Starbucks at 40: Java juggernaut branches out

Starbucks, the java joint that sold America on grande-sized drinks while imprinting a venti-sized stamp on our national psyche, turns 40 this month. The world's largest coffee chain — 17,000 locations in 55 countries — made almost $11 billion last year by coaxing some 60 million customers a week to feel momentarily indulgent over a warm brew and a crumbly nosh.

No one could have possibly predicted the gargantuan impact Starbucks would have on American culture when its first store opened in Seattle on March 30, 1971. Just try to find someone who doesn't know what a Starbucks is. And try to find someone who doesn't love it — or hate it. For a fleeting moment, in the depths of the recession, it almost looked like the Starbucks (SBUX) empire was sinking in its own $4-a-cup hedonism. No longer. The java juggernaut just posted its best-ever quarter.

Yet major changes are afoot. The words "Starbucks Coffee" were just removed from the Starbucks mermaid mascot with one purpose: so the brand can expand beyond the sexy siren's wildest dreams and all over the grocery store. It's one thing to buy a bag of Starbucks coffee at the supermarket, but it might not be long before folks can snag energy bars and other grab-and-go goodies with the Starbucks icon from the grocer. In an exclusive interview, USA TODAY marketing reporter Bruce Horovitz talks with Starbucks CEO and chief cheerleader Howard Schultz, 57, about his company's 40 years past — and 40 years forward. The interview is edited for length and clarity:

Q: How has Starbucks changed American culture?

A: I would never be so bold myself to say that. When I first discovered in the early 1980s the Italian espresso bars in my trip to Italy, the vision was to re-create that for America — a third place that had not existed before. Starbucks re-created that in America in our own image; a place to go other than home or work. We also created an industry that did not exist: specialty coffee.

Q: At age 40, is Starbucks showing wrinkles?

A: Over the past 18 months, the company has transformed itself through reinvention. New store design. New products. Via. Mobile payment. EGifting. We're more relevant in social and digital media. Over the past 18 months, we've become more relevant to our core customer and younger audience. The maturation of the company has enabled this. These are the best of times for Starbucks.

Q: What new products are on tap for 2011?

A: First, the platform of Via. Starbucks has reinvented the dormant, stale category of instant coffee. Via has over $200 million in annual revenue. It has 30,000 points of distribution outside of our own stores. Beyond coffee, Via will become a portfolio of other things. The future of Via is not only what it is today. Other coffee products and other things will emerge from the technology we created.

Q: What other innovations are in the works?

A: In the last few weeks, we introduced mobile payments and eGifting on our Facebook page.

Q: You redesigned the logo to expand the brand in new directions. What are they?

A: In addition to a national footprint in retail stores, we're developing a world-class consumer products business that will give us the capability to build brands and distribute them ourselves into grocery stores. By the end of 2011, besides the rewards you get on the Starbucks Cards in Starbucks stores, you'll get them at the grocery store.

Q: What would the grocer sell?

A: We're deeply committed to creating a consumer product business with a wide variety of other food and beverage products. If you look at the history of Frappuccino and Via, both brands benefited by being built first inside Starbucks stores. No national retailer has created this capability into grocery. And no Coke or Pepsi has created a national retail company. We'll be the first company to operate on both channels and integrate it with a significant rewards program. I can't tell you what we're going to sell.

Q: Maybe Starbucks will become like a Newman's Own and sell all kinds of stuff at grocers?

A: I don't want you to go off thinking that we're leaving the heritage of coffee. We are committed to that for the next 40 years. We're talking about complementary products.

Q: Starbucks pulled back from expansion into things like film production and books not core to coffee. Why try it again?

A: This is very, very different. What we're going to do is first introduce products to our stores before we introduce them to the grocery trade. If you look at coffee, tea, food and juice, we think there are inherent opportunities. If you look at health bars or grab-and-go products that are in our stores, we think we can significantly enhance them and make them more widely available.

Q: What new category intrigues you most?

A: Health and wellness.

Q: How big can the grocery category get for Starbucks?

A: Our hope is that the scale will rival the size of our U.S. retail business.

Q: Did you ever imagine that Starbucks would become what it is today?

