The History of the Frappuccino: A Tale in the Importance of Outside Perspective
The Best Mistake Howard Schultz Didn't Make
The history of the world’s most beloved coffee franchise, Starbucks, is a fascinating tale of entrepreneurialism and how one business can imprint a dynamic shift on consumer tastes across a nation, and eventually the rest of the world. Moreover, it's also a tale that highlights the importance of remaining open-minded and avoiding the narrative of what isn’t broken, doesn’t require fixing.
In the modern-day, consumers are spoiled by the bountiful optionality of coffee. From store-bought instant to Starbucks to high-quality independent shops, one is often only a stone’s throw away from some great coffee. Today, there are a number of critics who suggest Starbucks is akin to the ‘big mac’ of coffee. "Charbucks” is a common slur from those who dislike the brand. However, back in the early 80s, Starbucks were in fact a leading force behind the shift in consumer tastes that led to this great bounty of coffee choices. If you imagine an X-axis that assigns increasing levels of “quality” the further right you go, then at this time Starbucks was certainly considered to be on the far right of that axis.
When you consider that typical use-case for coffee back then, Starbucks came onto the scene as a high-quality, consistent, alternative to the bland water-like beverages that were served before. Equally, the fact that Starbucks were a coffee chain meant that customers could expect the same standard whether they were in California, Texas or New York. Founder and former CEO, Howard Schultz, envisioned Starbucks as the consumer’s “third place” alongside their workplaces and their homes. For decades, this vision materialised into fact. The story begins in 1971 in Seattle’s Pike Place Market, with a small retail coffee store, named Starbucks, which sold their own brand of roasted arabica coffee beans.
However, it wasn’t until the early 1980s that a young Howard Schultz would discover Starbucks. This man would become the catalyst for the coffee revolution that Starbucks helped shape in the United States over the following decades. Hired as a director of retail operations in 1982 (aged 29 at the time), Schultz would embark upon a life-altering trip to Milan the following year where he discovered the romanticism for espresso coffee bars in the heart of Italy.
Here, coffee was a language. It was a focal presence that communities congregated around during the morning rush, lunch breaks, and as a way to decompress in the evenings with friends and loved ones. This was far removed from how coffee was consumed in America at the time where it was often seen as a cheap, low-quality stimulant to get you through the day. Upon returning from his trip, Schultz would convince the owners (at their behest) to start experimenting with serving high-quality Italian-style coffee to go. This request, as mundane as it may seem now, was somewhat peculiar back in the early 80s. For Starbucks, who mostly focussed on selling their beans to customers, the notion of selling hot coffee seemed like a distraction.
To Shultz’s amazement, the concept proved to be a success.
In 1984, the company had developed the first Starbucks Caffe Latte. This, largely milk-based, beverage traces its origins back to Italy and was a roaring success for this small Seattle coffee roaster. During the early 80s, Starbucks played a large role in the popularisation of the product across Seattle, which then began to spread nationally towards the early 90s. Below is an excerpt of Howard Schultz recounting what that initial experience was like after launching the Italian espresso experience to consumers:
“At 7 A.M. sharp, we unlocked the door. One by one, curious people began walking in on their way to their offices. Many ordered a regular cup of coffee. Others asked about the unfamiliar espresso drinks listed on the Italian menu.
The baristas were jazzed about the new drinks and enjoyed explaining what each contained. They recommended the drink I had discovered in Verona, one that many customers had never heard of: caffè latte, espresso with steamed milk. As far as I know, America was first introduced to caffè latte that morning. I watched several people take their first sip. As I had, most opened their eyes wide, responding first to the unaccustomed burst of intense flavor. They hesitated, then sipped again, savoring the sweet warmth of the milk. I saw smiles as the full richness of the drink filled their mouths.
