Friday Story: Peet's and Starbucks
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We were having dinner and a family friend, who had grown up in Europe, was lamenting that in America "you can't get decent beer, bread or coffee." I must have been in my early teens and since then it's all changed. For the coffee part you can give thanks to two fascinating people.
Let's begin our story like so many business success stories, with three friends sitting around and trying to figure out what kind of business they could start together. In this case, the three friends were Zev Siegl, Gordon Bowker, and Jerry Baldwin. The business they decided to start was gourmet coffee. The company they started was Starbucks.
Way back in 1971, coffee didn’t look like it was a great business. It didn't show signs of getting better, either. Coffee consumption in the United States had peaked in the 1960s and by 1971 it was declining fast. One reason was that the coffee was awful.
Most Americans drank something called “coffee” that came ground up very finely in vacuum-sealed tins. You scooped the stuff out of the can and put it in a percolator. Some coffee made this way was so weak you could read a newspaper through a carafe of the stuff.
Sigel, Bowker, and Baldwin had traveled together to Europe where they discovered the rich dark coffee that was very different from the percolated brown beverage that most Americans were drinking. But for a while they didn't connect that preference with any kind of business idea.
The story shifts now to Berkeley, California, where a fellow named Alfred Peet had started Peet’s coffee at the corner of Vine and Walnut Streets, just around the corner from the Walk Shop (specializing in walking shoes and Birkenstocks). Further around the corner was Alice Waters' Chez Panisse restaurant.
Alfred Peet was born in the Netherlands and learned how to buy, select, and prepare coffee in a variety of jobs before he landed in San Francisco in the fifties. He was appalled at the quality of the coffee that Americans drank.
In 1966 he opened his small shop in Berkeley. That's the shop I visited a decade later.
By then Peet's was well known in the area. The shop was filled with people drinking coffee and tea and talking. People came in to purchase coffee to make at home and left clutching their bags.
It was a strange and exotic place to me. A young man asked me if I needed help and when I confessed that I did, he seemed to take it as a sacred duty to teach me about coffee and Peet's. Over the next hour he explained different roasts and let me taste each one. We decided on a blend and I bought my first cup of really good coffee in America. I left with a bag of the blend to make at home.
Somehow a bag of Peet's dark blend found its way north, into the hands of Jerry Baldwin. It convinced Jerry and his friends that a gourmet coffee shop would be a good business for them to start.
When they were pressed by their attorney for a name, their first idea was to call the place Starbo after an old mining camp. But after a bit of thought they settled on Starbucks to pay homage to Seattle's seafaring heritage.
They opened their first Starbucks in 1971. They weren't the only ones who thought a gourmet coffee business was a good idea. Elsewhere in town Jim Stewart was starting The Wet Whisker, which later became Seattle's Best Coffee.
Alfred Peet thought they were pretty good guys. He taught them about coffee roasting in his unbendable European way. For the first year of their business he even roasted the beans for them. Starbucks started to grow.
In 1982 a young marketing manager for the Swedish kitchen equipment company, Perstorp, noticed that a small company in Seattle called Starbucks was buying a lot of special drip coffee makers. He stopped by to see what was going on. He stayed on to become a partner.
That was Howard Schultz. Shortly after joining Starbucks Schultz took a vacation in Europe. One day, sitting in a coffee shop in Milan, he had a vision of what Starbucks could become. He imagined a place where the staff knew the customers and where the great coffee was only part of a totally wonderful experience.
When he got back to Seattle he worked hard trying to sell Bowker and Baldwin (Siegl had left years before) on his idea of the complete experience. They remained unmoved so Schultz decided to do it on his own.
He founded a company call Il Giornale to create the experience that he’d seen in that Milan café. By 1987 he had three locations. Things might have gone on like that with him competing against Starbucks, but that was about the time that Baldwin and Bowker decided it was time for them to sell out. Schultz arranged financing and became CEO of the company. He's now on his second run in the job.
By 1990 the company was profitable. By 1992 it was time for an initial public offering of 2.1 million shares at $17 a share. There were 125 stores and 2,000 employees. Starbucks was on its way.
In the meantime, Peet's was put up for sale in 1984. Jerry Baldwin led a group of investors that purchased Peet's. In 1987, he sold his interest in Starbucks. He was Chairman of Peet's until the company went public in 2001. He now sits on the board.
Alfred Peet died in 2007. He built his company on his strengths and preferences. He was successful by any reasonable measure without succumbing to the "bigger is the only better" philosophy that seems to grip much of American business.
Despite choosing to keep his business small, Peet had a major impact on America. When he arrived here he is reputed to have thought "Why does the richest country in the world have the lousiest coffee?" Today, quality coffee is everywhere.
Even though there might never have been a Starbucks without Peet, good coffee probably wouldn't be everywhere without Starbucks. Howard Schultz brought marketing savvy and a lust for growth to the task of spreading the gospel of good coffee.
The next time you have a cup of that good coffee, think about those two men and the intertwined stories of their two companies.
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To me Starbucks also stands for quality service as well as good coffee.
