In February 1986 the ICA quota system was suspended automatically because the average price had stayed above $1.50 for forty-five market days. Coffee futures plunged in anticipation that producers would dump surplus stocks onto the world market, then firmed up when Brazil restricted exports. Brazil announced that it would import African robusta beans, supposedly to supply domestic consumption and release higher quality beans for export. The Brazilians in fact were trying to maintain high price levels. By the end of 1986, with 45 million surplus bags overhanging the market and world consumption slumping, the price fell below $1.40 a pound, then drifted toward $1.20 by February 1987.
Technically, prices below $1.35 were supposed to trigger quotas again, but reaching an agreement proved difficult. The United States was angry that Latin American producers had formed a mini-cartel to limit exports, outside the ICA. Furthermore, the United States wanted a quota reallocation that would favor higher quality arabica beans. After March negotiations in London failed, prices sank to around $1 a pound.
The United States agreed to a new International Coffee Agreement in October 1987, again for political reasons. With civil wars still raging in coffee-growing countries of Central America and Africa, the United States knew that economies devastated by low prices would exacerbate the misery and intensify the conflicts.
The new ICA left all of the old issues unresolved. Brazil took a minuscule quota cut, from 30.55 percent to 30.48 percent of the total. Prices rose, hovering around the $1.20 ICA basement target. As tourist coffee reemerged in the two-tier market, the National Coffee Association abandoned its support of the ICA in February 1988, calling for “free and unrestricted trade in coffee.” In April, the head of the U.S. delegation to the ICA announced that the government had not yet decided whether it would renew membership in the agreement when it expired in September 1989.
Rumors of the ICA’s possible demise, then hopeful reports that a new agreement was near, sent coffee prices reeling up and down throughout the rest of 1988 and early 1989, but they sank gradually as Brazil and the United States squared off over tourist coffee and selectivity. With reformer Mikhail Gorbachev in the Kremlin and the Sandinistas recently voted out of power in Nicaragua, cold war fears no longer provided a compelling reason for the United States to support the agreement. Brazil’s economy now relied more on the export of soybeans, oranges, weapons, mahogany, and ballpoint pens than coffee. The deadlocked negotiations became so bitter that the ICA did not even survive until the September expiration date. When no coalition could summon the necessary votes to renew the quarterly quotas, the International Coffee Organization suspended all export limits on July 4, 1989.
By the end of July, prices had fallen to 85 cents a pound. Prices went down more steeply as panicked producers rushed to the market with beans, hoping to sell before the price dropped lower. In October, members voted to maintain minimal funding of the ICO, without quotas. With this news, prices dropped to 70 cents a pound. Only Maxwell House, Folgers, Nestlé, and the men screaming themselves hoarse in the futures pit were happy. The big roasters were slow to lower retail prices, taking a breather from the interminable price wars, while they built a gigantic stockpile of cheap beans.
The Coca-Coffee Connection and a Black Harvest
Under pressure from the Bush administration to crack down on cocaine processing and smuggling, Colombian President Virgilio Barco Vargas complained that the drop in coffee prices imperiled his fight against drugs. In 1988 Colombia had earned $1.7 billion from coffee exports, just over the estimated $1.5 billion in illegal cocaine sales. Now Colombia stood to lose some $500 million from the coffee price decline, and many of its 3 million citizens who made a livelihood from coffee might well shift to growing coca.118
In January the Colombian ambassador testified before a U.S. Senate subcommittee chaired by Joseph Biden that the Andean nations had lost nearly $750 million in revenue because of the ICA collapse. “How can we ask farmers in South America to grow coffee instead of coca leaves,” Biden asked, “when the price they are getting for their coffee has been slashed in half over the past year?”
Despite the U.S. willingness to take another look, however, even the producers were ambivalent about another ICA. No one had been satisfied with the flawed system, which had limped through twenty-seven years from 1962 until 1989. In the new free-market atmosphere of the 1990s, government control boards either were disbanded or radically weakened, allowing some farmers to keep a greater percentage of the market price. In 1990 the Brazilian Coffee Institute (IBC), with its staff of 3,500 and a $15 million annual budget, was summarily abolished.119 In Africa, the caisse de stabilisation boards fell by the wayside. By late 1993 efforts to revive the ICA failed, and the United States officially withdrew from the lame-duck International Coffee Organization just as the growers in desperation created the Association of Coffee Producing Countries (ACPC) to initiate a retention scheme to boost prices again.
