Starbucks: The Early Years

  • By Sheila Farr
  • Posted 2/15/2017
  • HistoryLink.org Essay 20292

Seattle-based Starbucks is a multi-national corporation that sells coffee drinks, coffee beans, food, and beverages at its retail stores as well as wholesale to other outlets. When the first Starbucks store opened near the Pike Place Market in 1971, most American coffee drinkers percolated inexpensive low-grade coffee, scooped out of a can and weakly brewed. The passionate, quality-driven approach of Starbucks's three founders -- Jerry Baldwin (b. 1942), Gordon Bowker (b. 1942) and Zev Siegl (b. 1942) -- helped change public perception of what a cup of coffee could be and set the stage for the company's development. They started by selling coffee beans roasted by Peet's, a gourmet coffee company in Berkeley, California, then began roasting their own. For a decade, the few Starbucks stores sold just beans and not coffee drinks, but those gourmet beans were popular and profitable. The first Starbucks to sell brewed coffee opened in 1982. Howard Schultz (b. 1953) was hired later that year, and at his urging Starbucks opened its first espresso bar in 1984. In 1987 Baldwin and Bowker (Siegl had sold his shares in 1980) sold Starbucks to a group of investors led by Schultz.

The Three Founders

When Gordon Bowker, Jerry Baldwin, and Zev Siegl opened Starbucks in a rented storefront near Seattle's Pike Place Market on March 30, 1971, they had little business experience and hardly any cash. But they were confident that once Seattleites discovered what a great cup of coffee tasted like, they'd be hooked. How right they were!

The most surprising thing about the creation of Starbucks is how much of it happened by chance. That the three founders ever met is something of a wonder. Siegl and Bowker were both Seattle transplants and Baldwin was raised in the San Francisco Bay area. They grew up in varied circumstances and the differences in their personalities and skill sets would make their partnership work.

Zev Siegl's family moved to Seattle from New York in 1956 when his father, the violinist Henry Siegl (1911-1997), accepted the job of concertmaster for the Seattle Symphony. In New York, Henry had played for the NBC Symphony under conductor Arturo Toscanini and served as concertmaster for George Balanchine's New York City Ballet. Zev's mother, Eleanor Siegl (1917-1996), also an accomplished classical musician, became a prominent progressive educator in Seattle and founder of The Little School.

Gordon Bowker was born in Oakland, California, and was just three months old when his father, Gordon Albert Bowker (1918-1943) died serving in World War II. His submarine sank in the straits of St. George off Papua, New Guinea; the ship and crew were never found. Gordon's mother, Hazel Ringseth Bowker (1915-1991) moved with her infant son to Seattle to live with her parents, Norwegian immigrants who had taken part in the Alaska gold rush before settling in Ballard.

Jerry Baldwin, the son of Rowland Baldwin (1914-1989), a door-to-door milkman, and Patricia Brodeur Baldwin (b. 1923), who worked in data processing for the federal government and IBM, found his life unsettled as a teenager when his parents divorced and his mother remarried. In the ensuing family disarray, Jerry bounced through three different high schools before enrolling at the University of San Francisco.

Creative Aspirations

That's where he and Bowker met by chance, standing in line to get their sophomore-year dorm assignments. Neither had signed up in advance or made a deposit, and it turned out the dorm was full. They looked at each other and said: "Want to go find an apartment?" (Bowker interview).

Siegl entered the picture through another unlikely coincidence. In 1962 he had a summer job at Seattle's Century 21 World's Fair, where he posted a notice on a bulletin board that he would be driving to New York via San Francisco and was looking for passengers. Bowker, in Seattle for the summer, was planning to depart from New York to Europe in the fall and needed a ride. He signed on with Siegl. On their San Francisco stop, Siegl got acquainted with Baldwin, too.

The three men found themselves together again, several years later, this time in Seattle, after Baldwin got out of the army. He came to town for a visit and decided to stay. He found a job at Boeing. Siegl was teaching school. Bowker worked as a writer and editor at the original Seattle magazine (published April 1964 through December 1970). They all had creative aspirations.

