Thinking Outside The Cup

Over the years, a handful of companies have taken Levitt's words to heart, reimagining the very definitions of their businesses and their industries each time they reached a critical turning point. Disney was once a little studio that turned out cartoon shorts. Then Walt Disney opened a theme park unlike anything anyone had ever known. Now his company develops, produces, and distributes films of all kinds; has a network of theme parks; and runs a vast media empire. Virgin's Richard Branson turned a little music magazine into a music superstore, then launched an airline, and, most recently, a cell-phone company. And before her ImClone disgrace, Martha Stewart was among this select few: Her home-catering operation became a series of cookbooks, then gave birth to a multimedia company and a lifestyle-products line that sold everything from hand towels to patio furniture at Kmart.

In each case, as the company reached a plateau in one industry category, a visionary leader looked past the original product or service to redefine, in the broadest terms, the business it was in. Disney, Branson, and Stewart reimagined their cartoon, magazine, and food-service operations as entertainment enterprises. Then, when entertainment itself became too constricting, they blew apart traditional industry characterizations altogether. Now what they really sell is a lifestyle. Disney and its idealized view of wholesome, all-American family life; Virgin and its vision of youth, sexiness, adventure, and exuberance; Martha Stewart and her promise that you, too, can lead the elegant, good life. They sell you the dream, then the full suite of products, services, and experiences to achieve it.

And Schultz would like Starbucks to join them. He aims to achieve what so few are able to do -- to reimagine his company as something bigger, better, and more significant than it has ever been. In fact, forget joining them. Schultz plans to surpass them all. "We have the potential to become the most recognizable and respected brand in the world," he says flatly.

That may be hubris, or it may be an attainable goal. Either way, Schultz must still answer Levitt's question: What business is Starbucks really in? Clearly, it's more than coffee shops. Like those other successful marketers, Schultz is selling his own lifestyle dream, one of affluence and comfort, a forward-looking but not-too-trendy community experience wrapped around a steaming cup of coffee in a cozy living room that exists on every block between home and work.

This wouldn't be the first time Schultz has transformed his company with a quantum leap of imagination. When he arrived at Starbucks in 1982 as the director of marketing and retail sales, the company was a coffee roaster and wholesaler. Back then, coffee was a 40-cent cup of brownish water, and Maxwell House reigned supreme. Now millions of coffee drinkers think nothing of paying $4 for a tall vanilla latte. Sure, it tastes better than coffee from the 1980s, but is it really worth 10 times as much? Probably not. And Schultz knows it, because he's not really selling the coffee. What he's really persuading us to pay for is that relaxing world of velvet armchairs and afternoon chats with friends in a home away from home that's filled with . . . yes, music. Or as he puts it, "We've known for a long time now that Starbucks is more than just a wonderful cup of coffee. It's the experience."

And those $4 lattes, with their extra-foamy triple-caffeinated profit margins, sure do add up. Since its IPO in 1992, Starbucks has been a stellar performer by nearly every measure. The stock is up 3,500%, with a market capitalization that increased from $400 million to about $15 billion this year. Starbucks opens three new stores every single day, and now has about 8,000 coffee shops around the world (up from 165 in 1992). It has racked up more than 12 consecutive years of sales growth in existing stores; in each of the last five years, same-store sales have increased by 5% or more. Far from showing signs of flagging, this critical measure of retail performance is looking even better lately. Same-store sales rose 9% in 2003.

And yet it's hard not to wonder whether Starbucks' cup won't someday run dry. With a shop on what seems like every corner, can market saturation be far behind? Schultz dismisses the notion; he's fond of pointing out that Starbucks has just a 7% share of the North American coffee market, which would suggest that there's lots of room to grow. And despite some setbacks, Starbucks has 1,867 stores overseas and has big hopes for China.

"Of course no chief executive wants to say, 'Yes, our market is saturated,' " scoffs Geoffrey Moore, a partner at the Silicon Valley venture-capital firm Mohr, Davidow Ventures and author of the business classic Crossing the Chasm (HarperBusiness, 1991). "But the notion that 7% market share means he still has a big field to go after is silly. His market is not all coffee drinkers. His market is people who buy into an upscale 21st-century cafe society experience, which is much smaller."