Coffee growers had suffered through four years of basement prices. Even for efficient plantations, prices remained below the cost of production. 120 As in previous bust cycles, many farmers stopped pruning or fertilizing. Others ripped up their trees to plant other crops. Although world coffee exports averaged 8.4 million bags a year more than in the late 1980s, average annual revenues fell from $10.7 billion to $6.6 billion—a staggering loss of over $4 billion a year. The dramatic price drop devastated small growers around the world.
In the highlands of Papua New Guinea, for instance, the Ganiga tribe had staked its future on a new coffee plantation co-owned with Joe Leahy. In Black Harvest, a film documentary, Leahy told tribal leader Popina, “With good prices, you’ll be up to your necks in money.” Instead, the bottom dropped out of the market. The bewildered Popina observed, “I feel like selling my big pig and traveling to where they make these decisions. This affects all of us. We’ll never be millionaires.” The Ganiga refused to harvest for lower wages, and the berries blackened and rotted on the trees. By the end of the film, the Ganiga had reverted in frustration to tribal warfare, and Leahy was considering a move to Australia.
Big Coffee: Ice Cold
In the consuming countries, few roasters thought much about the plight of growers. They stockpiled cheap beans, even as the merger mania continued in the industrial coffee world. In 1990 Philip Morris bought Jacobs Suchard, the dominant European coffee-chocolate conglomerate, for $3.8 billion. At the same time, Maxwell House announced the closing of its Hoboken roasting plant due to declining sales. All roasting would be shifted to a Jacksonville, Florida, facility. Maxwell House switched ad agencies again, back to Ogilvy & Mather. In 1991 Kraft General Foods barely managed to regain a slight lead in the ground-roast segment, holding 33 percent of the market versus 32.7 percent for Procter & Gamble. Folgers as a brand still trounced Maxwell House.
In the first few years of the 1990s, the major roasters continued to battle one another without much to show for it, other than an innovative Taster’s Choice campaign—and even that was cribbed from British commercials for Gold Blend, the Nestlé brand of freeze-dried coffee in the UK.121 The commercials featured mini soap operas in which Tony, a soulful bachelor, met Sharon, his lovely British neighbor, when she knocked on his door to borrow Taster’s Choice because of its “sophisticated taste.” In serial episodes ranging over years, Tony and Sharon flirted over the freeze-dried coffee in commercials dripping with sexual innuendo, sensuality, and intrigue. The advertisements catapulted the instant coffee to first place in market share by 1993, when Tony and Sharon finally kissed onscreen to great media hoopla. A romance novel based on the couple hit the best-seller list in England.
Maxwell House came out with a refrigerated liquid coffee concentrate, then tried Maxwell House 1892, purportedly the original slow-roasted formula. Both bombed. Next it launched Cappio, one of many iced coffee drinks that were heralded as the new wave of caffeinated beverages; it didn’t do well either. Coca-Cola and Nestlé announced a joint worldwide venture to market cold coff
ee drinks—excluding Japan, where Coke already dominated the market with its Georgia Coffee. Nestlé came out with a Nescafé Mocha Cooler, followed by Chock O’Cinno from Chock full o’ Nuts and a number of smaller specialty entrées. None of the iced-coffee products caught on the way Snapple and other “New Age” drinks did.
By the mid-1990s it was clear to industry observers that the major roasters had lost their way, while gourmet small-scale coffees were booming. In 1995 Forbes summarized the fate of the big coffee merchants in a one-word headline: “Oversleeping.” The message the magazine conveyed to Maxwell House, Folgers, and Nestlé: “Wake up and smell the freshly ground coffee.”
18
The Starbucks Experience
According to legend, Merlin was born in the future and lived backward in time, moving toward the past. He must have often felt out of step with his contemporaries, filled as he was with unconventional notions of what might be. I’m no sage, but sometimes I think I know how he must have felt. My vision for the future, my aspirations for what kind of company Starbucks should be, are so easily misunderstood.