In various partnerships together, they tried writing screenplays for KING-TV's production company and making prerecorded classical-music broadcasts for radio. Baldwin and Bowker, with another pal, had a scheme to make documentary films about American music: jazz, blues, folk. They called their company Pequod, after the ship in Moby Dick. And -- as they liked to point out -- that venture, like the Pequod, sank without a trace. Still, they wanted to start some kind of business together.

Why Not Start a Coffee Company?

One day over lunch and a bad cup of coffee, Bowker flashed an idea. In search of quality coffee, he'd been driving to Vancouver, B.C., to a coffee and tea company called Murchie's. Before long, many of his friends had gotten hooked and were placing orders with him. Why not start a coffee company in Seattle?

Baldwin and Siegl liked the idea. "It was really informal," Baldwin remembered, "We didn't have a pre-nup or anything. We just started doing stuff" (Baldwin interview).

Siegl was the champion researcher of the group in those pre-internet days. At the public library, through phone-book and newspaper searches, he located a place that sounded like what they had in mind: a gourmet coffee company in Berkeley, called Peet's. He phoned Alfred Peet (1920-2007), who was generous with information, and later arranged to visit.

The two men hit it off. Peet, an old-school European who grew up in the Netherlands working in the family coffee business, was impressed that Siegl's father was concertmaster of the Seattle Symphony. And Siegl was awed by Peet's business acumen: "He had a depth of knowledge of coffee that was unparalleled in this country. There was nobody in his league" (Siegl interview).

Siegl remembered that when he first visited Peet in December 1970, "his store was booming" (Siegl interview). Later that month, Baldwin and Bowker each made trips to Berkeley to briefly apprentice at Peet's and observe the business. Peet agreed to supply their fledgling company with fresh-roasted coffee beans.

Meanwhile, in Seattle, the partners had found the location they wanted, a corner storefront in the old Harbor Heights Hotel at 2000 Western Avenue, just north of the Pike Place Market. Rent was $137.50. As start-up funding, each partner put up $1,500 and they finagled a bank loan for $5,000.

Starbucks

By this time Seattle magazine had folded and Bowker had teamed up with designer Terry Heckler to form the advertising firm Heckler Bowker. As Bowker, Baldwin, and Siegl struggled to find a name for their coffee business, Heckler suggested that names beginning with the letters "ST" had a bold, memorable character. One day Bowker, looking at an old mining map hanging in his firm's waterfront office, noticed a town called Starbo:

"I immediately connected it to the character in Moby Dick and said 'Starbuck' ... And from that moment it became Starbucks. I didn't really have to convince Zev and Jerry very hard" (Bowker interview).

Heckler created the store logo: a voluptuous bare-breasted mermaid with two tails, which the partners saw as an enticing siren to beckon passersby into the store and an icon to evoke sea adventures without specifically referencing Moby Dick. (The logo was subsequently altered in 1987, 1992, and 2011.) To save money, Siegl and Bowker made outdoor signs for the shop, but then had to pay dearly for a professional company to mount them on the building's crumbling brick fa├žade.

By the time they finished building fixtures, painting, and getting permits, the planned store opening had been delayed. Their friend Daniel Jack Chasan stopped by routinely on his way to the market, waiting for opening day. Finally, on the morning of March 30, he spotted the sandwich board out. Proud to be the company's first customer, he selected a pound of Sumatra beans and something else, wrote a check for $5.36, and then stuck around to share a bottle of white wine that another friend brought in. Starbucks was in business.

At first Siegl was the only paid employee, while Baldwin and Bowker kept their day jobs. All three worked the store on Saturdays.

Each partner took a distinct role in company management. Bowker liked to refer to himself as "a background power figure" (Baldwin interview) and strategized on ways to publicize the company. Baldwin, who had taken an accounting course in college, became the default money guy. He also had a good palate for coffee and fell easily into the job of tasting and buying. Siegl liked tea and took on that department. Baldwin recalled, "One of the interesting things is how we accidently chose others with complementary skills. ... There was little overlap in skill set and I think that makes a huge difference" (Baldwin interview).