From the minute we opened, this much was clear to me: Starbucks had entered a different business. There could be no turning back. By closing time, about 400 customers had passed through the door—a much higher tally than the average customer count of 250 at Starbucks’ best performing bean stores. More important, I could feel the first ripples of that same warm social interaction and engaging artistry that had captivated me in Italy. I went home that day as high as I’ve ever been. As weeks went on, business grew, almost all on the beverage side. Within two months, the store was serving 800 customers a day. The baristas couldn’t make espressos fast enough, and lines began snaking out the door onto the sidewalk. Whenever I stopped by to check on the progress of my experiment, customers came up to me, eager to share their enthusiasm.
With the success of the first espresso bar, I began to imagine many further possibilities. We could open coffee stores around the city, all dedicated to serving espresso drinks. These would become not only a catalyst but also a vehicle for introducing a new, broader base of customers to Starbucks coffee.”
Despite the success of Howard’s concept, then manager Jerry Baldwin was reluctant to extrapolate a conclusion of success from the data he was seeing. Schultz would later recall that Jerry would remark that “we’re coffee roasters. I don’t want to be in the restaurant business.” To which Schultz would respond, suggesting that by serving hot coffee, they are giving customers the experience of consuming the high-quality beans “the way it’s supposed to be prepared.” Schultz endured several failed attempts at encouraging the management at Starbucks to implement his system.
Ultimately, this conflicted with management’s assertion that selling coffee beans was the more attractive model. They felt that by serving coffee to customers, they were getting distracted from the core business of selling arabica coffee beans at retail. Equally, they displayed animosity towards the idea of acquiring several expensive espresso machines to enact this vision, regardless of the fact it was tripling customer foot traffic in their stores.
They were so obsessed with the way things currently were, that they missed the opportunity to envision the way that things might be.
Finally, after giving in to the conflict in vision, Schultz would leave Starbucks in 1985 and set up his own store, Il Giornale, in 1986. In this store, which served brewed coffee and espresso beverages, he would use the beans of the employer he had recently left.
Just one year later, assisted by other investors, Schultz would return to the management team at Starbucks and acquire their operation for $3.8M as they decided to focus on distributing wholesale coffee beans. In this deal, Howard would rebrand the entire business as Starbucks (having acquired the rights to the name) and the old Starbucks coffee company would be renamed Peet’s coffee. This is a severely basic depiction of the early history of Starbucks, something which I could ideally write about at length, going into far greater detail. I may do that at some point in future. However, the premise of today’s discussion is not strictly about the history of Starbucks. Instead, I wanted to focus on the history of one of Starbucks’ most revolutionary products, the Frappuccino.
“The Best Mistake I Didn’t Make”
In Schultz’s recount of his initial tenure at Starbucks, Pour Your Heart Into It, he would call the Frappuccino “the best mistake I didn’t make”.
By saying this he not only acknowledges the drink was not his idea, but that it would have been a huge mistake to dismiss it. Despite originally being against the idea of an icy blend of dark-roasted coffee and milk, Schultz would allow his team to experiment with the newly proposed beverage, much to the contrary of how he was treated when originally pitching his vision for espresso bars to the original Starbucks management team back in 1983.
When the first iteration for the Frappuccino was put forward in 1993, Starbucks was already a thriving franchise, expanding both domestically and internationally. The company had joined the Nasdaq just two years prior, and only 6 years later they would expand into China. There was no precedent for national success in serving cold blended coffee beverages to order, and there appeared to be no obvious demand for it across the United States. Whilst Starbucks did serve iced lattes and iced mochas, both of these offerings were simply served with ice cubes.
“Many entrepreneurs fall into a trap: They are so captivated by their own vision that when an employee comes up with an idea, especially one that doesn’t seem to fit the original vision, they are tempted to quash it.” - Howard Schultz, 1997
Picture this. The year is 1993, and Starbucks operates a little under 300 stores across the US and Canada. It’s a swelteringly hot California summer and Dina Campion, then Regional Director at Starbucks, begins to become frustrated that their stores (of which she managed ~10 in the California area) began losing foot traffic to a number of smaller coffee stores offering granitas. Granitas were a cold blend of sugar and coffee that proved to be particularly popular during the warmer weather. The key difference was that these beverages had been blended alongside the ice, creating a different texture, and a more readily chilled drinking experience.
