Breakout

Starbucks’ mastermind faces big, new challenge

Breakout

Howard Schultz wants to sell a new drug

Having changed the way America spends its mornings, Starbucks (SBUX) Chairman and CEO Howard Schultz wants to capture your nights as well. Recently the chain announced plans to rollout its Starbucks Evening wine and beer stores. It’s an expansion of Starbucks Evening prototype stores.

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The critics took issue with the idea of debasing the relatively wholesome environment of a coffee shop with the degeneracy of a bar. It's a point that seems almost willfully ignorant of caffeine's place as America's most socially acceptable and available-over-the counter-medication.

The skeptics and doomsayers say it will be impossible for Starbucks to switch from coffee shop to bar over the course of the day. They snipe that baristas won't have the skillset required to handle delivering the complexities of taking and filling booze orders. The customers will be different and alcohol is somehow more complex.

Starbucks invented the American version of baristas. The Venti ("twenty" in Italian, as in 20 oz. cup of coffee) was literally foreign to American customers in the unimaginably long ago days before Starbucks. Any company that can sell items like non-fat, no foam, vanilla Lattes with extra syrup (my wife's regular order) at 6am without a hitch has the training in place to teach baristas to mix a Manhattan 14 hours later.

The Mount Rushmore of Retail

What the critics really can't seem to get their arms around is that Howard Schultz is a retail genius. Schultz and Jeff Bezos are the only living merchants worthy of inclusion on the mythical Mount Rushmore of retail. Only those who have changed the world get their visages cast in stone. Membership requires literally changing the face of retail.

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Howard Schultz

Sam Walton belongs for inventing not just big box discount retail but also the distribution systems to make the business model work. Richard Sears is on the mountain for having modernized the catalogue model. R.H. Macy belongs for popularizing the “department store” as well as the genius idea of the Macy's Parade and the fact that he all but created the modern image of Santa Claus out of whole cloth. Macy wasn't the first to put a Santa in his store, that honor belongs to a man named J.W. Parkinson in the 19th century. What Macy's (M) did was put its Santa in the movies with Miracle on 34th Street.

Good luck convincing anyone that Macy's didn't have the first Santa.

Bezos of course turned Amazon.com (AMZN) into a distribution and customer service juggernaut. That's a topic for a whole different conversation.

Reinventing Java

What Schultz did was arguably the hardest stunt for two reasons. First, when he took over Starbucks he somehow convinced America that it couldn't live without a $5 cup of designer coffee. He did it despite the fact that the caffeinated mud Americans were accustomed to was available for less than a dollar in every diner in the country.

When Schultz founded Starbucks in 1985 there was absolutely no public appetite for expensive coffee. Today there are more than 20,000 stores selling $15 billion worth in 2013.

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Schultz had two great insights. The first was that American coffee was horrible relative to what was served in Europe. He quite presciently realized that U.S. consumers would be willing to overpay for better product if they were convinced it was special.

That's where the real Schultz magic kicked into gear. His second great insight was realizing before all his competitors that ambiance is everything. Starbucks were nothing like what anyone had seen before. They are a blast of sensory pleasure from the moment you walk into a location. They have dim, but not too dim lighting. Music. Baristas. Exotic names that stop just short of being over the top. Schultz is selling an experience.

The Comeback: Schultz wins back Starbucks' soul

What sealed Schultz's place on the Rushmore of retail and proved his dedication of experience over industrial growth was his return from exile in 2008 after years of retirement. During his time away Schultz had watched his chain fall into something resembling less disarray than malaise. In a widely leaked 2007 memo Schultz sent to company executives he said the chain had "lost its soul" and became Ill-kept cookie cutters.

When he came back one of the first things Schultz did was close every single one of the U.S. locations for a day of retraining his staff. It was leadership brilliance. Whatever revenues were lost that day they were well worth it. By the time the training session was over there wasn't a simple Starbucks employee who didn't fully understand what the company was all about. Starbucks didn't sell coffee. It sold an experience. Those who didn't like that idea were invited to leave.

In case the message had been missed, Schultz then closed 100 U.S. locations. There were too many locations that were poorly kept, occupying bad real estate and generally not up to snuff. Rather than waste time getting them into shape Schultz closed them outright. The chain has since replaced those stores and more.

Starbucks' shares are up more than 10-fold since Schultz's return.

Expanding the Experience

The latest challenge facing Starbucks is a shift in traffic away from mall locations. In January Schultz explained that mall customers were gone and not coming back.

When companies face a radical shift in consumer tastes they have two choices. They can go the Kodak route and die clinging to their top position in a dying industry or they can go back to their roots and find a way to stay true to their core concept without becoming extinct. As a retail genius it never seemed to occur to Schultz to opt for anything but the latter.

Starbucks sells stimulants in liquid form in a unique environment. Their store base is shifting away from family based malls and into free standing locations. Most bars look alike. They are dark, have several TVs and loud music. When it comes to serving alcohol they are every bit as tired as the diners which dominated the coffee industry in 1984 before the arrival of Starbucks.

On top of that the market for selling stimulants tends to get pretty slow in the afternoons. So Starbucks has thousands of locations that are underused at night, an unequalled ability to sell beverages and Schultz, one of the best business men in history when it comes to creating a special, comfortable experience for customers.

Of course he's going to start selling alcohol. He'll do it better than anyone else and Starbucks will win. The logistical problems being cited (menu issues, legal restrictions, etc.) are nothing to an organization like Starbucks. The place is an execution machine entirely focused on the entire gestalt of serving customers. There aren't going to be bar flies harassing teenagers at the local Starbucks. To think otherwise is just naive.

As is his want Schultz is making the smart move ahead of the competition. Will it work? In a word, yes.

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