24 August 2010

the rise of starbucks and its business philosophy

One of my primary goals on Atma is to write about the intersection of sound philosophical principles with successful emerging business models. Its my core belief that business, grounded by moral values, is the most efficient way to improve society.

Starbucks is prime model of this philosophy. With the rise of the gen-y (and beyond) generation into the business world, you see profit as not the sole motive behind corporate actions (this could also be a cause of the free business model trend). Starbucks has taken the lead in many of the arenas - and they did it earlier than others and in a very old distribution medium.

First - let's commend starbucks on creating an innovative fast food concept. In a world of value menus and homogenous offerings, Starbucks brought the cafes of Verona to Hillsboro, TX (and even adopted it for drive-thrus). Somehow they were able to create a brand new successful fast casual concept that convinced the masses of the "third" place after work and home. Since perhaps Subway or some of the other sandwich chains, many have tried and few have been successful creating a large-scale sustainable business in this arena. They also taught us that a "tall" is really a "small".

Second - They did it right (see caveat below). They kept an uber-focus on quality from raw material sourcing to the end to end customer experience. They successfully balanced an offering that could be replicated throughout the country with an individual customer experience. They didn't compete on price, they made coffee shops cool everywhere, and grew the entire industry. Indepedent coffee shops actually grew 40 percent during 2000-2005 (the starbucks boom period). They never franchised (which would have helped profit), used only cash from operations to open new stores, and grew solely through word of mouth (didn't spend a dime on advertising until recently).

Third - They did good. They instilled the NW vibe throughout their business. They were the first company to offer health care to all employees (including part-time). Although expensive (particularly starting out, VCs didnt like it), they never wavered on this point. All of their beans are bought at prices HIGHER than commodity rates through fair trade (and generally direct from producers); they spend alot of time and effort to help the small plantations throughout the world. They have a foundation thats fairly large in helping the communities they impact.

Overall - I think Howard Schultz did good job of taking care of their employees, community and building a game changing business. CAVEAT: Sure there were issues that people can point to during their expansion years (reports of predatory pricing,etc..), but by in large, the benefits they created far outweigh the negatives. And I know that in the present, from a business standpoint, they face tremendous challenges (over expansion, increased competition). But at the end of the day - they built the business soundly from a business and cultural standpoint, and I think they will endure.

Let's hope Google truly "does no evil" and the next generation of big business embraces the Starbucks way. I think its a model that can work and hope its the rule and not the exception.


  1. Is Starbucks the only example? It does seem too good to be true. I am not sure exactly what went into the success of Starbucks, but I want to say so badly it wasn't 'caring truely about our customers and the world around' - then again I have no proof. If you go to do that, seems like you would have to have 2 things 1) unique and in-demand idea 2) non-competitive pricing. The 2nd one only works if have the 1st.

    You are right about the new generation though, I feel. I hope it is true, but then again, money does keep the world going - so that will always be the one goal. Why do you think all the guju businesses rip you off? Seems like Guju's can't do honest non-greedy business even if they already have a ton of money. Of course this goes for most businesses, but if there was one Guju business that did - I would say there is hope! ? !

  2. Good point. I think its true the luxury of catering to your employees and society in general is easier when you have something to sell with huge profit margins. Starbucks had that luxury, but so does other companies that do far less good.

  3. Starbucks is a nice, but perhaps not a representative case study. Facebook seems to be a countervailing example of "Do Only Evil Until Your Customers Complain, Then Pull Back Slightly". If Facebook prevails, and does not ultimately alienate its customers, then the example of Starbucks is severely diluted. And I'm under no illusion that Starbucks did what it did out of altruism. As a brand-driven business with huge margins it is imperative to manage brand risk by taking care of little things like fair trade coffee and employee benefits (they still aren't paying them jack).

  4. Great point. There are far more counterbalances the other way - facebook being a prime example.

    I'm under no illusion that altruism was the driving force for some of Starbucks' moves, but these characteristics were there from the outset. I think it was ingrained in their DNA. It's certainly alot better than most companies (ie FB).