Speaker 02

  And the challenge for Starbucks is continuing to innovate for the barista.

• 2:45:13Ben Gilbert?

  And when you, in this category, to extend that point, you start from a place of this a good job and you can sort of improve the experience for that employee so they can improve the experience for your customers. Whereas in other things that are commoditized, they start from a position of I have to do this job. And it's a really tough uphill battle to invest in your people. Whereas Starbucks kind of has a tailwind.

• 2:45:40Speaker 02

  But it is a hard job.

• 2:45:41Ben Gilbert?

  Certainly.

• 2:45:41Speaker 02

  And we have to honor the people who are doing it, more so today than ever before.

• 2:45:48Ben Gilbert?

  Yep. Another one that I have is, it's funny, it flies in the face of some of the pitfalls of ubiquity that we were discussing before. The fact that it is everywhere almost cheapens the experience. To me, Starbucks' ubiquity is a massive feature. The fact that I can go anywhere in the world and get basically my same order, or certainly anywhere in America and get my same order. I can even do it from the mobile app in a way that I'm very familiar with ordering. It's reliable, it's predictable. Like, it's the same reason I bank with Chase and I buy Apple products. It's this thing that I just know works everywhere and I never have to, you know, take any risk on. And Starbucks didn't have that when it was starting,

• 2:46:32Ben Gilbert?

  but it really feels like it's reached this scale that no one else can really compete with the level of ubiquity.

• 2:46:40Speaker 02

  So ubiquity, earlier on in our conversation, I said ubiquity is an enemy of Starbucks. And it's an enemy because we can't be defined by our ubiquity. We have to be defined by the one store you come into, not based on the thousands, but that experience you have in the store.

• 2:47:01Ben Gilbert?

  Yep.

• 2:47:01Speaker 02

  So if the ubiquity is driving trust and driving convenience, we have to ensure the fact that we are providing that intimacy in the store and not allowing ubiquity to commoditize the experience. That, that is the framework of the daily challenge of the company.

• 2:47:24Ben Gilbert?

  Frustratingly, for those of us who are trying to analytically put this puzzle together, the humanity is actually the answer.

• 2:47:31David Rosenthal?

  Yeah.

• 2:47:31Ben Gilbert?

  Scaling humanity is actually the...

• 2:47:34David Rosenthal?

  Yeah.

• 2:47:34Ben Gilbert?

  You know, along with...

• 2:47:35David Rosenthal?

  That's a challenge.

• 2:47:36Ben Gilbert?

  This obsessive quality of product, the fact that product isn't just product, but experience is the product. It's everything you experience around consuming the beverage itself. It's a bunch of the things we've already talked about. You invest in your employees, they take care of the customers, who takes care of the shareholders, but the shareholders are last. It's the fact that, oh yeah, we talked about the store cash flow dynamics, that you can scale in a really cash efficient way when you're paying the stores back in less than two years every time. Every store is a billboard, so you're intentionally picking real estate in these places where you're building familiarity with people. They're walking by over and over and over. You're extending the brand by doing United Airlines, by going to grocery stores.

• 2:48:19David Rosenthal?

  Everything is a billboard.

• 2:48:20Ben Gilbert?

  Everything is a billboard. Yeah, that's the, like, why pay for customer acquisition when you can, you know,

• 2:48:26David Rosenthal?

  Partner for it.

• 2:48:27Ben Gilbert?

  Get product in people's hands.

• 2:48:28David Rosenthal?

  Yeah.

• 2:48:30Ben Gilbert?

  The third place, you know, very novel idea at first. Turned out that was something basically the entire country and then the world wanted to participate in, not obvious at first. And it's so easy to think about these things that now we take completely for granted. Like Starbucks is infrastructure in our society. It is assumed, like when I go to an airport or a city and there's not an easy way to get to a store, I'm like, what?

• 2:48:56David Rosenthal?

  What is this place?

• 2:48:57Ben Gilbert?

