Authors: Howard Schultz

Pour Your Heart Into It (31 page)

BOOK: Pour Your Heart Into It

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While we all perceived the risks involved, almost no one appreciated the ambiguities and complexities such a relationship would force us to grapple with.

For example, there was considerable debate about the appeal of cold coffee. In Japan, people are accustomed to it, and they even buy it from vending machines. But in America, cold coffee was always regarded as something brackish that deserved to be tossed down the drain.

Others viewed Pepsi and Starbucks as strange bedfellows. Starbucks appeals to sophisticated customers with discriminating tastes, while Pepsi aims to appeal to the broadest consumer base possible. Purists in the coffee business accused us of selling our soul.

In fact, it was straight uphill in the early stages of our relationship, with a clash of cultures that shook people in both companies. The tensions between Pepsi and Starbucks were predictable, if only because we came to the venture for such different reasons. Starbucks was looking to leverage Pepsi’s distribution, while Pepsi wanted to leverage the quality and integrity of Starbucks’ trademark. Because of their company’s huge size, Pepsi people tend to be process-driven and focused on one project at a time, where Starbucks people tend to work on multiple projects simultaneously. Pepsi is so big that one division can be involved in a project that another knows nothing about, as we discovered when Pepsi International announced a joint venture in China with Maxwell House.

But differences can be complementary, as long as each side values what the other can bring to the table. Rather than slug it out until one party or the other won, we resolved our disagreements the hard way, assuming positive intent and aiming for winwin solutions. We learned to celebrate our differences rather than getting frustrated by them, and with time began to get along surprisingly well. I give great credit to Craig Weatherup, now chairman of Pepsi-Cola Company worldwide, Brenda Barnes, president of Pepsi-Cola, Mark Mangelsdorf, general manager of the joint venture, and Brian Sweete, head of marketing, for making the partnership work, because they recognized the long-term value of the joint venture and the Starbucks brand.

As it happens, the joint venture’s first attempt was a failure. Mazagran was a cold, lightly carbonated coffee drink with a name borrowed from the French Foreign Legion posted in Algeria in the nineteenth century. When we test-marketed it in southern California in 1994, it polarized people. Some loved it; others hated it. A lot of customers were willing to try it because of the Starbucks brand name, but Mazagran didn’t get the repeat business we had hoped for. We finally realized, with disappointment, that we had created a niche product, one that would catch on, if at all, only after a slow build.

Pepsi was remarkably patient. If Craig Weatherup and I had not established so forthright a relationship from the start, that episode might have ended it. But we both believed in each other and, obviously, in the capabilities of the partnership.

So we kept pushing until, in 1995, we found a better approach. Frappuccino had been a surprise hit that summer, drawing in tens of thousands of customers who were not normally coffee drinkers, filling our stores in afternoons and in hot months when the coffee business is usually slow. One day, in the midst of an agonizing discussion about the future of Mazagran, I said: “Why not develop a bottled version of Frappuccino?” The Pepsi executives were immediately enthusiastic.

But coming up with the idea was the easy part. Actually getting Frappuccino into a bottle in the supermarket was a challenge. In our stores, Frappuccinos are made in a blender, with crushed ice. They also contain milk, which has a limited shelf life. The first few efforts at a bottled version tasted wrong. It took months of experimentation before our joint venture R & D teams came up with a shelf-stable Frappuccino that tasted as delicious as the blended ones in our stores. When they did, I knew it would be a winner.

We were so confident of our product that we didn’t even test-market it. Pepsi ramped up production as quickly as possible, but even then we could supply only West Coast supermarkets for the summer of 1996.

The response overwhelmed us. Within the first few weeks of introducing bottled Frappuccino, we were selling ten times the quantities we had projected. We couldn’t make it fast enough. Supermarkets kept running out of it, and customers grew frustrated. We had to cancel all marketing support.

Pepsi, too, was blown away. Frappuccino was getting twice the level of trial they had predicted—and more than 70 percent repeat business, well above that of other New Age beverages. Sales of bottled Frappuccino were matching or exceeding early returns on Lipton and Ocean Spray. Finally, we had to withdraw it from the shelves until we could increase our manufacturing capacity.

Bottled Frappuccino was the runaway hit we had been hoping for. It ushered our way into the supermarket and into the ready-to-drink beverage business.

Throughout the summer, we met frequently with the Pepsi people to assess the unexpected surge of demand and the shortage of supply. In September, we jointly decided to invest millions of dollars to simultaneously build three bottling facilities for Frappuccino. It was the largest single investment Starbucks has ever made. With supermarkets continuing to clamor for the product, we planned a summer 1997 date for a nationwide launch. Once again, we set our sights on what seemed like a stretch goal. But we were confident we could make it.

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The equity of the Starbucks brand is a priceless asset. Every decision we make has to contribute to its sustainability and differentiation. Yet each time we create a new Starbucks product, we’re weighing a risk against a potentially great reward. If we capture the public imagination with innovative products, Starbucks could become larger than life. But we have to make sure that nothing we do dilutes the integrity of the Starbucks brand.

