Into the Black

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Already, Ericsen is considering offering workers a cafeteria-style benefits program that lets them select different degrees of coverage. Under such a plan, monthly benefits costs could rise to $200 to $240. Those are costs, she says, the company is willing to absorb. "To have the best employees, you first have to attract them," says Ericsen. "Benefits are our competitive advantage in that regard."

Starbucks wants to continue attracting and keeping an effective, loyal work force -- to be "the employer of choice" as Schultz puts it -- because the company continues to expand aggressively into a gourmet-coffee market ripe for the picking. Over half of all adults drink two cups of coffee every day. According to FIND/SVP, a New York City market researcher, the coffee-bean-and-beverage market was $6.5 billion in 1991. Of that, one-third of the sales were specialty coffees, a category growing at nearly 10% annually. Those brews, made with rich brown arabica beans rather than the pale robusta found on supermarket shelves, are Starbucks's stock in trade.

Despite such vast opportunity -- and 300 or so daily calls from willing investors -- Schultz shuns franchising, which he believes would compromise quality. "We're unwilling to take the route others have taken, like franchising," he says. "The only way we're going to be successful is if we have the people who are attracted to the company and who are willing to sustain the growth as owners."

Schultz understands that the first point of contact with customers is his workers, and he's determined to have them recite in their sleep how to make a mocha latte, and to know the difference between espresso macchiato and espresso ristretto. Each is given 25 hours of training before taking up work behind the counter. Management trainees attend 8 to 12 weeks of classes with titles like Coffee Knowledge 101. "The training is designed to embrace the company culture," says Schultz. "There's a deep sensitivity to the customer and the coffee."

Smith, the company pragmatist, adds: "The biggest defense against pilferage is a strong culture." Indeed, Starbucks's inventory shrinkage is less than half of 1%.

At Starbucks's newest store in Los Angeles, manager Mark Smith, 28, points to the company's strong culture as a large part of the reason he left another Seattle institution, Eddie Bauer, two years ago. He also felt the coffee maker offered him more opportunity, and that seems to be the case. After recently completing an 8-week management-training course, Smith steered his store through a major expansion that included hiring 20 people. From that experience, he says, he can attest to the fact that Starbucks's benefits "make a big difference in attracting quality workers."

The approach is working. For the past 12 months, the company had sales of $90 million, not counting stores that opened within the period. Two new stores just opened in Denver, following the opening of 31 locations in Chicago. One in Washington, D.C., is among the 75 debuts slated for this year, with another 90 targeted for 1994.

Schultz leaves little to chance when it comes to opening a new outlet. Stores are located in new cities with surgical precision. By tracking the addresses of mail-order customers in such a way as to find the highest concentration in a city, Starbucks ensures that its new stores have a ready audience. In San Francisco, where there are some well-entrenched rivals, Starbucks's first store is the fastest-growing Schultz has ever opened. For good reason: one-third of the store's customers were already familiar with the company through its mail-order service. Best of all, despite losing customers to newly opened stores, mail-order revenues nearly doubled last year.

Through it all, Schultz runs a tight ship. Although the company spends, by his estimate, $1,000 to train each new worker, his overhead is dropping as a percentage of sales, even as the number of stores climbs. The figure fell from 12.3% in 1989 to a scant 8% in 1992.

In addition to the reduced attrition and shrinkage, Schultz points to yet another benefit of maintaining a superior and involved work force: ideas. Executives from Seattle fan out to a dozen cities each quarter to conduct open forums and to gather ideas, which run the gamut from addressing environmental concerns to marketing. For example, in July the company doubled the customer discount to 10¢ for reusing paper cups, with the hunch it will eventually prompt customers to use their own containers.

Schultz says: "Over the past several years, we've really focused on our infrastructure. In a series of open forums, we heard our people asking for what I call a new paradigm," an incentive not only to stay with the company but also to have a stake in its success. As the centerpiece of that new paradigm, Schultz and Orin Smith came up with Bean Stock -- Starbucks's stock options, structured to achieve both employee and corporate goals.

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