  What backwards place am I in? Like, it's expected. And when you live with something, you know, most of your life, you forget that it was once a crazy idea. I think that's the...

• 2:49:10David Rosenthal?

  Yeah. I think the other piece that you didn't just list off there that we've covered in depth is, you know, the Costco-like investment in your employees.

• 2:49:18Ben Gilbert?

  Yep.

• 2:49:19David Rosenthal?

  And the people and the reduction of turnover. And, you know, in Costco's case, I think it's probably much more so the reduction of turnover. In Starbucks's case, it really is like, that's a key, the key element to building the humanity, right? Like, I don't know the employees at my Costco store.

• 2:49:41Ben Gilbert?

  What's the stat that you have on, I've heard you say it a number of times, on employee tenure at Starbucks versus others in the category?

• 2:49:48Speaker 02

  It's a 2X is what I believe.

• 2:49:50Ben Gilbert?

  That employee tenure is 2X longer or turnover is half of what it is industry wide.

• 2:49:54Speaker 02

  Yes.

• 2:49:56Ben Gilbert?

  It makes a huge difference.

• 2:49:57Speaker 02

  And you've talked about Beanstalk, you've talked about comprehensive health insurance. When I think about the most important thing we probably have done in the last 20 years, it's been the unique relationship that we established with Arizona State University and its president, Michael Crowe. Could we create free college tuition, a four-year free college tuition through our other own state for every single partner at Starbucks? And we did it. And thousands of Starbucks partners are engaged and going to school and thousands have graduated. The College Achievement Plan demonstrates going back to the early years of the speeches

• 2:50:40Speaker 02

  I was giving about what is the responsibility for a for-profit company in the world we're living in? And it's not just to make money.

• 2:50:50Ben Gilbert?

  Here's one that we haven't talked as much about.

• 2:50:55Ben Gilbert?

  You were part of this secular trend of gourmet coffee. And I'm curious if you view that to be a true statement or if you're saying, no, we created this entire wave. It wasn't going to happen.

• 2:51:09Speaker 02

  No, I don't want to sound arrogant at all, but I think it's so clear that Starbucks created an industry that did not exist. And as a result, tens of thousands of stores have fallen in our wake and we created an employment industry that did not exist. Not to mention it's 5 million, it's 5 million alum.

• 2:51:35Ben Gilbert?

  Right. Yeah, that's a lot of people who have gone on to do other things after.

• 2:51:38Speaker 02

  And I think one thing that's always been missed is that Starbucks has always been a great first job.

• 2:51:46Ben Gilbert?

  So in your mind, then, let's say there's a parallel universe where Howard Schultz doesn't exist. The year is 1995. Is there a nationwide chain not called Starbucks with gourmet coffee taking off in the United States because the conditions were perfect for it?

• 2:52:08Speaker 02

  I would assume that there would have been a national franchised business that would have occupied the coffee space, but would have been more commoditized.

• 2:52:20David Rosenthal?

  A Dunkin' Donuts, for instance.

• 2:52:23Speaker 02

  Yeah, I don't think anything would have been executed like Starbucks. But I think someone would have showed up.

• 2:52:32Ben Gilbert?

  Right.

• 2:52:33Speaker 02

  The opportunity was just too much white space.

• 2:52:35Ben Gilbert?

  There was clearly demand there. We were coming off this horrible Folgers and Maxwell House era, and there was this growing demand. But that doesn't mean that a company like Starbucks would have been created. It means just in some way that consumer demand would have been satisfied.

• 2:52:52Speaker 02

  Well, just remember, our intent was not to build a global business. You know, the first business plan, and I've said this many times, when I was raising money, was 100 stores. And I wasn't raising the money and I couldn't afford to reprint the whole document, whatever that was at the time. And I whited out. No one even know what that means.

• 2:53:12Ben Gilbert?

  How do you use "whited out"?

• 2:53:13Speaker 02

  I whited out 175.

• 2:53:15David Rosenthal?

  When was the last time you used "whited out"?

• 2:53:17Speaker 02

  Yeah.

