Chapter 4
Building Il Giornale: The Underdog's Journey
Starting a new enterprise means facing rejection and skepticism. Entrepreneurs must overcome people shutting them out, regarding them with suspicion, undermining their confidence, and offering countless reasons why their idea won't work. But being an underdog has its advantages-it can be invigorating.
Schultz's fundraising journey for his new coffee-bar enterprise faced immediate rejection. Faema, an Italian espresso machine producer, turned him down in Milan, insisting Americans could never enjoy espresso like Italians. His first outside investor was Ron Margolis, a physician who invested in startups based on trust rather than financial projections. Before Schultz could even show his business plan, Ron interrupted him and wrote a $100,000 check on the spot. He invested in Schultz, not just his idea, demonstrating that while passion alone doesn't guarantee success, it remains a necessary ingredient.
Despite crushing rejection, Schultz never doubted his plan would work. He truly believed the Italian espresso experience-with its sense of community and artistry-was key to changing American coffee habits. Through persistence, he gradually improved his fundraising pitch. When the first Il Giornale store opened in April 1986, sales exceeded expectations, but they still struggled financially, often barely making payroll.
Schultz's biggest challenge was convincing investors that coffee-a declining commodity with no proprietary technology or patents-could become a growth industry. Unlike high-tech startups with proprietary advantages, Il Giornale offered nothing that competitors couldn't replicate. He explained repeatedly how they would reinvent coffee by weaving romance and community around it, rediscovering its mystique and charm while creating an atmosphere of sophistication and knowledge. Similar to how Nike transformed sneakers from cheap commodities into premium products, they would elevate coffee beyond its commodity status.
Chapter 5
Coming Home to Starbucks
In a twist of fate, Jerry Baldwin and Gordon Bowker decided to sell the Seattle Starbucks stores, roasting plant, and name in March 1987, keeping only the Peet's assets. Though Starbucks was much larger than Il Giornale (6 stores to 3), Schultz knew instantly he had to buy it-it seemed like destiny. After arranging financing, Schultz acquired Starbucks for $3.8 million.
Returning to Starbucks as owner and CEO felt like coming home. Schultz dipped his hands into warm, freshly roasted beans-a grounding ritual that became his daily tradition. Despite employees' warm welcome, many felt nervous about the coming changes. At their first meeting, Schultz spoke from his heart: "I'm here because I love this company. I love what it represents." He promised not to dilute Starbucks' integrity while building a national company they could all be proud of.
The small management team faced overwhelming challenges. Dave Olsen mastered complex coffee buying and roasting skills after a key employee resigned. Ron Lawrence tackled merging financial systems, implementing new technology, and conducting audits simultaneously. They dreamed boldly, promising investors 125 stores in five years-a stretch that many called impossible. But Schultz's vision wasn't just about store count; he wanted to create a respected brand and company with strong values, where people worked together with shared purpose toward ambitious goals.
After acquiring Starbucks, Schultz faced the critical decision of which name to keep. Despite his attachment to Il Giornale, he consulted Terry Heckler, who confirmed his instincts: Starbucks was easier to spell and pronounce, had established recognition, and possessed a unique American mystique. They merged the identities by keeping the Starbucks name while updating the logo with Il Giornale's affirming green color, creating Starbucks' signature hybrid retail concept that sold both whole-bean coffee and espresso drinks.
Chapter 6
People Are Not a Line Item
Throughout 1987, Schultz's father's lung cancer worsened. When he died in January 1988, one of the greatest tragedies was that he never witnessed what his son achieved with Starbucks. During his father's final months, Schultz was building trust with Starbucks employees, many showing the same doubts about management that his father had expressed. But unlike his childhood helplessness, he was now in a position to address workplace insecurity and disrespect.
Against prevailing corporate trends of the late 1980s, Schultz proposed expanding health benefits to include part-timers working just twenty hours weekly. The board was skeptical-how could they justify such expense when they weren't even profitable? Schultz argued passionately that it would reduce costly turnover (training a new hire cost $3,000 versus $1,500 annually for benefits) and strengthen customer connections.
The board approved, making Starbucks the only company offering full health benefits to part-timers. The results proved transformative-turnover rates stayed at 60-65% versus industry norms of 150-400%. More importantly, employee attitudes improved dramatically. This policy's true value became clear when Jim Kerrigan, an early dedicated partner, told Schultz he had AIDS. They created a policy covering terminal illnesses, supporting Jim until his death. Years later in 1994, this commitment led to President Clinton inviting Schultz to the White House.