I was standing alone at a Starbucks counter a few months ago. One of the young staff came out from the back and was appalled to find me there waiting for service. Although I protested that I had been there for no more than a minute they insisted that I not pay for my order. I have had similar experiences in other Starbucks.
From the way you described your experience at Peets in your article I would assume this commitment to service has been also passed down from the beginning as well.
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Thanks for your comments, Laura. I don't think the service experience/standards were transferred from Peet's to Starbucks. I think you've got to give Schultz the credit for the Starbucks experience both good and bad. It's far easier to create a wonderful experience in a single store than it is in thousands of stores. The Peet's experience was wonderful, but they never attempted what Starbucks attempted.
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It's always inspiring to hear the story of how little startups made it big. They kept it simple and focused on what they were doing, making great coffee. People love it.
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Good points. Thanks for stopping by.
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Wally,
Thanks for posting such an interesting blog. I grew up in Seattle in the 70s and 80s when Starbucks was taking off, but never knew the history. I tasted my first Peet's coffee in San Francisco a couple of years ago. It was delicious. I still prefer my Starbucks though. I love living in a country where you can take an idea and make it into something spectacular.
Ken
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Thanks for commenting, Ken. Quality coffee has become common so now the differentiators are involved in either breadth of choice or the experience in the store.
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Wally, thanks for the post. As someone who writes, "Leadership Caffeine," as well as consumes a fair amount of great coffee, I couldn't pass up adding a shot here. For a great insight into Schultz and his character as a leader (a current incarnation of a Level 5 IMO), I urge your readers to check out the HBR Interview with him in the July/August, 2011 issue. The title of the article, "We Had to Own the Mistakes," sets the tone, and the description of tough, character and culture focused decisions that he made in navigating the recent turn-around are great insights into the man.
I wrote my own review of the article here: http://bit.ly/d8xCAH ...this includes the article link at HBR's site.
Thanks for your always interesting read and the character profiles. Now, it's time to brew a fresh pot...although it has to be decaf...I hit my limit of the fully leaded about an hour ago.
Best, Art
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Thanks for the kind words, the pointers, and the links, Art. I think there will be many lessons about Starbucks when we can look back on all this. The thing I admire Schultz the most for is adapting and learning.
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A little about Howard Schultz. We grew up in the same projects; Bayview Houses in the Canarsie section of Brooklyn, at the same time. We are one year apart and ran in different crowds but played ball together in the school yard.
In his autobiography, Howard tells about how he was driven by his disdain for the blemish of growing up poor in subsidized housing, which he also attributes his drive for excellence too. Not everyone had the same view about our childhood stomping grounds, and many are very successful.
As far as lousy coffee goes, my wife and I discovered good coffee in Europe on our honeymoon. The Europeans teased us about the sludge we drank over the pond here in the US. We became so spoiled that it was difficult for me to drink coffee after we returned. My son-in-law brings us the good stuff from Brasil with a couple of Cuban cigars.
Sigel, Bowker, Baldwin, and Peet brought something to the west coast that was lacking. Schultz did his best to bring it to the rest of the country. Scaling up a great business comes with dilution of quality, yet Schultz has done an excellent job of preserving agreat customer experience. One of our friends that played football in HS with Schultz is angry about Howie's negative tainting of our neighborhood, yet he has breakfast every morning at Starbucks. Why? Because of the experience.
Howie has done as good a job as possible at keeping Alfred's product intact, has done well for his company, the shareholders, and himself. He is a living Horatio Algieresque character.
It is a marvel to look back on how gears meshed in a musical machination of success.
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Thanks for adding that great stuff, Gary. I think you've added some real insight into Schultz and how and why he does what he does.
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Hearing stories like this always makes me want to start my own business, but then i wonder if I would have the success they did
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Amanda,
Why would you go into business; success, independence, fulfillment of a dream?
Do you have a vision for something better or new?
Just some questions to ponder
Gary
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Well said.
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Thanks, Amanda. Very few of us have the kind of success that they had, but very few of us who play basketball ever make it to the highest levels of that game either. Give it a shot.
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Wally –
It’s always inspiring to hear the summary of such a success story. The tough part (and where most people lose their way) is the phase between 1971 (first store opening) and 1990 (“…by 1990 Starbucks was profitable…”). Obviously during the ‘70’s & ‘80’s lots of things were happening (Siegl left, Schulz arrived, and over 1,000 locations were established) but that is really where the heart of the business is. Lots of entrepreneurs out there have the inspiration and many marketing experts and business managers can take the public company and turn a profit. But what are most rare of all is the pure guts to stay the course when the outcome is in doubt. Luck, quality, timing, or determination often all play a role in any new businesses success. I’ll bet Zev Siegl wishes he would’ve stuck it out. Hindsight’s 20-20.
Thanks.
Adam
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Thanks for that thoughtful analysis, Adam. I think the "guts" you refer to are important, but so is willingness to change to meet new challenges. There have been several good articles and books about this, but the one I often recommend to clients is Larry Greiner's classic HBR article on "Evolution and Revolution as Organizations Grow." As for Siegl, I suspect he feels a bit like Pete Best, the drummer for the Beatles before Ringo Starr.
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