Pour Your Heart Into It (20 page)

“Look,” I told the board, keeping my voice as steady as possible, “we’re going to keep losing money until we can do three things. We have to attract a management team well beyond our expansion needs. We have to build a world-class roasting facility. And we need a computer information system sophisticated enough to keep track of sales in hundreds and hundreds of stores.”

Although it took various forms in the years to come, that message became like a mantra, repeated every quarter: “We have to invest ahead of the growth curve.”

Fortunately, the board and investor group showed remarkable patience in supporting me and my plans. If Starbucks hadn’t turned a profit in 1990, they would have had good reason to kick me out.

Looking back now, I realize how sound our strategy proved to be. In those early years, 1987–1989, we laid a solid base for rapid national expansion by hiring key managers and by investing early in facilities we would soon need—far sooner than we realized. It was expensive, but without it, we would never have been able to accelerate our growth, year after year, without stopping to catch our breath.

When you’re starting a business, whatever the size, it’s critically important to recognize that things are going to take longer and cost more money than you expect. If your plan is ambitious, you have to count on temporarily investing more than you earn, even if sales are increasing rapidly. If you recruit experienced executives, build manufacturing facilities far beyond your current needs, and formulate a clear strategy for managing through the lean years, you’ll be ready as the company shifts into ever higher gears.

What we did was try to figure out how big we wanted to be in two years and hire experienced executives who had already built and managed companies of that size. Their background enabled them to anticipate the pitfalls of growth and plan and react accordingly. Hiring ahead of the growth curve may seem costly at the time, but it’s a lot wiser to bring in experts before you need them than to stumble ahead with green, untested people who are prone to making avoidable mistakes.

Of course, building an infrastructure takes money. Ideally, capital should be in place even before you need it, not only to fund the expansion itself but to respond quickly to problems and opportunities as they arise. Convincing shareholders to increase their investment is probably the hardest part of an entrepreneur’s work. It’s a humbling experience to stand before these financially savvy individuals, who are already full of doubts, and tell them, “We’re losing money. Can you invest more?”

In our case, just a year after we raised $3.8 million to acquire Starbucks, we had to raise an additional $3.9 million to finance our growth plans. By 1990, we needed even more money, and we brought in $13.5 million from venture capital funds. The following year, we completed a second round of venture capital, for $15 million. That added up to four rounds of private placements before Starbucks went public in 1992. If Starbucks had failed to perform, if investors had lost faith in us, obtaining those levels of funding would never have been possible.

Luckily, Starbucks’ revenues were rising at more than 80 percent a year, and we were nearly doubling the number of stores annually. We pushed into markets outside our home base, including Chicago, to prove the idea could work in other cities. We were able to show attractive “unit economics” at each store, and investors could see that the overall specialty coffee business, both in supermarkets and in stand-alone stores, was catching on all over the country.

To supply our accelerating number of stores, we needed a much larger roasting facility than we had acquired with the purchase of Starbucks. With the help of Jack Benaroya, we built a new office and plant in Seattle in 1989, large enough, we thought, to last ten years. We installed a high-speed roaster and packaging equipment and moved across Airport Way to a building that seemed huge at the time. Now it houses only our mail-order business.

Securing good sites for new stores also became increasingly expensive as we expanded. For the first five years after 1987, I approved every site personally—for more than a hundred stores. We aimed for highly visible locations, either in downtown office buildings or in densely populated urban or suburban neighborhoods, near supermarkets. We worked with outside brokers in each region, and in 1989, we hired one of our best brokers, Yves Mizrahi, to be our vice president for real estate. Working closely with me, he pre-screened each site and closed each deal. Our process of site selection was enormously time-consuming, but we couldn’t afford a single mistake. One real-estate error in judgment would mean a $350,000 write-down for leasehold improvements, plus the cost of getting out of the lease. That represented a minimum of a half million dollars at stake, not counting the opportunity cost of money we could have been using elsewhere.

Eventually I came to the conclusion that store development was too big a task to run out of the CEO’s office, so I did something controversial: I hired an old friend from New York to be senior vice president for real estate. Arthur Rubinfeld, whom I had gotten to know during my single days in Greenwich Village, was a practicing architect and developer who had moved to San Francisco around the same time I moved to Seattle. Arthur started a firm that specialized in retail real estate brokerage in northern California, and we turned to him to represent us in our entry strategy into the San Francisco market. I realized I needed not only his expertise and professional judgment but also someone I could trust. Choosing the right sites is such a critical part of success for a retailer that it should be done by someone with a passionate commitment to the future of the company.

But Arthur didn’t want to do just site selection. He convinced me that we needed real estate, design, and construction to speak with one voice, under the direction of one person, to avoid the conflicts that sometimes arise between those disciplines. He coordinated the departments and built a complete store-development organization that ultimately enabled Starbucks to plan for and open one store every business day. Of the first 1,000 stores we opened, we opted to close only two locations because of site misjudgments. Few other retailers could boast such a record.

Although we leased rather than owned our sites, we bore the entire cost of design and construction. Why? Because every store was company-owned. We refused to franchise. Although it would have been tempting to share costs with franchisees, I didn’t want to risk losing control of the all-important link to the customer.

Behind the scenes, we also kept investing in new systems and processes for a far larger operation than we had at the time. In late 1991, when we had just over 100 stores, we hired Carol Eastin, a computer expert from McDonald’s, gave her a blank slate, and asked her to design a point-of-sale system that would link all our outlets and would be able to accommodate the 300 stores we planned to have within three years.

