01 Oct 2001
Q&A: Orin Smith
Brewing Success at Starbucksby Julia HannaTopics:
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
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
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
Class of MBA 1967, Section D