A: We've been blessed beyond any of our expectations. None of us could have ever dreamed the company would have gotten to this size and had the impact we have. None of us felt the reach of Starbucks would be this extensive. But once you arrive at this place, your dreams become bigger and your aspirations become bigger. You ask yourself: How can we continue to grow the company and make a difference?

Q: What was your finest Starbucks moment?

A: Without a question, the announcement of health insurance for our people in 1990 — two years before we went public.

Q: What was your most challenging hour at Starbucks?

A: That was 11/2 years ago when, for the first time in our history, we had to close stores (900 worldwide) and lay off people.

Q: How did the recession change Starbucks?

A: I returned to Starbucks as CEO in January 2008, because we had to navigate through our own issues and deal with the cataclysmic financial crisis. The past two years we've done our best work. We're a much stronger brand because of the recession.

Q: Was the decline due to the recession, or was it Starbucks failing to gauge consumers?

A: There was a dramatic change in consumer behavior. On a parallel track, Starbucks has to assume responsibility for decisions that were made. There were self-induced mistakes. But the last quarter (first fiscal quarter of 2011) was the best quarter in our 40-year history. When our back was against the wall, we were able to do our best work.

Q: In the depths of the recession, was there a moment you thought the Starbucks empire could implode?

A: I don't want to seem arrogant, but I always believed that Starbucks would be able to weather the storm. We certainly had challenging moments. But there was not one single moment when I thought we couldn't overcome the challenges. I have a book coming out at the end of March about the last two years of our transformation, Onward: How Starbucks Fought for Its Life without Losing Its Soul.

Q: Describe the coffee shop culture in America if you hadn't taken Starbucks coast to coast.

A: I think Starbucks created a platform and, ultimately, a runway for many other companies to emulate. I suspect if we had not achieved what we have, there would have been many regional brands that would have succeeded. But I'm not sure there would have been a national brand of the scope of Starbucks.

Q: Why are people so passionate about loving — or hating — Starbucks?

A: Twenty years ago, we repainted the wall of one of our stores, and our customers were very upset that we changed the color of the wall. I thought it was a great lesson for us and for me. We have to recognize that our customers feel as if this store is their store. I don't know how many companies could paint a wall and customers would feel as if they need to be consulted.

Q: Why do some folks hate Starbucks so?

A: We have a Twitter feed visible in our corporate office that is unfiltered. So we are watching what people are saying about Starbucks. From time to time I go over and look at it, and it's not always positive. I like that. I can't answer why people are so emotionally linked to what we do or why they like or don't like us so much. I do like the fact that they're talking about us.

Q: How do you justify selling drinks that cost $4 or even $5?

A: The majority of people buying beverages at Starbucks don't pay that much. Our Pike Place roast is $1.50. Keep in mind, we're buying the world's most expensive coffees. The health care we offer to our employees costs us $250 million per year. And we give back to the communities.

Q: Why not create a permanent value menu?

A: We're not in the fast-food business. So bundling products or Happy Meals is not who we are.

Q: Why has Starbucks never had a food hit?

A: I think the quality of our food has gotten significantly better over the years. Sales of food as a percentage of our revenue is the highest it's been in our history. It's about 20% of our volume today. Our biggest success has been oatmeal, which turned out to be a great category for us.

Q: What other foods are on tap?

A: We're rolling out a line of what we're calling Starbucks Petites — eight cravable sweets. Among them, Cake Pops (small cakes served on sticks), Whoopie Pies (rich frosting sandwiched between fluffy cake pieces) and Mini Cupcakes. This is the most significant, broad-based introduction we've ever had. For the first time, we're introducing a new beverage and new food line globally. The focus of the company in years past was not as high on food as it should have been.

Q: Some say Starbucks needs teens to drink coffee as much as tobacco makers need teens to smoke. What age is the right age for a kid to start drinking Starbucks coffee?

A: Because of the capability we've developed around social and digital media, we're one of the few food and beverage retailers that is getting younger in terms of our customer demographic. We want to be very thoughtful and disciplined not to market and merchandise coffee-related products to people that are very young.

Q: But what's the right age?

A: This is a parental issue.