In its first years, Starbucks looked nothing like the espresso bars serving food and beverages that now bear its name. The store sold bulk coffee beans, tea, and spices. That -- along with a selection of coffee makers, grinders, and teapots -- was it. The only brewed coffee was given away as samples. Siegl explained:

"We would use coffee as a way to get people who came in the door to engage with us. ... 'Would you like a sample?' 'Oh sure,' and that would root them in the store; they couldn't leave. We would scoop some coffee, put it under their nose ..." (Siegl interview).

It worked. Word of mouth spread. With his background in journalism and advertising, Bowker knew how to get the attention of reporters. He sent a seductively aromatic package of coffee to influential Seattle Times columnist Don Duncan, who stopped by the store, got thoroughly caffeinated on free samples, and wrote an enthusiastic story.

One busy Saturday, the weekly shipment of roasted beans didn't arrive on schedule from Peet's. One recollection has it that the truck got delayed in a snowstorm. Others maintain that Peet hadn't been paid and held back the shipment. Either way, rather than disappoint customers, the owners took orders from everyone who came in. The next week, when the coffee arrived, they all jumped in their cars and delivered one-pound bags around the city.

In its first nine months, Starbucks grossed $46,832. After expenses, there wasn't much left. Still, by the following year, the partners, with Baldwin now on staff, were moving to open a second store. They found an excellent location at the University Village shopping center, near gourmet supermarket QFC. Broke, they had to solicit money from friends to get the new store up and running.

Learning to Roast

Alfred Peet notified them that they needed to start roasting their own coffee beans. He helped them locate a used machine and taught Baldwin how to achieve the distinctive dark roast that Starbucks was known for. The company rented a funky warehouse near Fishermen's Terminal to serve as a roasting plant.

With business expanding, the owners needed help and Starbucks made two instrumental hires. The first, in 1972, was Jean Mach. She quickly progressed from store employee to store manager and then to wholesale sales director, responsible for developing Starbucks's restaurant business. Mach wrote the first employee manual, personally testing and describing the operation of each piece of equipment the stores sold. "My heart was totally, totally in it," she said years later, remembering the sense of emotional ownership that characterized those early days (Mach interview).

The next major hire was Jim Reynolds, a longtime coffee aficianado, who came onboard in July 1973 as coffee roaster. With the University Village store open, a third store was planned for Edmonds, north of Seattle. Reynolds built shelving and coffee bins; Mach sanded and stained the floor; Baldwin did the electrical work. With Siegl's urging, this store featured a line of gourmet cookware aimed at expanding the business. It was a time when everything seemed possible for the young company and the future looked rosy.

That illusion came crashing down in 1975, when an extraordinary freeze devastated the Brazilian coffee crop. Coffee prices spiked. As prices rose, sales declined. Starbucks quit offering free samples of brewed coffee. For a while Starbucks supplemented its income by roasting barley for another company that sold it as a coffee substitute. It was tricky, unpleasant work for Reynolds, with the barley often bursting into flames. Eventually Baldwin gave up that deal. And topping off the bad news, the Surgeon General issued a warning that coffee drinking might increase the risk of cancer.

By 1976 Starbucks was struggling to stay afloat. Edmonds had proven a disappointing location and the cookware line was not moving. Mach, the store manager, took to buying pots and pans herself, just to boost sales. "It was a bomb," she said, "the lonely outpost up north" (Mach interview). Starbucks sold the lease and opened a new store in Bellevue.

Then, more bad news: The building that housed their original store was to be torn down. The company's flagship would have to move. They found an available storefront a half block south at 1912 Pike Place in the Pike Place Market. That's where the store still operates -- with tourists shooting selfies in front of the so-called "original" Starbucks.

