How Starbucks Became An $80B Business - YouTube

With nearly 30,000 cafes across the globe, Starbucks has become more than just a household name.

From its iconic cups, often adorned with misspelled names, to the espresso inside them, Starbucks has catapulted from one

coffee bean shop in Seattle to a sprawling $80 billion business over

the last 47 years. Starbucks sales account for 57 percent of the total

cafe market. Yes, 57 percent. Nearly two-thirds of all coffee sold at

cafes in the U.S. comes from a Starbucks. But this impressive expansion

hasn't come without growing pains. With more than 14,000 locations in the

U.S. alone, Starbucks has spread itself too thin. Having too many stores

has led to fewer transactions at individual stores. To compensate, the

company has raised prices. But doing this too quickly or too often can

drive customers away. So how did this happen? And what's a coffee giant to do about it?

The year is 1970. Three college friends, Zev Siegl, Jerry Baldwin and

Gordon Bowker decide to get into the coffee business. They found a mentor

in Alfred Peet, founder of Peet's Coffee and the man responsible for bringing custom coffee roasting to the U.S..

He knew the coffee industry inside and out, especially the gourmet end. He

was the most educated coffee guy in the country at that time.

So with Peet's help, the three friends open Starbucks, a coffee bean shop

and roastery at Seattle's famous Pike Place Market in 1971. Peet provided

the young entrepreneurs with roasted coffee beans and connected them with

coffee brokers until they could set up their own roastery and source their

own beans. For the first decade, the founders opened five more locations

in Seattle. At this point, contemporary coffee consumers might have

noticed a glaring absence: actual coffee drinks. But that's the thing

about the 70s coffee culture: it didn't really exist outside the home.

There were no coffee bars. Nor was there much of a demand for

espresso-based drinks. You purchased coffee beans and you either took them

home as beans or we ground them for you in the store. Nobody expected to

get a beverage at a Starbucks coffee store until after 1980.

Starbucks' initial focus was bringing high quality beans to consumers who

were more accustomed to instant or canned coffee. But that changed with

the addition of one man.

The company hired its first really professional Director of Marketing and

Sales, and that man was Howard Schultz. And he couldn't figure out why we weren't selling beverages.

In 1983, Schultz travels to Italy and returns with an idea: turn the coffee

bean stores into cafes. Starbucks served its first latte the next year.

The experiment was a success, and four years later, Schultz partnered with

investors and bought Starbucks for $3.8 million. He was only 34 at the

time. Schultz pursued a strategy of aggressive expansion. By the time the

company went public in 1992, it had 165 stores. By 1996, it had opened

more than a thousand locations, including its first international cafes in

Japan and Singapore. Growth was so rapid that, just three years later, Starbucks opened its 2,000th location.

Schultz switched from CEO to Executive Chairman in 2000, at which time

Starbucks operated 3,500 stores in more than a dozen countries. Between

2000 and 2007, the number of Starbucks cafes more than quadrupled, from

3,500 to over 15,000. During this period, the company opened an average of

1,500 stores every year, including 2,500 in 2007 alone. Sales shot up from $2 billion to $9.4 billion.

Consumers were increasingly ditching their kitchen mugs for these iconic

paper to-go cups. But then, Starbucks hit a wall: the 2007 financial crash.

That year, its rapid growth screeched to a halt and its stock price plummeted by 50 percent

as cash-strapped consumers backed away from pricey coffee habits. So Starbucks brought back Howard Schultz.

This news alone caused Starbucks stock to shoot up by 9 percent. Schultz

halted growth and focused on customer experience. He shuttered cafes -

more than 600 in 2008 and another 300 in 2009 - and laid off around 6,700

baristas. A month after his return, Schultz ordered Starbucks to close all

of its U.S. locations for one afternoon so he could retrain more than

135,000 baristas about how to make its signature espresso. Schultz's goal

was to remind customers what they loved about the brand by making the

stores an experience, not just a place to get a quick coffee. They stopped

selling breakfast sandwiches and brought back in-house grinding, infusing

the cafes once again with that fresh coffee aroma. Schultz even mandated

the removal of automatic espresso machines. These made service faster, but

removed much of the romance and theater of watching baristas craft each

cup of coffee. Schultz's makeover worked. The company's stock soared more

than 143 percent in 2009 and same-store sales rebounded. Starbucks has

posted positive same-store sales ever since. During Schultz's makeover of

the cafes, Starbucks barely opened any new stores. But the pace picked up

again in 2012. By 2017, Starbucks opened nearly 3,000 more locations,

ending the year with 28,000 cafes around the world.

However this brings us back to the first problem:

profit cannibalization. Over-saturation, particularly in urban locations,

has spread sales thin. Because Starbucks has so many locations, customers

don't have to be loyal to just one. So even if Starbucks overall sales are

growing, its individual same-store sales won't reflect it. Compounding

this problem are changing consumer preferences. People are shying away

from sugar-laden calorie bombs. which happens to be one of Starbucks'

staples. These signature Frappuccinos contain an average of 57 grams of

sugar. That's more than double the recommended daily limit of sugar. So to

combat these problems, Starbucks is changing once again. The company

announced the closure of 150 stores in 2019. That may seem like a drop in

the bucket for a sprawling company like Starbucks, but it's three times

the number of stores it usually closes each year. The company will still

open stores, but future growth will be more focused. Additionally,

decadent drinks topped with whipped cream are taking a backseat. Instead,

the company is pushing lighter drinks like cold brew and its fruity

Refreshers. The company also plans to roll out delivery to a quarter of

its company-owned stores by the middle of 2019. Perhaps the company's

biggest undertaking is its new line of upscale stores: Starbucks Reserve

Roasteries. These massive, 20,000-square foot stores are designed to be a

tourist destination. Here, Starbucks baristas and bartenders experiment

with different brewing methods and craft new, innovative beverages. These

have proven popular. In the first weeks, the Shanghai Roastery made an

average of $64,000 every day, which is double what a regular cafe makes in

a week. The company has opened four Roasteries so far with plans for two more.