It is 1980: You’ve just inherited Starbucks, a small Seattle business that roasts and sells coffee beans in 4 locations. How would you build it into a company worth more than $30 billion in 30 years?
(Before continuing, make sure you’ve read the template to this post, the famous essay by Charlie Munger about Glotz building Coca-Cola.)
Start with big, no-brainer decisions
Coffee beans are a commodity, so we’d have to find a way to attach a brand name and get customers to repeatedly buy the brand even when similar alternatives are available. Seattle and the Northwest are too small to account for this size of coffee business, so we would have to sell our product to the rest of the country and likely in other first-world countries around the world. There is currently only a small percentage of people in the U.S. that desire to buy high-end, dark-roasted coffee.
So to increase the size of this niche we would have to make it more convenient by selling individual cups of fresh coffee that we brew in each store location. Stores would have to be plentiful with very conveniently accessed locations. This would make it easier for infrequent instant coffee drinkers to try us out and further develop their habit for coffee and Starbucks. Even if it’s higher quality, people still wouldn’t pay much for a simple cup of coffee, so we would have to also sell espresso and milk-based drinks like they do in Europe. These are higher margin and can be highly customized by the customer, which makes it more likely they’ll buy and be attached to the experience.
For the business to be worth $30 billion, it would have to be earning pre-tax at least $1.5 billion if the company was doing well. The worldwide potential market would perhaps be around one billion people — if we could achieve 25% market share that means 250 million customers. If each store served 15,000 people, our total store base would have to be about 16,500, which means opening 550 stores a year from now until 2010. This would be a difficult number to achieve so we’d likely have to franchise or sell licenses to increase locations.
If all 15,000 customers per store spent an average of $4 per month at Starbucks (1-2 drinks), that would give us $12 billion of revenue in 2010. Many people already drink coffee every day, so this shouldn’t be too much of a problem. We’d have to achieve a 12.5% operating margin at this level, which is 31 cents for a $2.50 drink. No supplier — other than coffee beans when supply is restricted — has bargaining power and we will be buying their product on a massive scale so minimizing cost of goods sold wont be an issue. Our biggest overhead cost will be rent and wages, though many associates will be part-time due to sales being concentrated in the morning hours as customers commute to work.
The caffeine stimulus in coffee will aid habit formation in customers. Habit formation will also be increased by letting people customize their drinks and designing stores with local interests in mind (excessive self-regard tendency). By putting our logo on every cup, we’ll promote social proof.
If customers have a good feeling and good mental association with our brand, they will be more likely to buy and like the product (halo effect). So we must make sure their in-store experience is good, which means good design and paying employees well. We should make stores comfortable enough that people will want to go there regardless of the product. Promoting charitable causes and giving our brand a good environmental image will help as customers become more socially conscious.
What must be avoided?
Loss of brand name or trademark, slipping quality of product or consumer experience.
As we grow, our success will cause other companies to copy our strategy, especially in cities or areas where we aren’t. To minimize this, we will have to expand very quickly, first in major metropolitan areas and then outward from there. Word of mouth and some marketing should help spread brand association and make it easier for us to compete in new areas. If another similar coffee company has already established dominance in a certain region, we should attempt to buy them because it would likely be too costly to break local habit.