With coffee prices soaring and retail sales down 25 percent, Starbucks used a $95,000 line of credit at Rainier Bank to stay in business. Still the partners remained "cautiously optimistic," as Bowker wrote in the company's annual report, beginning "Fellow Capitalists: Another year of growth and change, progress and uncertainty, toil and sorrow, tears and laughter has passed since we last spoke corporately with you" (annual report, August 12, 1977). Bowker invited shareholders of the private company to their annual meeting, to be held "aboard the Washington State ferry Hyak, Walla Walla, Yakima, or whichever vessel departs Seattle for Bremerton at 7:15 p.m. on Tuesday, August 30th" (annual report, August 12, 1977).

Starting to Take Off

The cost of coffee beans began to drop, and Starbucks was finally able to lower retail prices. In May, anticipating rising demand, Baldwin traveled to Germany to buy a larger coffee roaster and visit suppliers. While he was away, he turned over coffee buying to Reynolds, and when he returned, never resumed the duty. "Cash flow was terrible," Reynolds recalled, "we couldn't buy much" (Reynolds interview). He remembered being embarrassed when suppliers told him the company hadn't been paying its bills.

But business was picking up and in 1978 Starbucks moved its roasting plant and offices to a 6,000-square-foot facility at 2010 Airport Way.

Throughout that period, Siegl had been coming up with ideas to expand and diversify the business. Starbucks started a subsidiary called Pike Place Teas, imported commercial coffee grinders, and developed a grocery-store brand called Blue Anchor. "My partners were tolerant, interested supporters" he recalled (Siegl interview). To accommodate the new ventures, the company reorganized, with Siegl supervising the roasting plant. Reynolds was coffee buyer, head roaster, and plant manager; Linda Grossman, retail-merchandising manager; and Steve Ramsey the new plant-operations manager. Mach was promoted to vice president, sales. Baldwin narrowed his focus to planning and financial management.

But as time went by, the adjunct businesses didn't pay off. Pike Place Teas had to be closed out at a substantial loss, and eventually Baldwin drew a line: It was fine to do all that stuff, but not as part of Starbucks. That left Siegl the choice of being a manager in a growing corporation or being, as he put it, "a start-up guy" (Siegl interview). He exited the company in May 1980 and Starbucks bought back his 2,541 shares.

At the same time, Starbucks's core business was beginning to take off. For its 1980-1981 fiscal year sales swelled to $4.4 million, up 49 percent from the previous year.

A Pivotal Year

Then came a pivotal year in company history. In May 1982, Starbucks opened its fifth store, at 4555 University Way NE. Designed by Seattle architect George Suyama, it featured the first Starbucks coffee bar, selling brewed coffee.

Jim Reynolds was promoted to vice president. Bowker, a director and advertising guru for the company, now moved his office into the Airport Way plant. (He had sold out of Heckler Bowker and was in the process of co-founding Red Hook Brewery, the Northwest's pioneering microbrewery, which debuted that year.)

In addition, director of finance Ken Dayton and his staff moved into new offices across the street at 2015 Airport Way South, where the company's new Ultimate computer was installed. Baldwin sold the Blue Anchor grocery-store brand. Grocery-store profit margins were slim and he wanted to pare down the company and create a more targeted expansion plan.

That September, Starbucks hired a director of marketing, a New Yorker named Howard Schultz. It was a controversial move.

Schultz first encountered Starbucks as a salesman for Hammerplast, marketing drip-brew thermoses. He came to Seattle, visited the Pike Place Market store, toured the roasting plant, met Bowker and Baldwin, and was smitten. The creativity and idealism fueling the young company dazzled him. "It was my Mecca," he later wrote, "I had arrived." (Pour ..., 28). Schultz wanted a piece of it and set out to woo the owners.

Baldwin and Bowker had dinner with Schultz and his wife, Sheri, in New York, and then later got together with Schultz at the restaurant Donatello in San Francisco. Schultz, wearing one of his best suits, made his case to the more-casually-dressed Starbucks board of directors: Baldwin, Bowker, and business consultant Steve Donovan. As Schultz remembered it, "I could tell I had charmed them with my youthful enthusiasm and energy" (Pour ..., 42).