Despite a number of customers asking for blended drinks, Starbucks employees would refuse, as this was not regarded as a “true coffee drink”. As a result, they were losing customers. Dina decided that Starbucks were missing out. After discussing the matter with several other store managers, she found that there was additional consensus amongst her peers. In September of that year, Dan Moore (a colleague in retail operations) purchased a blender for Dina, where she began testing the blended beverages in a store located in the San Fernando Valley, where requests for blended ice beverages were particularly high.
This experiment was conducted without the permission of Dina’s superiors. In Schultz’s own words, “they didn’t ask for permission; they just went ahead, wondering if they’d get in trouble”. Schultz is on record as initially being resistant to the idea, claiming that “it seemed to dilute the integrity of what we stood for and sounded more like a fast-food shake than something a true coffee lover would enjoy.”Regardless, after several iterations of the product, both Dina and Dan presented their final product to the Starbucks food and beverage department, whereby they agreed to create a proprietary blended beverage for further testing.
The outcome of that testing would then be brought to Howard Schultz in early 1994, who found the beverage to have a chalk-like consistency and thought it was “awful”. Some years prior, Schultz had offered up a similar reaction to Starbucks’ experimentation with low-fat milk. He disliked the addition of low-fat milk but decided to allow customers to make the call of whether or not it belongs on the menu. To his surprise, they enjoyed it. Thus, in a similar fashion, he allowed the team to trial the newly proposed blended beverage with customers in a Santa Monica store headed by Anne Ewing, which was located within an outdoor mall, rife with tourists and shoppers throughout all periods of the day.
Anne Ewing and her assistant manager, Greg Rogers, were handed control over the project and after several tests began to create their own version of the iced beverage. In their recipe, they would replace the powder base with freshly brewed coffee, increase the blending time from 10s to 25s, and alter the ratio of ice to liquid. That summer, they would present both versions of the drink (the original and their own iteration) to Howard Behar, the former President of Starbucks as he visited the Los Angles area. After sampling Anne and Greg’s version, he brought it back to Seattle to insist to Schultz that the company pursue this new version which includes freshly brewed coffee as the base.
After further development, and the inclusion of low-fat milk to create a texture that was icier as opposed to creamier, the product was initially launched across 12 California stores in October 1994. After testing both blended and soft-serve versions of the product, customer feedback highly favoured the blended beverage, and it was then rolled out across three more cities. Finally, at this point, Schultz declared that he enjoyed the taste of this new product, going so far as to say it was “delicious”. One year after dismissing the idea, he came around and understood the potential for this new offering. Keeping an open mind helped the Starbucks team develop one of their most popular products to date, as well as opening the floodgate for an entirely new range of higher-margin offerings, which positively influenced the pricing mix.
Just last quarter (Q3 FY21) Starbucks sold $3.5B worth of cold beverages across company-operated stores which accounted for ~74% of their entire beverage sales, or ~46% of their entire sales base, over that three month period. Granted, this was during a summer period, but it goes to show the prominence of the company’s in-store cold brew offerings today.
Where Did Frappuccino Come From?
So, the product is tried and tested, but management still needs a name. It might surprise readers to know that this was not the brainchild of a Starbucks employee. In fact, the name originated from The Coffee Connection, a Boston-based coffee retailer that Starbucks had acquired earlier that year to catalyst their Boston expansion. As part of this acquisition, Starbucks would acquire the rights to a slushy-style beverage made from a soft-serve machine. Management didn’t care too much for the product, but the name “was perfect, evocative of both the cold of a frappe and the coffee in a cappuccino”
This name, the Frappuccino, would be repurposed for Starbuck’s new beverage.