—Howard Schultz, 1997
By 1995 one specialty roaster had emerged as the definitive leader in the dynamic, fragmented market. Starbucks, the pioneering Seattle company begun in 1971 by Jerry Baldwin, Zev Siegl, and Gordon Bowker, had been transformed into a national phenomenon in an astonishingly short period of time. Without paying for the publicity, Starbucks had become synonymous with fine coffee, hip hangouts, and upscale image.
In 1980 Zev Siegl sold out to pursue other interests. By that time, Starbucks was the largest roaster in Washington, with six retail outlets. It also sold its beans to restaurants, other retailers, and supermarkets, and sold espresso machines, grinders, and brewers. Jerry Baldwin sold the Blue Anchor supermarket division to focus primarily on sales in his own stores. He also gave up the equipment accounts, but in 1982 he hired Howard Schultz, a New York salesman who had supplied the coffee firm with drip-brewing thermoses, as his new head of marketing. “You’ve got a real jewel,” Schultz told Baldwin. “Starbucks could be so much bigger.”
In 1983 Baldwin got a call from Sal Bonavita, who had bought Peet’s in 1979. Bonavita wanted to sell. “I was so excited I could hardly sit still,” Baldwin recalled. Here was his chance to own the store that started it all. “I wanted to see Peet’s and Starbucks together.” In 1984 Starbucks bought Peet’s, putting the company deeply into debt. Baldwin found himself juggling two company cultures and commuting between Seattle and San Francisco.
Howard Schultz was agitating to take Starbucks in another direction. In spring 1983 Starbucks sent Schultz to an international housewares show in Milan, Italy. There, like Alice Foote MacDougall sixty years earlier, he found a vibrant coffee culture. Milan, a city the size of Philadelphia, supported 1,500 espresso bars, and there were 200,000 in all of Italy. “Buon giorno! ” a barista (bartender) greeted Schultz one morning, as he handed a tiny demitasse of espresso to one customer, then deftly created a perfect cappuccino. “The barista moved so gracefully that it looked as though he were grinding coffee beans, pulling shots of espresso, and steaming milk at the same time, all the while conversing merrily with his customers,” Schultz recalled. “It was great theater.” In Verona, Schultz had his first caffè latte, a drink with more steamed milk than espresso.
Schultz was inspired. Why not take great Starbucks beans and brew such drinks? Why not create community gathering places like those in Italy? Back in Seattle, Schultz received a chilly reception. Jerry Baldwin didn’t want to dilute his mission to sell whole beans.
When Starbucks opened a sixth store in April 1984, Baldwin let Schultz test a small espresso bar. It proved an immediate hit, but Baldwin didn’t want customers to think of Starbucks as a place to grab a quick cup of coffee to go. Schultz decided to branch out on his own, starting Il Giornale, a coffeehouse named after Italy’s biggest newspaper, meaning “daily.”
Schultz, who grew up in a Brooklyn housing project, had the aggressive drive of a street kid determined to make it. Baldwin showed his goodwill and confidence by investing $150,000 of Starbucks money in Il Giornale, and Schultz convinced other Seattle businessmen to kick in seed money. He hired Dawn Pinaud, who had run the first test espresso bar, to train staff and supervise the retail stores. Then Dave Olsen joined the team. In 1975 Olsen had opened the funky Café Allegro in Seattle’s university district, where he roasted Starbucks beans to a dark finish for his espresso drinks. “I had been running my place for ten years by 1985, and I was beginning to think I should do more. Howard’s dream matched mine.”
The first Il Giornale opened in April 1986. Within six months, a thousand people a day were buying espresso drinks there. A few gulped the concentrated beverage straight like the Italians, but most opted for the cappuccino (a little more espresso than steamed milk) and latte (a lot more milk). Italians drank such dilute beverages only in the morning but Schultz adapted to American preferences. In Italy, most customers stand for their brief shot. Americans wanted to linger, so Schultz added chairs. Customers complained about the incessant opera, so he modified it to background jazz.
The essential elements worked, though. Dawn Pinaud and her staff created their own lingo. Although Il Giornale was essentially a fast-food outlet, the service people weren’t soda jerks or flunkies. They were baristas, spotlighted as though on stage. A drink wasn’t small, medium, or large. It was short, tall, or grande. A double espresso with a splash of milk was christened a doppio macchiato. “It’s amazing to me that these terms have become part of the language,” Pinaud said. “A few of us sat in a conference room and just made them up.” Eventually, after Starbucks caved in to customer requests and offered skim milk and flavors, ordering became a poetic art form. A large decaf espresso with lots of milk and no foam was an unleaded grande latte without. A small iced hazelnut coffee with one shot of regular and one of decaf, skim milk, and a fair amount of foam, to go, was an iced short schizo skinny hazelnut cappuccino with wings.
