In 1971, three partners who met in college opened the first Starbucks in Seattle, Washington. They were inspired by coffee roaster Richard Peet and sold fresh-roasted gourmet coffee beans in addition to teas, spices, and other coffee-making supplies, naming their store after the coffee-loving first mate "Starbuck" in Herman Melville's classic novel "Moby Dick." The early Starbucks did not sell brewed coffee and sourced their green coffee beans from Peet's. Starbucks purchased Peet's in 1984 just as sales of specialty coffee were beginning to take off, and quickly grew.
Howard Schultz: Man With a Vision
In 1987, Howard Schultz, vice president and general manager of Hammarplast USA, noticed that Starbucks was purchasing quite a few of his company’s espresso machines. This attracted his attention, so he decided to take a look at the business for himself. When he arrived in Seattle he discovered that four locations were in operation under the ownership of Gerald Baldwin and Gordon Bowker.
Shortly after his visit, Schultz joined the owners’ team, offering his finely tuned marketing and business expertise. A year later, while vacationing in Europe, Schultz realized that in Italy, sipping coffee at coffee shops and outdoor cafés was an important part of people’s daily social lives. In a word, Schultz realized that drinking coffee was an "experience." Right then and there, he decided he wanted to replicate the feel of an Italian coffeehouse (and the coffee experience) back in the U.S.
Schultz decided to leave Starbucks to open one of his own coffee shops that would closely mirror the Italian cafe that was so prevalent abroad. However, he later found out that the Starbucks owners were interested in selling their stores. Schultz wasted no time and purchased the chain for $3.8 million and combined their stores with his own coffee shop. Starbucks had its initial public offering (IPO) on the stock market in 1992.
The Structure of Starbucks
Schultz quickly set out to overhaul the entire operation through several strategically planned adjustments. First, he expanded the items that Starbucks would offer to include more gourmet-type drinks such as espresso, café latte, and iced coffee. Even more importantly, he enhanced the company’s interaction with its employees by training the employees to provide top-notch customer service. His goal was to turn Starbucks into an enjoyable place to work, offering many perks and benefits. He also made the decision to create comfortable living-room-style seating at all Starbucks.
His efforts paid off. The company experienced tremendous growth throughout the 1990s and became the country’s No. 1 specialty coffee retailer. With well over 16,000 locations worldwide, many people believe that Starbucks is a franchise. It is not. In reality, it is considered the world’s leading coffee chain.
North American Operations
Most Starbucks stores in North America are company-operated. The company does sometimes enter into licensing arrangements with companies that provide the right to use particular locations that would otherwise not be accessible, such as airports, grocery chains, small colleges, and large universities. Starbucks calls these locations their special market arrangement coffee and tea "programs." It will also consider other qualified high-volume or high-traffic retail locations as potential operations for the Starbucks "program," as long as they don't veer from the finely tuned Starbucks image.
What Starbucks Does Franchise
Since 2003, Starbucks’ wholly owned subsidiary Seattle’s Best Coffee does franchise the operation of its cafes and kiosks. This subsidiary has over 540 cafés in the U.S. as well as nearly 100 espresso bars, with retail stores and grocery sub-stores in 20 states and provinces and the District of Columbia. Sub-stores can be found within many other businesses and on college campuses, including in Subway restaurants.
A Good Concept and Well-Executed Business Model
Although Starbucks is not considered a franchise, it is still thought of as a valuable example of a well-thought-out franchising concept because of its business principles and business model. Clever marketing, a consistent product and image, superior customer service, and good old-fashioned hard work have led to its success as a multibillion-dollar business. It is the epitome of the entrepreneurial spirit—one man with a vision sees an opportunity and fills a void.
The Starbucks company demonstrates that it is possible for a small business operating on the right principles to become very large and extremely successful. As Howard Schultz wrote about the company in his book, “There was something magical about it, a passion and authenticity I had never experienced in business. Maybe, just maybe, I could be part of that magic. Maybe I could help it grow.”
And grow it has. The coffee juggernaut generates annual revenues of over $22 billion, operating over 25,000 stores in six continents. And considering that Starbucks is opening new stores in China at a rate of one shop every 15 hours, it is showing no sign of taking a breather. Starbucks currently operates 3,000 stores in China and intends to have 5,000 outlets there by 2021.