Hospitality Management

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Schultz's Growing Frustration

On Schultz's return from Italy, he shared his revelation and ideas for modifying the format of Starbucks stores with Baldwin and Bowker. But instead of winning their approval, Schultz encountered strong resistance. Baldwin and Bowker argued that Starbucks was a retailer, not a restaurant or bar. They feared that serving drinks would put them in the beverage business and dilute the integrity of Starbucks' mission as a coffee store. They pointed out that Starbucks was a profitable small, private company and there was no reason to rock the boat. But a more pressing reason for their resistance emerged shortly—Baldwin and Bowker were excited by an opportunity to purchase Peet's Coffee and Tea. The acquisition took place in 1984; to fund it, Starbucks had to take on considerable debt, leaving little in the way of financial flexibility to support Schultz's ideas for entering the beverage part of the coffee business or expanding the number of Starbucks stores. For most of 1984, Starbucks managers were dividing their time between their operations in Seattle and the Peet's enterprise in San Francisco. Schultz found himself in San Francisco every other week supervising the marketing and operations of the five Peet's stores. Starbucks employees began to feel neglected and, in one quarter, did not receive their usual bonus due to tight financial conditions. Employee discontent escalated to the point where a union election was called, and the union won by three votes. Baldwin was shocked at the results, concluding that employees no longer trusted him. In the months that followed, he began to spend more of his energy on the Peet's operation in San Francisco.

It took Howard Schultz nearly a year to convince Jerry Baldwin to let him test an espresso bar. After Baldwin relented, Starbucks' sixth store, which opened in April 1984, became the first one designed to sell beverages and the first one in downtown Seattle. Schultz asked for a 1,500-square-foot space to set up a full-scale Italian-style espresso bar, but Jerry agreed to allocating only 300 square feet in a corner of the new store. There was no pre-opening marketing blitz and no sign announcing Now Serving Espresso—the lack of fanfare was part of a deliberate experiment to see what would happen. By closing time on the first day, some 400 customers had been served, well above the 250-customer average of Starbucks' best-performing stores. Within two months the store was serving 800 customers per day. The two baristas could not keep up with orders during the early morning hours, resulting in lines outside the door onto the sidewalk. Most of the business was at the espresso counter; sales at the regular retail counter were only adequate.

Schultz was elated by the test results; his visits to the store indicated that it was becoming a gathering place and that customers were pleased with the beverages being served. Schultz expected that Baldwin's doubts about entering the beverage side of the business would be dispelled and that he would gain approval to take Starbucks to a new level. Every day he went into Baldwin's office to show him the sales figures and customer counts at the new downtown store. But Baldwin was not comfortable with the success of the new store; he believed that espresso drinks were a distraction from the core business of selling fine arabica coffees at retail and rebelled at the thought that people would see Starbucks as a place to get a quick cup of coffee to go. He adamantly told Schultz, "We're coffee roasters. I don't want to be in the restaurant business . . . Besides, we're too deeply in debt to consider pursuing this idea."6 While he didn't deny that the experiment was succeeding, he didn't want to go forward with introducing beverages in other Starbucks stores. Schultz's efforts to persuade Baldwin to change his mind continued to meet strong resistance, although to avoid a total impasse Baldwin finally did agree to let...
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