01 Oct 2001
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Q&A: Orin Smith

Brewing Success at Starbucks
by Julia Hanna

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A native of rural Chehalis, Washington, Orin C. Smith (MBA '67) was an EVP for Danzas, an international freight shipping company, when Starbucks CEO Howard Schultz approached him in 1990 to join the fledgling company. Schultz, Smith recalls, was "personable, creative, impatient, and innovative — the quintessential entrepreneur." When Schultz purchased the Starbucks name and assets in 1987 for $3.8 million, the company, founded in 1971, had six retail stores that sold whole bean coffee, tea, and spices. Three years later, there were forty-five Starbucks stores selling the specialty coffee drinks that would win the brand international recognition. Smith liked the café concept and the enthusiastic workers behind the counter; he took a substantial cut in pay to sign on as EVP and CFO. Today, the company operates approximately 4,800 stores around the world, with three new locations opening every day.

In addition to coffee, Starbucks offers tea, pastries, and gift packages; distributes coffee-flavored ice cream and beverages to supermarkets; and maintains the retail Web site starbucks.com. Smith oversaw the company's IPO in July 1992, was named president and COO in 1994, and became CEO in 2000, when Schultz positioned himself as the company's chief global strategist. Revenues for 2000 reached $2.2 billion, while quarterly reports for fiscal 2001 are already exceeding last year's record performance.

Smith spoke to the Bulletin last summer at Starbucks' Seattle headquarters, where work was under way to repair damage done by February's 6.8 magnitude earthquake. Despite this activity — to say nothing of the high-octane pace of Starbucks' growth — Smith was calm and seemingly unflappable, quite the opposite of the caffeinated whirlwind one would expect to head a company that has revolutionized the way Americans drink coffee. In his spare time, he enjoys golf and skiing, and names a Seattle Starbucks location in his Capitol Hill neighborhood as his favorite store. Customers might even enjoy a double-tall-nonfat latte prepared by Smith himself. "Every quarter I spend at least a day or two behind the counter as part of our 'Adopt a Store' program for senior executives," he explains. "It keeps us connected to the spirit of
the company."

How did you decide to go to HBS?

It's a pretty simple story, actually. I took a year off from the University of Washington to work as an engineer for Boeing. At that time there were rows and rows of engineers sitting at desks, as far as you could see — it looked like an assembly line. After six months or so, I decided I didn't want to be one of those guys, I wanted to be the one who told them what to do! So I shifted from my engineering orientation into business.

How do you explain Starbucks' success?

In the past, coffee was treated as a commodity, with quality secondary to cost. So when we offered a terrific product in an appealing environment, with all the sensory experiences of the smell of coffee, the theater aspect of people-watching, and the general ambience, it was extremely attractive to customers. Also, a key aspect of our strategy is to be preemptive; we get there ahead of the competition, and if we're a little late, we accelerate our development.

Which markets does Starbucks plan to enter next?

Right now we're focused on partnership developments in Europe. We're in most countries in the Asia-Pacific region and the Middle East already — we even have some presence in China, in Beijing, Shanghai, and Hong Kong. Expanding into Europe is a bigger challenge than we've faced before because the coffee there is already of very high quality. We offer a much different experience from a European café, however, and our specialty beverages will attract the younger crowd. The older generations may be reluctant participants, but other American concepts have encountered this and have been enormously successful with young consumers. I believe that will be true in our case.

How would you describe the Starbucks company culture?

It is highly aspirational and very people-oriented. Starbucks gives stock options to all employees (we call them partners); we were also the first in this industry to provide health-care benefits to part-time workers. We have a consulting firm poll our workers every year to find out how they feel about the company, and they've told us that they've never seen such a positive response in an organization of this size — the degree of satisfaction is "best of class."

Many of your customers use Starbucks as a regular hangout or informal office — a "third place" between home and work. How has this aspect of the stores evolved over time?

In the beginning, we knew on an intuitive level that Starbucks was about far more than a cup of coffee. But we didn't expand on that understanding until the early 1990s, when we realized that the entire environment was important, particularly the personal connection between our partners and the customer. Regular customers are known by name, and the partners remember how they like their beverage; there's an exchange that takes place. We also made the stores more comfortable by increasing their size and adding soft chairs, even fireplaces. Approximately five hundred of our stores are set up to provide wireless access to the Internet; later this year, we'll expand this capability to the majority of our stores and begin allowing customer use. In addition, customers will be able to order beverages and access content relating to events and news in their immediate area.

What is Starbucks' attitude toward coffee farmers and the environment in developing countries?

We became involved with Conservation International (CI) because it has targeted 25 "hot spots" where conservation is crucial. These areas account for about 1.2 percent of the land mass on the planet but between 60 and 70 percent of its biodiversity — primarily, the tropical rain forests of Central and South America. Almost half the land under cultivation is used for growing coffee in this area. How coffee is farmed has an important impact on the environment. CI recognizes the need in this situation for an environmental strategy, without ignoring economic realities for the families who live in these areas.

Most people concerned about Third World poverty don't understand that one of the most important things we've done is to popularize high-quality coffee and persuade the customer to pay a higher-than-average price for it. This enables us to pay two to three times what traditional coffee companies are paying for their coffee in order to purchase the highest quality coffee beans. Working with CI, we have been successful in helping farmers increase the quality of their coffee. Since we pay more for high-quality coffee, it isn't necessary for farmers to increase the cultivation area and boost production by chopping down forests. At our CI project in Chiapas, Mexico, the incomes of farmers in the area are up by 55 percent, and we plan to expand the program to five other countries over the next couple of years. It's a win-win situation.

Describe your own coffee-drinking habits.

I started out drinking instant coffee in college, because I needed to stay awake and cram for exams. Over time, I drifted into the Maxwell House–Folgers category. Coffee served a purpose — it was a beverage I drank for its aspect as a stimulant. After I started working at Starbucks, I switched to the caffe latte — it's the "training wheels" introduction to our coffee — then moved on to Starbucks drip coffee. Once in while, I'll have a frappuccino as a special treat.

— Julia Hanna

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Featured Alumni

Featured Alumni

Orin Smith
Class of MBA 1967, Section D

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