After hearing Schultz's pitch, the three Starbucks leaders discussed whether or not to hire him. There were reservations and the decision was against it. Schultz, shocked and devastated, was not about to accept that answer. "Jerry, you are making a terrible mistake," Schultz told him by phone, then laid out an impassioned defense of his proposal (Pour ..., 42). Baldwin went back to his partners with Schultz's plea. "So we caucused about it some more and ... the veto was withdrawn, and we hired him" (Bowker interview).

Tall, avid, assertive, and dressed for success, Schultz stood out among his more casual and low-key coworkers at the Starbucks warehouse offices. His forceful presence in the company ramped up the temperature for everyone. Reynolds, who counted Schultz as a friend, recalled:

"He was this New Yorker. We weren't used to that kind of personality in Seattle or the company ... He wouldn't let anything stand between him and his objective. He'd knock it down like bowling pins" (Reynolds interview).

Potential for Espresso Bars

In 1983 Starbucks sent Schultz to a trade show in Italy, where he had his first latte. He came back to Seattle charged up about the potential for espresso bars. For him, espresso was the future: "It seemed so obvious. Starbucks sold great coffee beans, but we didn't serve coffee by the cup" (Pour ..., 52).

Baldwin disagreed with Schultz's portrayal of events. "Apocryphal," he said in 2016, then explained: "It's like Howard body-slammed Gordon and me ... but that's not the case" (Baldwin interview).

In fact, Starbucks was already selling coffee by the cup at its U District store and planned to continue adding coffee bars. But Baldwin did believe in retaining the focus on selling coffee beans. He knew that Peet's popular coffee bar in Berkeley only provided about 10 percent of its sales.

And Baldwin acknowledged that neither he nor Bowker saw the huge potential of espresso drinks. Schultz was determined to demonstrate that potential.

As Schultz began his crusade within the company, Baldwin had more pressing issues on his mind. Starbucks had an opportunity to buy Peet's, the West Coast's premier specialty coffee company and Starbucks's "alma mater," and he was deeply engrossed in how to make that happen. The company was also creating a wholesale brand, Caravali, to cater to the market for flavored coffees -- something Baldwin refused to sell in Starbucks stores.

In May 1984 Starbucks opened a sixth store at 4th Avenue and Spring Street in downtown Seattle, which, at Schultz's urging, included an espresso bar. It was "extremely successful" the company reported, opening at 7 a.m. to draw office workers in the neighborhood (annual report, May 20, 1985).

That August, Starbucks opened a store in downtown San Francisco. Then, on October 1, the company completed the purchase of Peet's for $3.8 million. At that point Peet's operated four Bay Area stores and a roasting plant. The San Francisco store was quickly rebranded as Peet's. Business had started off slowly there, but when the name changed to the familiar Bay Area trademark, it increased dramatically.

Reynolds moved to Berkeley to oversee operations. He was appointed to Starbucks's board of directors, which also now included Jim Casey, a former president of Eddie Bauer. At the close of the 1984 fiscal year, Starbucks sales were $6.5 million, up from $5.6 million the previous year. And Peet's sales for 1984-1985 were $5.5 million.

Tectonic Shifts

Such rapid expansion caused tectonic shifts within the company, which had gone heavily in debt to buy Peet's. Baldwin remained president, but in the course of reorganizing Casey was brought on as chief operating officer. In March 1985, employees voted for union representation and joined Local 1001 of the United Food and Commercial Workers. In addition, Starbucks negotiated a sale of its Caravali brand.

In January 1986, Schultz resigned from Starbucks to start his own business, Il Giornale Coffee Company. Starbucks invested $150,000 in cash and services, plus half of Bowker's time for a year, giving Starbucks a minimum 20 percent stake in the venture. Starbucks would supply roasted coffee beans to Il Giornali.

Bowker's time was spread thin already. In addition to Starbucks he was a partner in the successful Red Hook Brewery and a co-founder of Apanage, a real-estate development company; he was also a producer of Olympic ski films. In 1987 Bowker decided to sell his stake in Starbucks.