Even at this stage, Schultz was conflicted about the idea of selling these beverages in the store. Blenders could potentially disrupt the ambience of the “third place” that visitors frequented to enjoy their coffee, and the product itself was more so a milk product than a coffee product. A few years earlier, in the late-80s, Starbucks had been consulting with Pepsi about developing lightly carbonated coffees, in bottles, for wholesale consumption. He pondered whether or not this product might be better suited to those channels of disruption.
In the end, he opted to hear what customers and partners were saying and rolled out the Frappuccino (in two flavours, mocha or coffee) nationwide in late 1994 with the goal of formally introducing the product in April before the summer climate kicked in. This pursuit involved a 5-month retrofit operation of more than 550 individual stores to install blenders and train baristas to make the new drinks. The task was completed on time, and Schultz cites that the Frappuccino was an instant hit.
“The first week of launch we were tracking sales, and it was something like 200,000 drinks the first week – when we were hoping for 100,000.
The next week it was 400,000 and the next it was 800,000. We had figured it would do well in Southern California but it sold just as well in Chicago, Vancouver B.C. and Boston. It was huge.” - Dan Moore, ex-President of Starbucks
Within the first summer of launch (1995), this one product accounted for more than 11% of their summer sales and by the conclusion of FY96 (the first full fiscal year on the market), the Frappuccino was 7% of their fiscal year revenue base. That year Starbucks sold $52M worth of Frappuccinos and, as I referenced earlier, those cold beverage sales have continued compounding for decades thereafter. Schultz later highlighted the fact that he did not let his own ignorance stand in the way of giving customers what they want:
“That’s $52 million we would not have registered had we not listened to our partners in California. I was wrong, and I was delighted about it. Turning down Frappuccino was the best mistake I never made. In late 1996, Business Week named it one of the best products of the year. And did it dilute the integrity of Starbucks? A coffee purist might think so, but, most importantly, our customers didn’t.
Frappuccinos not only gave us a welcome alternative for warm-weather months but also provided a way to introduce non–coffee drinkers to Starbucks coffee. Besides, the more I drank Frappuccinos, the more I liked them.
Perhaps the most remarkable thing about this story is that we didn’t do any heavy-duty financial analysis on Frappuccino beforehand. We didn’t hire a bluechip Establishment consultant who could provide 10,000 pages of support material. We didn’t even conduct what major companies would consider a thorough test.
No corporate bureaucracy stood in the way of Frappuccino. It was a totally entrepreneurial project, and it flourished with a Starbucks that was no longer a small company.” - Howard Schultz, 1997
So, despite Schultz’s frequent reservations, the Frappuccino project went ahead. Should Starbucks have been bound by the same constraints as a more cumbersome corporation, the product may never have emerged. To repeat a quote I shared earlier when management becomes “so captivated by their own vision that when an employee comes up with an idea, especially one that doesn’t seem to fit the original vision, they are tempted to quash it.”
Avoiding the initial dismissive responses that our own subconscious mind can generate, we should take the time to consider ideas outside the perspective of our own bias purview. Richard Branson was one of the first entrepreneurs I read about at a young age that sparked my own curiosity into the ways of business and experimentation. Reading his autobiography, losing my virginity, was a critical moment in my own life. As a young man, in my mid-teens, I discovered a whole other world of possibilities outside of the traditional 9-5 conformity.
Branson once remarked that “If somebody offers you an amazing opportunity but you are not sure you can do it, say yes”.
Whilst not strictly related to the Starbucks case study, I think when offered an opportunity that one is not familiar with how the inputs or outcomes may take shape, we, as humans, as naturally inclined to say no. We feel most comfortable in our own bubbles. For Howard Schultz, he allowed his conceptions of what his customers wanted to be tested by Dina Camion, Dan Moore, and others, before saying “no”. In the end, it proved to be a fruitful endeavour. Should it have failed, then at the very least, they would have learned something new about their customers.