• 2:53:18Ben Gilbert?

  It's been a while.

• 2:53:19Speaker 02

  Yeah.

• 2:53:20Ben Gilbert?

  Wait, really? So you...

• 2:53:21Speaker 02

  Yeah, I whited it out, 75, because I couldn't...

• 2:53:23Ben Gilbert?

  Did it feel too ambitious?

• 2:53:24Speaker 02

  Yeah, people didn't believe.

• 2:53:26David Rosenthal?

  Think you were crazy.

• 2:53:27Speaker 02

  But we never, you know... Japan was the turning point of thinking we could build an international business. But none of us had any international experience, no one, in the entire company. I mean, in many ways, you could say this shouldn't have happened.

• 2:53:46David Rosenthal?

  Yeah.

• 2:53:47Ben Gilbert?

  Okay, so this brings us to the absolute magic of founder-led businesses. I mean, when you have a founder at the helm, you get all this leeway from shareholders, from employees. You can take crazy risks. And people know it's because you're you. But for you, it wouldn't exist at all, so run with it. What are the biggest innovations that have happened at Starbucks, not under Howard Schultz?

• 2:54:16Speaker 02

  What a question. I'm pausing, not because there hasn't been any, because I'm sure there has been, but I'm hard pressed to kind of think about what it was.

• 2:54:30Ben Gilbert?

  I don't think you were running the show when the pumpkin spice latte came out.

• 2:54:35Speaker 02

  Yes, I was.

• 2:54:35Ben Gilbert?

  You were. I thought I had one.

• 2:54:37Speaker 02

  Yeah, I didn't like it.

• 2:54:39Ben Gilbert?

  Oh.

• 2:54:41Speaker 02

  Yeah.

• 2:54:42Ben Gilbert?

  It does feel like you were obsessed with the purity of the Italian coffee bar for a long time, and then at some point you were like, actually, what I'm obsessed with is serving customers in whatever they want from us.

• 2:54:55Speaker 02

  Well, the Il Gialli store only played Italian opera and had no chairs.

• 2:55:01David Rosenthal?

  I mean, that wouldn't have scaled as well.

• 2:55:02Ben Gilbert?

  I'm recalling my time from Rome two years ago. That's literally, I'm walking around Rome and that's everywhere.

• 2:55:07Speaker 02

  Yeah.

• 2:55:08Ben Gilbert?

  It's completely different than.

• 2:55:09Speaker 02

  No, I think I had to see the light. I had to understand. We were not a business to please me, but please the customers.

• 2:55:15Ben Gilbert?

  I mean, what is it, 70% of drinks are now ice beverages? And it was when you started, 0%.

• 2:55:21Speaker 02

  Didn't have a cold beverage.

• 2:55:22Ben Gilbert?

  For the first decade, it was 0.

• 2:55:24Speaker 02

  Yeah.

• 2:55:25Ben Gilbert?

  So to me, there's this thread of, at some point, shaking off your own opinions and saying, we're going to do what the customer wants us to do.

• 2:55:36Speaker 02

  To a degree.

• 2:55:37Ben Gilbert?

  Yeah. But I was clearly leading, there was a leading question around innovations, not under.

• 2:55:43Speaker 02

  Yeah. So what's the point? What's your, it's not that there hasn't been innovation. I think there's a burden that the organization has and a reliance on the founder that over time can become unhealthy. And not that I didn't want succession, I just, I wasn't really on my mind. And the marketing and the merchant mentality of Starbucks was always with me and probably did not allow others who were well-intended and could have done

• 2:56:27Speaker 02

  good things were following and leaning on me, which is not the healthiest thing over the longevity of the company. And I think that has covered up mistakes, that's covered up things and then was revealed when I left.

• 2:56:44Ben Gilbert?

  I mean, it's the very things that make the business successful, the founder bets, that then at some point in the company's second act, kind of hold it back. You have all this muscle memory as a company of relying on founder maverick acts. And at some point, you need to figure out how, as a company, to not.