With the company already strapped for cash, this put additional pressure on Baldwin. "I didn't know what I was going to do. I talked to investment managers, venture capitalists, and I just decided it would be better to sell one of the businesses" (Baldwin interview). With input from his wife, Jane, Jerry decided that Peet's -- the gold standard of the gourmet coffee industry and the inspiration for Starbucks -- was where he wanted to be.

Starbucks was for sale and Howard Schultz and a group of investors quickly raised $3.8 million to purchase it.

Postscript: The Schultz Years

Schultz wasted little time gearing up for expansion, and from the time of the purchase Starbucks has grown exponentially, first across the nation and then the globe. The company opened 30 stores in 1990, 32 the following year, and 53 in 1992, when the company went public at an opening price of $17 a share.

The subsequent ups and downs in Starbucks's rise to dominance in the world coffee industry have been documented in news stories, magazine articles, and a number of books, included two by Schultz. Schultz built a reputation as a progressive corporate leader, advocating for higher minimum wages and health care, and eventually using the company's clout to promote fair trade policies.

In late 2016 Schultz announced he was stepping down as CEO to focus on the company's high-end Roastery business. As of that November, the company boasted 25,085 stores in 75 countries, with some 300,000 employees, and was actively expanding. As Schultz once put it, for him "Enough is never enough" (Pour ..., 23).


Sources:

Sheila Farr interviews with Zev Siegl (October 4, 2016), Jerry Baldwin (telephone, October 5, 2016), Gordon Bowker (October 5, 2016), Jim Reynolds (telephone, November 29, 2016), and Jean Mach (telephone, November 29, 2016), notes, recordings, and transcripts in possession of Sheila Farr, Seattle, Washington; Farr Zev Siegl email to Sheila Farr, November 1, 2016, in possession of Sheila Farr; Gordon Bowker email to Sheila Farr, November 1, 2016, in possession of Sheila Farr; Starbucks annual reports, 1972-1986, copies in possession of Gordon Bowker, Seattle, Washington; Mark Pendergrast, Uncommon Grounds: The History of Coffee and How it Transformed Our World (New York: Basic Books, rev. ed. 2010); Howard Schultz and Dori Jones Yang, Pour Your Heart Into It (New York: Hyperion, 1997); Howard Schultz and Joanne Gordon, Onward: How Starbucks Fought For Its Life Without Losing Its Soul (New York: Rodale, 2011); Don Duncan, "A New Source for That Heady Aroma," The Seattle Times, June 17, 1971, p. B-1; Stephen H. Dunphy, "Sky High Coffee Prices Going Higher?" Ibid., October 18, 1976, p. A-7; John Wilson, "City to Sell 3 Acres Near Market for New Housing," Ibid., October 20, 1976, p. D-1; "Coffee Company Dropping Prices," Ibid., June 21, 1977, p. A-11; "Local Roaster Drops Price of Coffee Blends," Ibid., March 18, 1978, p. B-8; Tom Stockley, "Adventure in Coffee," Ibid., January 18, 1981, Pacific Northwest magazine, pp. 11-14; Carol Pucci, "Coffee Wars: Canadian Company Invading the State and is Edging Out Largest Local Roaster," Ibid., April 16, 1981, p. E-1; "People & Places," Ibid., January 4, 1983, p. E-2; Alf Collins, "Fresh Today," Ibid., May 25, 1983, p. E-3; Alf Collins, "Fresh Today," Ibid., May 16, 1984, p. D-11; Carolyn Marshall, "Alfred H. Peet, 87, Dies; Leader of a Coffee Revolution," The New York Times, September 3, 2007 (http://www.nytimes.com); Daniel Jack Chasan, "How Great Corporate Power Shadows Gregoire on Coal Shipments," Crosscut, March 9, 2011 (http://crosscut.com/2011/03/how-great-corporate-power-shadows-gregoire-on-coal/); "Starbucks Company Timeline," Starbucks website accessed November 30, 2016 (https://www.starbucks.com/about-us/company-information/starbucks-company-timeline).


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