When companies fail, or fail to grow, it’s almost always because they don’t invest in the people, the systems, and the processes they need. Most people underestimate how much money it will take to do that. They also tend to underestimate how they are going to feel about reporting large losses. Unfortunately, that’s a given in the early stages of retail development, unless you raise money by franchising. Huge investments upfront mean not only potential annual losses but also a dilution of the founder’s shareholding.

If you want to know what Starbucks did right, you have to look at our competition and find out what they did wrong. Clearly, Starbucks isn’t perfect. But among our competitors in the specialty coffee business, you’ll see examples of all the mistakes we didn’t make: companies that didn’t raise enough money to finance growth; companies that franchised too early and too widely; companies that lost control of quality; companies that didn’t invest in systems and processes; companies that hired inexperienced people, or the wrong people; companies that were so eager to grow that they picked the wrong real estate locations; companies that didn’t have the discipline to walk away from a site if they couldn’t make the economics work. All of them lost money, too; some are still doing so. But they didn’t use their years of losses to build a strong foundation for growth.

You can’t create a world-class enterprise without investing in it. In a growth company, you can’t play catch-up. But you also can’t just excuse losses in the early stage of the business without examining each expenditure. Growth covers up a lot of mistakes, and you have to be honest about what’s right and what’s wrong about your operations.

Fortunately, we realized this in the early years. And our investors had strong stomachs.

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Sometimes, in life as in business, you know exactly what you need to accomplish your goals and you have to go out to look for it.

During those tense years when we were losing money, I realized I was badly in need of a mentor. I had a faithful board of wealthy investors who believed in me and trusted me (for the most part!) to make the right decisions. They questioned me diligently, but because most of them had no experience building a retail company into a national brand, they could offer only limited guidance for future planning.

I had also never anticipated how isolating running a company would be. You can never let your guard down and admit what you don’t know. Few people can share your frustrations and anxieties when you’re losing money, when you have to deal with investors who have high expectations, when you suddenly find yourself responsible for hundreds of employees, when you face difficult hiring decisions. Trying to balance the intricacies of rallying people and forging complex strategies can feel like running a political campaign—with the same sense of accountability to many different constituencies.

Although they can hire executives with many talents and skills, many CEOs discover that what they lack most is a reliable sounding board. They don’t want to show vulnerability to those who report to them. If they feel uncertain or fearful, or if they just want to think out loud, they need to have friends they can call up and complain: “Oh, shit! You wouldn’t believe what happened today!”

In the Il Giornale years, the only person with whom I could talk openly was Sheri. I’d come home so tired, so beaten down, so out of sorts that I’m sure I wasn’t easy to live with. But she listened, and she gave me much-needed support. She anticipated what I was going to need and made sure she off-loaded the pressure I would have on other things so I could concentrate on my work. So much of that period is a testimonial to Sheri’s forbearance and wisdom, but still I felt acutely the lack of a professional confidant.

Not long after taking over Starbucks, I strengthened a friendship with one of my investors, Steve Ritt, a relaxed and genial guy who runs a leather-cleaning company in Seattle. For almost two years, until my daughter was born, we ran together, three mornings a week, starting at 5:30
A.M.
During these runs, I was able to get Steve’s reading on any number of problems I was facing. It was great therapy for me. Steve proved a valued adviser because he had no vested interest other than to be supportive of me. I could share my doubts with him as comfortably as I could my triumphs. He had great confidence in me and became a close friend. But even he didn’t have experience in building a retail company.

I knew that what I needed was advice from a person who had been there before, someone who understood what I was trying to accomplish. I wanted someone who had built a fast-growing company, who lived and breathed the retail business, who could guide me and direct me whenever I reached an unfamiliar fork in the road.

I did a mental audit of the Seattle business community, thinking about the many individuals who had built successful retail companies. One in particular had both the experience I lacked and a willingness to help: Jeff Brotman.

Jeff is a seasoned veteran of retailing, eleven years older than I. As the son of a retailer, he understands the operations instinctively. He ran a family-owned chain of twenty clothing stores and founded several other companies. In 1983, he made his biggest, boldest move when he founded Costco Wholesale, a company of membership-only wholesale club stores. In ten years, he and Jim Sinegal built Costco into a national operator of more than a hundred outlets with annual sales of $6.5 billion. In 1993, they merged with Price Club, and now Jeff is chairman of the combined company, which has $19 billion in revenues and more than 250 warehouse stores. Starbucks is a dwarf by comparison.

I first met Jeff Brotman when I was trying to raise money for Il Giornale. Later, after I bought Starbucks, I called on him several times, asking his advice. He offered his time and counsel unselfishly, well before he had any connection to Starbucks. He had a sixth sense for good opportunities and an understanding for the range of issues entrepreneurs face. I confided in him, and I realized I could trust him. Listening to his counsel, I appreciated how talented he was. He became, de facto, my mentor.

After several meetings, I asked him to join Starbucks’ board of directors. It took a while to court him. Jeff is careful about his investments, of both time and money, but once he makes a commitment, he takes it seriously.

Jeff eventually joined the board in 1989, a rough time in Starbucks’ history. We were losing money for the third year in a row, and it was by no means clear we would make it in Chicago. Although I had assured the board that we would turn profitable in fiscal 1990, it took Jeff Brotman to give my arguments credibility in the face of escalating losses. His was the voice of authority and experience, and much easier to believe than my promises based on sheer faith.