After achieving their first profitable year in 1990, Schultz implemented Bean Stock-a revolutionary stock option plan that turned every Starbucks employee into a partner. They did something unprecedented-granting stock options to every employee in a private company, from top managers to baristas, proportional to their base pay. The program created such goodwill that warehouse workers even voluntarily decertified their union, saying "You trusted us, and now we trust you."
Nothing gave Schultz greater pride than hearing how partners used their Bean Stock to buy homes, motorcycles, pay for college, or visit family. By treating employees as valued individuals rather than interchangeable cogs, they created passionate devotion-their number-one competitive advantage.
Chapter 7
Building a Hundred-Story Foundation
Looking back, Starbucks' early investment strategy proved sound. Between 1987-1989, they laid a solid foundation for national expansion by hiring key managers and investing in facilities they'd need sooner than expected. Though expensive, this approach allowed them to accelerate growth year after year without stopping to catch their breath.
Starting a business requires recognizing that things take longer and cost more than expected. If your plan is ambitious, temporarily investing more than you earn becomes necessary even with rapidly increasing sales. The key is recruiting experienced executives who've built companies of the size you aspire to reach in two years, building facilities beyond current needs, and formulating a clear strategy for managing through lean years.
They raised substantial capital: $3.9 million just a year after their initial $3.8 million to acquire Starbucks, followed by $13.5 million in venture capital by 1990 and another $15 million the following year. This funding was possible because their revenues were rising over 80 percent annually, they were nearly doubling stores each year, and they'd proven the concept could work outside their home market.
To support growth, they built a new roasting facility in 1989 that they thought would last ten years, and Schultz personally approved every store site for the first five years-over a hundred locations. They hired Arthur Rubinfeld to oversee real estate, design and construction as one integrated function, achieving a remarkable record of closing only two of their first 1,000 stores due to site misjudgments.
Most competitors failed by not investing enough in people, systems and processes; franchising too early; losing quality control; hiring inexperienced people; choosing poor locations; or lacking discipline in real estate economics. Starbucks avoided these pitfalls by investing ahead of their growth curve.
Chapter 8
Surrounding Yourself With People Smarter Than You
There's a common entrepreneurial mistake: having the passion and idea but failing to delegate to those with skills you lack. Many surround themselves with faithful aides rather than truly smart, successful managers. But strong, creative people are far more stimulating than yes-men, and an intelligent executive team is vital for company growth.
In August 1989, Howard Behar hit Starbucks like a tornado. With 28 stores planning to double annually, his retail expertise helped establish systems for growth. But his deeper impact was on their culture. Unlike reserved, polite Seattleites who avoided open disagreement, Behar spoke his mind passionately. He'd raise his voice, pound tables, sometimes tear up.
Behar's most valuable critique was that Starbucks was too product-oriented. "We're not filling bellies," he'd say, "We're filling souls." He taught them to be customer-oriented, initiating "snapshot" programs to monitor service and encouraging staff to "Just say yes" to requests. He established Open Forums where employees could speak freely, even criticizing management.
Building a successful company requires both entrepreneurial vision and disciplined execution. Orin Smith provided the perfect counterbalance to Schultz's temperament. Quiet and reserved, he worked steadily at problems until they were solved, carrying a notebook and pen, pondering carefully before making reasoned decisions.
When Smith joined in 1990, Starbucks was entirely entrepreneurial with a "Ready, Fire, Aim" approach. Rather than making a dramatic shift that would have alarmed Schultz, he led by example, subtly creating appreciation for the disciplines necessary to run a large, profitable business. He recruited professionals in key areas: information systems, finance, accounting, planning, legal affairs, and supply-chain operations.
Schultz gradually recognized that building discipline doesn't stifle creativity but strengthens it. With a solid foundation, they could stop reacting to small problems and focus on innovation and long-term strategy.
Chapter 9
Balancing Authenticity and Growth
Every business faces difficult decisions about when to compromise to please customers. At Starbucks, they balance two seemingly contradictory principles: standing for something authentic and saying yes to customer requests. Some issues were non-negotiable-no franchising, no artificially flavored beans, no supermarket sales that could compromise freshness, and never compromising on coffee quality.
Howard Behar forced them to reconsider some of their most dogmatic views by listening to customers in new ways. The nonfat milk controversy showed how they evolved from initial resistance to embracing customer choice. They realized their responsibility was to give people options while maintaining their core commitment to quality coffee.
Their position became: customers have the right to enjoy coffee however they prefer it, but they won't compromise the core product. They won't buy cheaper coffees, stop roasting dark, or pollute beans with artificial flavors. As Dave Olsen analogizes, coffee is like music-you can listen with audiophile precision or with windows down in a car, but the music itself remains unchanged.
Starbucks maintains unusual vertical integration, controlling the coffee from raw beans to steaming cup. Despite receiving hundreds of franchise inquiries monthly, they refuse to franchise. Company ownership preserves their culture and ensures baristas understand their passion and values.