Bottling Up Frappuccino’s Success
I mentioned earlier that Starbucks were in talks with Pepsi in the late 80s and early 90s, attempting to figure out how they can cooperate to distribute Starbucks for wholesale and retail customers outside of the Starbucks stores.
After a trip to Tokyo in 1991, Schultz had noticed the success of ready-made, chilled, coffee beverages in Japan. These drinks would be sold in either aluminium cans or glass bottles and would represent ~33% of Japan’s annual coffee consumption at the point in time. In total, Japan would spend ~$8B on ready-made coffee products each year, which was a stark contrast to the United States, which spent closer to $50M on these products. Even Coca Cola had a small presence in Japan through their Georgia Coffee brand. Schultz reasoned that Starbucks, which specialise in coffee, could create a superior product. For this, they would require a product and a strong global distribution partner.
Who better to take on the Western companies like Coca Cola than their arch-rivals, PepsiCo? In 1992 Schultz, alongside George Reynolds, then Starbucks’ senior vice president for marketing, went to meet with Pepsi in New York.
“Initially, neither of us had a clue how Pepsi and Starbucks might work together. But I figured there had to be a way to leverage Pepsi’s tremendous distribution power to help move Starbucks out of our retail stores and into a more visible position in the mainstream market.” - Howard Schultz, 1997
Prior to the creation of the Frappuccino, Starbucks had experimented (with Pepsi) on a rollout of a carbonated coffee product called Mazagran. It ultimately failed but Pepsi remained patient. In 1995, after a successful first summer for the newly minted Frappuccino, Starbucks had the perfect candidate for their mass-market bottled coffee expansion. The idea was already established, and the Pepsi team loved the idea of bottling the product. After tackling the difficulties of converting the Frappuccino (which requires on-site blending, and limited shelf life milk) into a bottle, within a few months and some additional R&D effort, the recipe was perfected for this new iteration of the Frappuccino. In fact, Schultz claimed that they were so confident in the final product, that they didn’t even market test it on consumers.
Despite ramping up production as quickly as possible, the partnership only had the capacity to supply the West Coast for the first summer of 1996. Within weeks of launch, Starbucks began to sell “ten times the quantities we had projected”.
The only problem facing Starbucks was that they struggled to replenish stock fast enough. After masses of empty shelves from the excessive demand, and frustrated customers, Starbucks pulled advertising until they ramped up their manufacturing capacity. However, after supply constraints eased, the bottled Frappuccino was the sole flagship force that allowed Starbucks to penetrate supermarkets and expand into the read made beverage business.
So, Schultz’s decision to ignore his initial reluctance offered up both a brand new product category for their in-store business, as well as an entry into the supermarket business. Today, Starbucks customers can enjoy more than 36,000 different combinations of Frappuccino blended beverages, as well as a host of other cold beverage menu items such as iced lattes, iced cappuccinos, iced teas, seasonal fruit blends, and several iterations of their cold brew product, including the relatively new Nitro Cold Brew, which is infused with nitrogen to give the beverage a smooth and velvety texture.
Too many rules will stifle innovation. So too, will a management team (or individual) that lacks the ability to welcome new perspectives. The adage of what is not broken doesn’t require fixing, is certainly another roadblock to the fostering of new, potentially business altering, ideas. Schultz could have easily quashed the Frappuccino project, confirming his own priors about what Starbucks is and what he perceived customers wanted. Moreover, he could have been equally dismissive of the fact the idea had been tested without his knowledge. As someone who occasionally enjoyed an iced beverage from Starbucks, I am glad he didn’t.
For those interested in the history of this great business, Howard Schultz has authored two books that cover his founding period and initial tenure as the CEO of Starbucks, as well as his recount of the period in time when he was lured back to the company to regain their core values after a period of underperformance.
• Pour Your Heart Into It (1997)
Thanks for reading,
Author of Investment Talk