Then, in March 1987, Howard Schultz learned that Starbucks was for sale. Gordon Bowker wanted to cash out to start a microbrewery. Baldwin sold off Caravali, the company’s wholesale subsidiary, and was looking to spin off Starbucks itself. He and his chief roaster, Jim Reynolds, would move to San Francisco to concentrate solely on Peet’s. Within weeks, Schultz convinced his investors to contribute $3.8 million to buy the six Starbucks retail outlets and roasting plant. Schultz, then thirty-four, announced plans to open 125 outlets in the next five years. He abandoned the esoteric Il Giornale name in favor of Starbucks. He sanitized the logo’s bare-breasted mermaid, reducing her to a wavy-locked goddess figure, while company brochures now proclaimed that Starbuck was the “coffee-loving first mate” in Moby-Dick, although no one in the book drank coffee.
Schultz attracted a core group of devoted coffee people. Among them was Kevin Knox, the “coffee specialist” who supervised everything that happened from the time the beans tumbled from the roaster until the first sip. In October 1987 Schultz sent Pinaud to open a Chicago Starbucks. “A consultant later said that I was parachuted into enemy territory with a Boy Scout knife and told to survive,” Pinaud recalled. Over the next two years, she opened fifteen stores. Chicagoans, weaned on Hills Brothers and Folgers, did not take to the strong, dark-roasted Starbucks blend immediately. Still, the cappuccinos and lattes were tasty, and gradually the stores developed a loyal clientele.
In 1987 Starbucks lost $330,000. The next year, $764,000, and by 1989 the firm dropped $1.2 million. There were then fifty-five Starbucks locations in the Pacific Northwest and Chicago. Investors simply had to have faith, delivering repeated infusions of venture capital. In 1990 the company turned the corner, building a new roasting plant and showing a small profit. The following year, Pinaud took Starbucks into Los Angeles, where many feared the warm weather would deter hot coffee sales, but it was an immediate hit. “Almost overnight, Starbucks became chic,” Schultz remembered. “Word of mouth, we discove
red, is far more powerful than advertising.”
Schultz began to hire MBAs and corporate executives with experience running chain franchises, creating complex computer systems, and training employees nationwide to deliver standardized consumer goods. He recruited many of them in the early 1990s from fast-food companies, and they brought professional management to the preexisting coffee idealism, though the two did not always coexist comfortably. By the end of 1991, there were just over one hundred stores with $57 million in sales, and Schultz was preparing to take Starbucks public to finance more rapid expansion.
Latte Land
“I became increasingly afraid of waking up the sleeping giants,” Schultz admitted, referring to Maxwell House, Folgers, and Nestlé. “If they had begun to sell specialty coffee early on, they could have wiped us out.” Yet they never made a move into small retail stores. Several other regional specialty coffee outlets were expanding.122 Gloria Jean’s Coffee Bean, owned by Ed Kvetko, loomed as Starbucks’ major competition. In 1985, when Kvetko owned eleven stores in the Chicago area, he began franchising, primarily in malls. While Starbucks projected a highbrow Italian image, Gloria Jean’s was thoroughly middle-class, featuring a huge variety, including plenty of flavored beans and, eventually, a variety of coffee beverages. By 1991 Kvetko’s wife’s name graced 124 stores in over a hundred cities, considerably more than Starbucks’.
Sales of gourmet beans tripled in only six years, accounting for 20 percent of home purchases. Consumers were confronted with “beans from countries that college graduates cannot find on a map,” one journalist groused. Once they settled on a nationality, they still had to decide on a flavor: “chocolate, amaretto, vanilla, Irish cream, sambuca, orange, cinnamon, hazelnut, macadamia, raspberry, even chocolate raspberry. Will it be French, American or Italian roast? Decaffeinated or regular? Which grind?” In the 1991 movie LA Story, comedian Steve Martin ordered a “half double decaffeinated half caf with a twist of lemon.”
Uncommon Grounds: The History of Coffee and How It Transformed Our World Page 40