They've made careful exceptions. Airport locations through Host Marriott became their first licensing agreement in 1991, though they experienced growing pains as they learned to maintain standards through influence rather than direct control. Today, less than 10% of Starbucks stores are licensed, with additional arrangements in places like college campuses.
Maintaining their ideals while expanding requires discipline and balance. They reject more business proposals than they accept, walking away from potentially lucrative deals that might compromise quality. Their obsession with control makes business harder but ensures better coffee.
Chapter 10
The Third Place: Coffee as Community
The specialty coffee phenomenon grew far beyond what Howard Schultz had imagined in Starbucks' early days. Nobody, including industry experts, foresaw espresso becoming so deeply woven into American culture or coffee bars becoming as ubiquitous as fast-food restaurants on street corners across America. As Starbucks expanded from Seattle into new markets, they discovered they were fulfilling much deeper societal needs than simply providing premium coffee beverages.
Their stores offered multiple layers of value to customers: a taste of European romance through exotic drinks like caffe latte and cappuccino, an affordable luxury that made everyone feel special regardless of income level, a peaceful oasis amid increasingly hectic urban lives, and most importantly, a space for casual social interaction. Though most customers rarely engaged in direct conversation with strangers, they felt a sense of connection and belonging simply by being present in the shared space, working on laptops, reading, or meeting friends.
Sociologist Ray Oldenburg's concept of the "Third Place" - informal gathering spots that serve as anchors of community life outside the realms of home (first place) and work (second place) - perfectly described what Starbucks locations were organically becoming. Americans, particularly younger urban professionals and students, were increasingly hungry for community connections in an era of suburban sprawl and declining traditional meeting places. While their original business concept focused on quick, to-go service, their most successful and fastest-growing stores became those in residential neighborhoods where people would linger for hours.
The 1990s brought significant cultural shifts including the rise of telecommuting and early internet usage, which paradoxically increased social isolation while making physical gathering places more essential. Starbucks hadn't anticipated these social trends when launching their coffee bar concept in 1987, but by creating an atmosphere they themselves enjoyed - comfortable seating, warm lighting, carefully curated music - they inadvertently tapped into a profound unmet need in American society. The overwhelming customer response proved that true innovation must both address relevant needs and inspire emotional connection.
As they achieved each expansion milestone, their organizational confidence grew exponentially. They accelerated store openings from 15 new locations in 1988 to 53 in 1992, constantly challenging themselves with increasingly ambitious growth targets. Yet Schultz deliberately balanced this confidence with a healthy dose of fear - specifically, fear that major food and beverage companies might enter the specialty coffee market or that successful regional competitors might expand nationally. Their competitive strategy remained remarkably consistent: win customer loyalty through superior coffee quality, genuine service, and an inviting atmosphere while establishing strong regional market presence before expanding into new territories. This methodical approach helped them maintain quality and culture during rapid growth.
Chapter 11
Leading With Your Heart
Leadership means discovering your company's destiny and having the courage to follow it. Companies that endure have a noble purpose that goes beyond profits. Schultz's vision for Starbucks has always been clear, though often misunderstood. They envision becoming an enduring, great company that enriches people's lives globally while remaining bold enough to defy conventional wisdom.
Watching the Beatles anthology, Schultz was struck by Paul McCartney's explanation for why they quit touring: "We were getting worse as a band while all those people were screaming... we couldn't hear to play." That resonated deeply-when they could no longer hear the music, they lost their meaning. At Starbucks, as in any business, we often become so consumed with putting out fires and solving problems that we lose sight of what we're really here to do.
Schultz's unfettered idealism may seem out of sync with the cynicism of the 1990s, where skepticism is synonymous with sophistication and glibness mistaken for intelligence. But in an era of mediocrity and fractured values, people long for something authentic and uplifting. When millions of people weekly visit Starbucks and wait in line, they're not just coming for coffee-they're coming for the feeling they get when they're there, a feeling directly related to their refusal to do things like everyone else.
Growing up in Brooklyn, Schultz was afraid to look into the crystal ball. Now he realizes we can shape what we see in that ball if we envision it, plan it, and act smartly. But the vision must be worth bringing to life. Success shouldn't be measured in dollars but in how you conduct the journey and how big your heart is at the end.
Business shows what people achieve working together-one person can do only so much, but a committed team can perform miracles. It takes courage when people tell you to lower your sights or that business can't be benevolent. Victory is most meaningful when it comes from joint achievements, not individual effort. The euphoria lasts when participants lead with their hearts, winning not just for themselves but for one another. Success is sweetest when it's shared.
