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Measuring Twice and Going Big: Starbucks
Going with a gut feeling, but verifying it with data
George Pillari
February 28, 2024
When we look at the table below, it would be rational to conclude that it is a good time to get into the coffee business in the U.S. if you believe in one critical assumption:
Coffee consumption per person in the U.S. will one day approach the consumption experienced in the top coffee-consuming countries.
If we look back at the example of Webvan, the company cratered because it relied on a similar philosophy upon which to build its business model. Webvan looked at the consumption of its services in the San Francisco Bay Area (the Webvan initial market) and extrapolated those results to new geographies. As we discussed earlier, other markets did not behave like the Bay Area and Webvan didn’t make it.
Let’s move back to our chart. Can we use the top-consuming countries as an aspirational goal, start a coffee business in the U.S., and expect U.S. consumption to converge toward the top markets and give us a successful business?
A company called Starbucks made this bet and was right. By the way, Starbucks was founded in 1971, the chart above includes data from 2016, after Starbuck’s had already opened more than 10,000 stores in the U.S. during the prior fifteen years.
Part of the Starbucks lore is the story of when CEO Howard Schultz visited Milan, Italy, and observed the sheer volume of cafes and places to get coffee in the city. He thought about why such density is not yet present in the U.S., a simple observation (measuring once) he was easily able to verify with data (measuring twice).
As it turned out, Schultz was right, sort of. In the U.S., it was not so much a demand for coffee as it was for a place to hang out, drink coffee, and get work done. If you go into many Starbucks locations in the middle of a workday, you can see what they are really selling: meeting space.
Before Starbucks and other coffee shops took the U.S. by storm, coffee was boring and almost a chore. You purchased a tin can of ground coffee at the grocery store, poured it into a paper or aluminum filter, added water, and waited for the coffee to brew. Whew, but it was part of the daily ritual for tens of millions of Americans.
The genius behind Starbucks was translating to the U.S. the cultural significance of the European café as a gathering place. On top of that, Starbucks built a track record of innovation matched by few other businesses in modern history.
Seemingly small things like writing the customer’s name on the cup created the feeling of personalization and exclusivity. Suddenly, people were fine paying more for one cup of fancy coffee than they paid for an entire can of coffee grounds.
But Starbucks took innovations much farther and added merchandise, cold beverages, and food to its menu. In fiscal year 2022, only 60 percent of Starbucks sales were from beverages and a good portion of that from innovative cold beverages like Frappuccino.
Did we mention the record label? Starbucks started Hear Music and cut exclusive deals with artists like Ray Charles and Alanis Morrisette.
Starbucks was an early adopter of free Wi-Fi and internet service in its stores. I can remember several colleagues preferring to meet and work at Starbucks because the internet connection was better, and the mood and music were more relaxing than our office.
Starbucks pushed us to rethink our thinking about coffee. By importing the European model to the U.S., Starbucks reset the playing field. It was not about getting a good cup of coffee anymore; it was all about the coffee experience. But it all started because of some careful measurement and thinking at the origin of the decision-making.
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