• 2:57:04Speaker 02

  Well, the other thing about that is, most founder-led companies are entrepreneurially driven. They're not, it's not that they're not following the rules, they're making the rules, especially if you're creating an industry that did not exist. Founder leaves, and I'm not talking about me, historically, and companies lose not only the extent of the entrepreneurial DNA, but they lose the ability to be on offense. And the worst thing that a company can do, like a sports team, is start playing defense because you're afraid to fail.

• 2:57:49Speaker 02

  That is a disease, not unlike another disease, which has happened at Starbucks, which is hubris. The worst thing that could happen to a company is believing that you are incapable of doing anything but succeeding, and you deserve the success. But if you start playing defense and don't have the offensive mind, it's not going to go well. And I think, over time, that has happened at Starbucks.

• 2:58:21Ben Gilbert?

  You've transitioned from being the CEO to someone else three different times. If you could go back, let's even just say the first time, if you could go back, yours 1999, or 1997, so you can start working on some talent development, what would you do differently to make sure that succession?

• 2:58:41Speaker 02

  I would have believed Orin when he said, "I only want to do this for a couple of years." And I convinced myself, I could just get Orin to do this for five years, maybe 10 years. And so, when he kept saying, "You know, I don't want to do this anymore." So I was stuck because I was not prepared. To look around the room and say, God, I think he could do it. And if I would have spent maybe a year or two, but I didn't. I was very, I believe that I could convince Noren to stay longer. And so I think, and also Jim Donald's a great guy, but I think the immersion of an outsider at that time, given we were moving into a crisis. Not a Starbucks crisis, but the Financial crisis.

• 2:59:25Speaker 02

  Financial crisis, very difficult. So it's on me, I think, when I look back and I just did not do a very good job of recognizing the internal talent and cultivating it. But I want to, I want to say one more thing about Starbucks. And it's the complexity of it. We're in multiple businesses. So we're in the agricultural business. We are buying coffee from 30 producing countries around the world. We are subject to weather and the agricultural issues, some of which are, many of which are not in our control, political, all kinds of stuff. Second, we are manufacturing

• 3:00:10Speaker 02

  a commodity that is very, very challenging because it's coming from 30 producing countries. And each coffee, each coffee from every country has its own proprietary taste profile that has to be roasted differently. And when you're blending it like a winery, it's art. And so we're, we're an agricultural buyer. We are a manufacturer. We are a retailer. We are a wholesaler. We are managing JV relationships in 80 countries. We have JVs with two behemoth companies, Nestle and Pepsi-Cola.

• 3:00:54Speaker 02

  And above all else, we are in the people business, managing the behavior, the motivation, and the opportunity creation for five, almost 500,000 people.

• 3:01:07Speaker 02

  And we're a public company in which the expectations based on our success have been higher than most.

• 3:01:15David Rosenthal?

  Not to mention you're a quasi-financial institution, too.

• 3:01:18Speaker 02

  Yeah, and we've got, yeah, all of that. And lastly, I think the personal responsibility of a founder, in my case, who loves this company as much as I love my family. And so it's a challenging, fragile thing on a very personal level, and you can't escape it. You made your point, you want to go somewhere and get, I mean, you can't escape it, so it's always around you.

• 3:01:52David Rosenthal?

  I'm so glad you're bringing this up. It really resonates to us, hearing you say that, like, it's the way we feel about acquired in our show.

• 3:02:00Speaker 02

  Yes.

• 3:02:00David Rosenthal?

  And like, to imagine, like, that's easy for us. We have no stakeholders. We never would expect that this would scale to 500,000 people. If it did, I can't even imagine the complexity of that.

• 3:02:12Speaker 02

  But you also have, now that you've achieved this level of success, you have an expectation that you've got to keep, not reinventing, but you've got to make sure that you're as good as you've been.

• 3:02:24Ben Gilbert?

  No better.

• 3:02:25Speaker 02

  Yeah, better. You've got to be better. Again, and your success is not an entitlement, like Starbucks, just isn't. And when you have success, it gets harder, because the bar keeps getting higher.

