BUS101: Introduction to Business

Starbucks Perks More Than Coffee

At Starbucks, CEO Howard Schultz understood that the single most important aspect of creating an enduring brand is its people. Schultz wanted to set Starbucks apart from other coffee shops and service businesses, and he did this by offering health benefits and stock ownership for people who work part-time. It had never been done before, and it came with a cost.

In addition to employee benefits, funding to build the brand was funneled into operations to create an experience that would enable the brand to endure and be sold profitably for many years to come. So instead of expensive marketing and advertising campaigns, the company focused on experiential marketing.

Scott Bedbury, the president of marketing of Starbucks at the time, explains. "The stores were once four white walls. There was no comfortable furniture or fireplaces or music. So we set out to create an experience in the stores and a level of brand equity that most traditionally marketed brands couldn't touch. That meant constant creative development of products, and the look and feel in the stores. It wasn't cheap. The first year, we spent $100 million building out stores, which is a significant marketing budget for anyone".

But the defining moment for the brand was the stock option and employee benefit plan. This laid the foundation for the company's internal brand, and was Schultz's mission from the very beginning, explains Bedbury. "When Howard took over the company, he was not a rich man and he didn't own a house or even a car. Howard grew up poor in Brooklyn and was influenced strongly by his dad, who never got health benefits from any of his employers. This fueled Howard's drive to create a company that put employees first. He is passionate that when it comes to customers versus employees, employees will always come first".

But it wasn't easy, and it took a lot of courage to present this idea to investors. Bedbury said, "When Howard tried to raise $2.8 million to buy the company from the three founders, he made 220 presentations and he got shut down in all but 12 of them. He was seen as an idealist who was going to put an unnecessary burden on the bottom line by offering benefits to part-time employees who viewed this as a temporary job. But Howard convinced them that turnover would drop, which it did. Store manager attrition was 15 percent, part-time hourly employees was 65 percent, compared to McDonalds and Taco Bell, which were about 200–300 percent a year. That's turning over your work force every four months, and when you do that, your service suffers and there are all kinds of problems. I don't know why more people don't do it. If you give up some equity to employees, they'll reward you for that".

Critical Thinking Questions

1. How can a company like Starbucks sustain its strong employee culture while continuing to grow rapidly?
2. Can a firm give its employees too much in terms of benefits and services? Explain.

Source: Rice University, https://openstax.org/books/introduction-business/pages/8-6-employee-compensation-and-benefits
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