Q: OK. Let's try it this way: At what age did you let your kids drink coffee?

A: My kids probably started drinking coffee in their late teens. But I'm not Dr. Spock.

Q: There's nothing better-for-you about the products Starbucks sells most of: coffee, cappuccino and latte. Are you looking into healthier platforms?

A: Tazo Tea is growing at 30% a year. We look at tea as a significant medicinal beverage and at the core of our health and wellness strategy. Our plans for tea will be quite significant. And you shouldn't discount the health benefits of coffee, which also has a wonderful component of antioxidants.

Q: How many more Starbucks can open?

A: I've said publicly that I can see us opening 100 to 200 stores annually in the U.S. for quite some time. The growth internationally will be much greater, especially in Asia.

Q: When will there be more Starbucks outside the U.S. than inside?

A: There are about 6,000 locations outside the U.S. and 11,000 in North America. In short order, we'll get to a point where there will be an equal number of stores in the U.S. and internationally. The growth in China will be dramatic.

Q: So the real growth is outside the U.S.?

A: There's a strategic shift to create a significant number of products for the grocery channel that will rival the size and scope of our U.S. retail business. This new business will offset the ultimate slowdown in U.S. retail store growth.

Q: Where are you aching to open a Starbucks store that you don't already have one?

A: Vietnam.

Q: Were you ever surprised to find a Starbucks that even you didn't expect to see?

A: I know where every Starbucks store is.

Q: Many retailers have copied Starbucks colors and designs. What can you do to stand out?

A: This past year, we remodeled more stores and refurbished more stores — over 1,000 — than any year in our history.

Q: Starbucks sells beer and wine at a handful of locations. How long until most folks can find alcoholic beverages at their local Starbucks?

A: There's no question it's working at those locations. But our intention from Day One was not to make this broad-based. This is part of our strategy to test things and stretch the envelope. Our intent is not for this to be pervasive.

Q: What's the one thing you vow to never sell at Starbucks?

A: Tobacco.

Q: What's the most popular beverage at Starbucks?

A: Tall latte.

Q: What's the most popular food item?

A: Muffins.

Q: You were named to Groupon's board. Is there a Starbucks connection?

A: When I came back as CEO in January 2008, I removed myself from the public boards I was on at eBay and DreamWorks. I've said no for three years since then. I joined Groupon's board because I'm amazed at the impact they're having, and I wanted to learn. I thought that could help me at Starbucks. This is an exception because they're doing something unique, and I wanted to have a front-row seat.

Q: With Starbucks at the forefront of new technologies, project the things folks will be able to do inside Starbucks 10 years from now.

A: We have to be at the cutting edge of how our consumers are living, how they're communicating, how they're sharing and how they're getting access to information. What we've done this year with eGifting and mobile payments is just the beginning.

Q: Starbucks is known for its corporate conscience. Is there something else in this area that you hope to accomplish before you retire?

A: We are deeply involved in micro loans with coffee farmers living in emerging countries. When I look at the growing divide between the haves and have-nots in the U.S., I've had conversations with leading financial institutions to see if there's a way that micro loans or micro lending could potentially be created in the U.S.

Q: What has been the chain's biggest new product success?

A: Frappuccino is a $2 billion business. But I'm most proud of Via.

Q: What's been the biggest flop?

A: Sorbetto, a frozen beverage we tested in L.A.

Q: What do you drink at your desk?

A: French Press of Aged Sumatra.

Q: What do you order to indulge?

A: Doppio Espresso Macchiato.

Q: What's your nuttiest Starbucks story?

A: I've received photos of people making Starbucks coffee on Mount Everest.

Q: Starbucks is named after a character in Moby Dick. I hear people are now naming their pets — and even their kids — after Starbucks.

A: Yes, I know someone who named their thoroughbred Starbucks and hopes to enter it in the Kentucky Derby.

Q: Would you consider selling Starbucks?

A: I've never considered selling. This has been a love story.

Q: When will you retire?

A: I have no intention of stepping down soon.

Q: Describe Starbucks 40 years from now.

A: In 40 years, the core of our mission will still be about achieving that fragile balance between profitability and social conscience. Without the latter, the former is unsustainable