• 3:02:38Ben Gilbert?

  Yeah, that's just human expectations. Going into this, I was thinking, I had some funny thing occur to me, which was, at some point, why does Starbucks need to grow anymore? It's already everywhere. And of course, like, it's a public company, so it literally has, just has to keep growing. But it's just human expectation that things keep getting better than they were last year. They should.

• 3:02:58Speaker 02

  They should.

• 3:02:59Ben Gilbert?

  People should just figure it out and make it better. We all think that about every product and experience that we have.

• 3:03:04David Rosenthal?

  Indeed.

• 3:03:06Ben Gilbert?

  Well, listeners, we were thinking about how to land this episode. And in our normal episodes, we land the plane in some way or come up with the one thing you really, you can't leave the episode without thinking about. And I feel like we covered a lot of those in playbook. And so rather than drilling into that again, we were talking with Howard and he threw out this idea. I really do have one more thing to say.

• 3:03:28David Rosenthal?

  Yeah, given this moment that Starbucks is in right now, here in summer of 2024, this felt like the right way to address that.

• 3:03:36Ben Gilbert?

  Back to the interview. Well, Howard, we're, we're at the end here and I think listeners may be wondering, okay, but what about Starbucks today?

• 3:03:46Speaker 02

  Yeah.

• 3:03:47Ben Gilbert?

  And the last few years have seen, you know, you come back as interim CEO for a year, transition to a new CEO. It's been about a year after that. And it's been a rough couple of years. I mean, part of it is coming out of the pandemic, but I think anybody who tuned into the last earnings call is wondering what's up with the future of this company.

• 3:04:06Speaker 02

  Right.

• 3:04:07Ben Gilbert?

  Can you give us a little bit of narration on what brought you back, the things you did and where the company is today?

• 3:04:12Speaker 02

  Yeah. Let me try and go back to when I returned as an interim CEO in April of 22. I was asked by the board to come back to the company and I said, no, I, my, my life has changed. I have, I have no desire to come back. I have no intent to come back. But it was clear to me as the weeks were going on that the company was heading into a existential crisis. And if your listeners take anything away from what we've talked about is my love of the company is so significant that I, I changed my life and I came back to the company.

• 3:04:56Speaker 02

  Now, when I came back, And I want to be fair, I don't want to criticize anyone. But when I came back, I saw things that really surprised me about the lack of investment over a four to five year period. And also, I didn't like the way the stock buybacks were being used to basically increase EPS. And it's no way to run a company. So the first day I came back, and I knew what the market would do, is I announced that we were suspending the stock buybacks and the stock went down. I expected it, and I announced that we were going to take, basically, the money we were

• 3:05:38Speaker 02

  using to stock buybacks for the year, and I think it was north of $2 billion, and invest back into the people of Starbucks, the partners, which I did. The most important thing I did, though, because I'm not a messiah, but I have an instinct about the company, and I know the inner workings of the company better than anyone else, I know the people. And so, in a year's time, despite the underinvestment and the challenges, we brought the company back to a much healthier place operationally, and certainly the stock price was significantly higher when I left. I think when I came back, when I started, it was in the 70s, when I left, it was, you know.

• 3:06:15Ben Gilbert?

  But that's an output, that's investors voting on the performance.

• 3:06:19Speaker 02

  Yeah, yeah, we don't have to talk about the stock price, we don't want to. Nevertheless, again, succession. And the board led a succession process. You have to remember, I wasn't on the board for four or five years. And I resigned when I decided to leave the company after a year, despite the board asking me to stay another year. I just said, I've done my duty, we have to find a new CEO.

• 3:06:54Ben Gilbert?

  They wanted you to be interim CEO for a second year.

• 3:06:56Speaker 02

  Yeah, they wanted, it was up to me. And I just thought we, and so the board led a search. There was a number of candidates. Laxman was chosen, I met him, I approved his hiring, but the search committee was driving the process.