Creating new products through joint ventures has now become a central part of how we do business. In 1995, we worked with Seattle’s Redhook Ale Brewery to create Double Black Stout, a stout beer with a shot of Starbucks coffee extract in it. It amazed and delighted many of Redhook’s customers. We then moved into another line Starbucks’ founders could never have imagined: coffee ice cream.

In October of 1995, Starbucks ice cream wasn’t even in our business plan. By July of 1996, it was in supermarkets around the country, number one in its category.

Although Howard Behar had been pushing for ice cream for years, it had never seemed to me to be a serious business proposition. But Don Valencia’s extract opened my eyes to the possibility that we could bring authentic Starbucks flavor to a variety of products we had long dismissed as unlikely. So when Harry Roberts, our vice president for merchandising, came to me with an ice cream proposal in August 1995, I agreed to let him invite a few manufacturers to discuss it with us. After a few intriguing meetings, we picked Dreyer’s Grand Ice Cream as a partner because they had nationwide distribution and experience making super-premium ice cream. Dreyer’s was also willing to produce and distribute Starbucks ice cream without co-branding, or putting their name on the ice cream along with ours.

Don Valencia took his coffee extract to Dreyer’s, and their ice cream experts began working with our coffee experts to come up with some flavor profiles.

In September, Dreyer’s president Rick Cronk brought a high-level team to Seattle to meet with us and taste several samples. Like us, the Dreyer’s people were dressed in plaid or striped shirts, and were genial and informal, open and excited. I asked them, “How do you guys stay so thin?”

They laughed and responded, “How do you guys stay calm?”

In a slide presentation they outlined the size of the market opportunity (potentially a $100 million market) and proposed five to six coffee-related flavors of premium ice cream in quarts, as well as two or three novelty items, on a stick. Then they broke out the ice cream: three prototypes they had prepared. It was wonderful, rich and creamy, with the distinct taste of Starbucks dark-roasted coffee.

I flashed a look across the table at Behar and said, “You’re going to get your wish after all.”

It seemed like a big opportunity, good timing, and the right partners. I knew that this product would enhance our brand equity and burnish our image. So I set a goal.

“July Fourth, 1996, nationwide, that’s the target,” I announced. “Super-premium ice cream, better than Ben and Jerry’s, better than Häagen-Dazs. Best of class. Go for it.”

Developing a new product at such high speed with a new partner is fraught with potential difficulties, but our legal department helped us work them out. The final products were of a quality that made both sides proud.

When it hit the supermarkets in April, Starbucks ice cream sales blew off the charts. We introduced five gourmet flavors: Italian Roast Coffee, Dark Roast Espresso Swirl, Javachip, Caffè Almond Fudge, and Vanilla Mocha Swirl, adding Low Fat Latte the following year. During the month of July, before we even completed our national rollout to 10,000 grocery stores, we passed Häagen Dazs as the number-one premium coffee ice cream brand in the United States—with very little promotional expense.

The customers voted yes on both ice cream and bottled Frappuccino. People who had never entered a Starbucks store were trying our products.

We were leveraging the equity of the brand, but in a way that was very risky, one that could either reward us handsomely or do great harm. The compressed timetable added to the potential dangers. Other companies might have declined that gamble.

Did we make the right decisions?

Conventional marketing wisdom says that every brand has its limitations. If you slap it on just anything, it will be cheapened beyond recognition. We put the Starbucks brand only on best-of-class products that take advantage of our recognized expertise in coffee.

Ice cream and Frappuccino are almost certain to become profitable and fast-growing businesses for Starbucks, but that’s only part of the point. We want to attract new customers to Starbucks, and we want it to be known that this company is not sitting on its haunches. New products show that Starbucks the company is dedicated to innovation and self-renewal.

These opportunities were open to us only because we had already validated the brand at retail, through word-of-mouth reputation with consistently high-quality coffee. Once people came to trust the Starbucks brand, we were free to experiment, within a carefully drawn set of parameters. In fact, we’ve recently begun testing whole-bean coffee in supermarkets, an outlet we avoided in the early years because grocery-store coffee was generally, and correctly, regarded as inferior. If we had done this before the Starbucks brand was firmly established, it could have hurt us. But now, we are bringing premium whole-bean coffee to markets too scattered or small to merit a dedicated store. Although no barista is present to explain the different blends, many grocery shoppers already know that Starbucks stands for the highest quality of coffee.

All the goodwill and trust we’ve built up over twenty-five years could evaporate if customers thought these supermarket products were shoddy or mediocre. It’s a delicate balance. We have to bring our consciences to the table every day. If we succeed, new products will refresh the brand, not dilute it. The market will always let us know how we’re doing.

Living in the same city as Microsoft, I’m only too aware that, even in low-technology businesses like coffee, the Next Big Thing could knock the dominant player into second place tomorrow. I keep pushing to make sure that Starbucks thinks of the Next Big Thing before it has even crossed anybody else’s mind. In fact, Don Valencia is working on it even as I’m writing this book.