• 3:07:17Speaker 02

  So now we're a year later. And I think we probably, let's just fast forward. It hasn't been a great year for Starbucks. In fairness to Laxman, there's a lot of external issues that have contributed to the pressure, like on every company. But the company has not executed the way that I think it should have. I go into the stores, you know, like I, I know the company and I think we're, we're not, we're not at our best right now. Why did I write the letter? I didn't write the letter because he had a bad interview on Kramer. This is on LinkedIn? Yeah. I wrote the letter because I had written a couple of other letters.

• 3:08:01Speaker 02

  Probably the iconic letter I wrote was entitled "The Soul of the Brand." And I was writing that letter because I was, I don't get financial information, so I don't have any understanding whether the company's making the quarter or not. I was as surprised as anyone else to see the dramatic drop in revenue and in profit. But I wrote "The Soul of the Brand" because I could smell instinctively that there were things going on that just did not feel right to me, that the shine was off the brand, that partners were maybe not as inspired as they had been. The first thing I want to say is, I've made it clear to the Starbucks board, Howard Schultz,

• 3:08:42Speaker 02

  and I've made it clear to Laxman, Howard Schultz has no desire or intent to return as CEO of Starbucks. If you want, I'll say it again. But I don't. But I can't ignore what we've just discussed for the last few hours, if the company is in a drift towards mediocrity. And I hold leadership and the board responsible for that. And my letter was not accusatory, my letter was not predatory, my letter was steeped in counsel and advice based on 40-plus years of experience in building this company.

• 3:09:25Speaker 02

  That's the advice and counsel I'm giving you. If you want to take the advice, it's up to you. If you don't, you're responsible for the outcome. And so I'm not, I have no operational role. I'm not on the board. And I'm watching from afar and rooting and cheering for Starbucks. And I wrote the letter in hope that it would be a catalyst for a positive interpretation.

• 3:09:49Ben Gilbert?

  And what were your recommendations in the letter?

• 3:09:52Speaker 02

  The one thing is, we're not a beverage company serving coffee. We are a coffee company serving people. And we need to be much more coffee forward. And we cannot continue to allow the mobile app to be a runaway train that is going to consistently dilute the integrity of the experience of Starbucks. We're not in the transaction business. We have to, we have to execute transactions. But that has to go through the lens of being an experienced business, an experienced place. People are longing for human connection, even if they're on a mobile app.

• 3:10:37Speaker 02

  Let's provide it. But I also recognize this is a complex time. It's difficult. But that's your job.

• 3:10:46Ben Gilbert?

  Yeah. Makes sense. Well, to finish the episode, I can definitely say, as an unabashed fan, the same way I opened the episode, rooting for everyone over, you know, a few miles away to pull it off.

• 3:11:04Speaker 02

  Thank you very much. And I think Starbucks is so resilient. Starbucks has had many, many challenges. I have great faith in the company and the equity of the brand and the people who wear the cloth of that company, the green apron.

• 3:11:19Ben Gilbert?

  Thanks, Howard.

• 3:11:21David Rosenthal?

  Thanks, Howard. Thank you. Great. Really enjoyed it. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 3:11:30Ben Gilbert?

  Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 3:11:41David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 3:12:01Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 3:12:14David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 3:12:25Ben Gilbert?

  All right. Well, listeners, thank you for being on the journey with us. That was super fun to do with Howard. If you want to talk about this episode, come to the Slack, acquired.fm/slash-slash. And if you want to keep going with Acquired, you're out of episodes. You've decided that I've listened to the entire back catalog and I really wish they had a second show. Good news, we have one. So check out ACQ2. Lots more interviews there. And I know the backlog and it's only getting better from here. And you can imagine that having a great piece in the Wall Street Journal and hitting number one on Apple and Spotify, which we will reflect on at some point, a totally surreal few weeks here, certainly primed the pump for a whole bunch of great interviews that we've got coming on ACQ2. And listeners, we will see you next time.

• 3:13:11David Rosenthal?

  We'll see you next time.