Starbucks was having a students going home issue and needed to keep selling coffee, so they copied and perfected as Seattle treat.

Dave Young:

Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us. But we’re highlighting ads we’ve written and produced for our clients, so here’s one of those.

[Maven Roofing Ad]

Dave Young:

Welcome back to the Empire Builders Podcast. I’m Dave Young alongside Stephen Semple. And man, this topic takes me back. I feel like in the early days of the Empire Builders Podcast, we talked a lot about coffee and coffee products.

Stephen Semple:

We did. We did.

Dave Young:

And today, you told me we’re going to talk about Frappuccino.

Stephen Semple:

Yes.

Dave Young:

And my big question is is that a brand?

Stephen Semple:

No, it’s a name. It’s a product name. And it’s actually owned by Starbucks. And yep, Starbucks, I looked this up, Dave, guess what episode Starbucks was? Guess how far back we got to go?

Dave Young:

I don’t know, single digits?

Stephen Semple:

Yes, episode five. It’s like four years ago we talked about Starbucks.

Dave Young:

And they own the word Frappuccino?

Stephen Semple:

They own the word Frappuccino. No one else can use the name. They didn’t create it. And it’s funny, when I learned this, I went, “No, no, no.” Because Tim Hortons and things like that, they use Frappuccino. And then I noticed they don’t. It’s called things like frozen caps or frozen cappuccinos. No one actually uses the name Frappuccino, even though in my mind they did.

Dave Young:

I feel stupid. You don’t hear why?

Stephen Semple:

Why is that?

Dave Young:

It’s a portmanteau of frozen and cappuccino. I never figured that out before.

Stephen Semple:

Well, it’s actually not quite that.

Dave Young:

Isn’t it? Okay.

Stephen Semple:

No, it’s going to be something a little bit more interesting. You’re close, but it’s a little bit more interesting than that.

Dave Young:

Okay.

Stephen Semple:

So it’s kind of an interesting story, and it’s a huge category in Starbucks. And in fact, when the idea was first introduced to Howard Schultz, he hated it. He was like, “No, we’re not doing this. I’m a coffee purist. We’re not doing this frozen drink thing with the star and all this other crap.”

But our story actually starts with the relocation of George Howell from Berkeley to Boston in the early-1970s. Because George is a real coffee nerd. I mean real coffee nerd. There’s stories of George pulling into a diner and wanting to have a coffee and smelling the burnt coffee in the diner. And basically, he’ll ask for a pot of hot water and he’ll pull out his beans, pull out a coffee grinder, and his French press, and to start to make coffee. And people would gather around, like, “What the hell are you doing?”

Dave Young:

To show them how to make coffee.

Stephen Semple:

Yeah, exactly. Exactly. So it’s the 1970s, and there’s not much of a coffee culture yet in United States. But there was in Berkeley, which he just left. And Berkeley was kind of ground zero for the coffee culture in the United States.

Dave Young:

I see what you did there. Grounds, zero.

Stephen Semple:

I didn’t even think about that. And he’s moving to Boston. Now, ironically, Boston is kind of the starting point for coffee consumption in the United States, but it’s really still not good coffee. George wanders the Boston area visiting literally every cafe and ordering coffee, and it’s terrible. He tries all of them, and he’s continually disappointed. And George not only misses coffee, but the culture of coffee, hanging out to have a coffee. So he asked himself a question. What if I brought the West Coast coffee culture to the East Coast?

Dave Young:

Okay.

Stephen Semple:

Now here’s an interesting sidebar. So if you go back to episode five where we talked about Starbucks, Howard Schultz brought the Italian coffee culture to the West Coast. George now wants to take it to the East Coast. It’s interesting, right?

Now, Roy Williams, the founding partner of the Wizard of Ads, he often would talk about how in the United States, with the exception of Detroit, that culture happens on the coasts. It happened on the East Coast, and the West Coast, and Detroit. Typically in the middle of the United States, it’s not where you get cultural movements. Cultural movements in the United States happens on the coasts, which I thought was interesting when we took a look at this.

So Starbucks started as a wholesaler. It was later that Schultz added this concept of the third place, which actually happens in the early eighties. So in many ways, George is even ahead of this curve, which tells you just how specific it was to Berkeley. So George Howell is ahead of them. 1975, outside of Harvard, George opens a coffee shop called Coffee Connection. And it has art, and cushion benches, and all of those things that Howard Schultz brought to Starbucks, but Howard discovered the idea when he was in Italy. So it’s kind of interesting that there’s these parallel things going on.

And Howard plays around with pioneering single origin sourcing in the terre noire to coffee, and he’s mirroring the wine industry around this whole idea. And has higher prices and students become his top customer. And I always find this interesting because so often, Dave, you and I hear this, somebody will be coming out with a premium priced product and they immediately go, “Well, I have to market to the wealthy because this is premium priced.” And how often do we see premium priced things don’t have to be just sold to rich people? I get it. If it’s a Ferrari, yes. But you know what? If it’s a nicer vacuum cleaner, no. If it’s a nicer coffee, no. Students are his customers and they’re not wealthy dudes.

So it’s the mid-eighties and he starts opening other locations. He’s now up to 10 stores. But he’s got a problem. His number one customer are students. Students go away in the summer. Sales fall. He’s got a problem.

Dave Young:

And eventually they go away for good.

Stephen Semple:

That’s even another problem. But he really noticed this as whole issue where sales fall. And it’s funny, I experienced that when I was in university. When I was in university, myself and a couple of other guys had a DJ business. Now we grew this business so it did well north of a million in sales. We had 30 people working for us. And we did dances at high schools and universities. We didn’t do the wedding thing. And right when our staff were off for the summer, we had no sales. So what did we do? We would go in Canada, every small town has got a hockey arena. So we would go to these hockey arenas and you could rent them for nothing. And we would rent the arena, and we put up posters around town and we ran our own events through the summer.

Dave Young:

Just have a dance.

Stephen Semple:

We would run a dance. And it became popular enough that eventually Pepsi came along and sponsored us.

Dave Young:

Nice.

Stephen Semple:

So Pepsi ran it. But it’s that whole idea of students go away, what the heck do you do? So George is looking at this going, “I’ve got a problem. I need to look for an idea.” So he decides to travel to Seattle to see what’s going on in Seattle in the coffee business because Seattle is kind of the coffee crown in the United States. So George goes to Seattle to find inspiration. And when he’s there, he comes across a barista who’s making a frozen cappuccino in a slushy machine.

Dave Young:

In a slushy machine. Okay.

Stephen Semple:

In a slushy machine. George orders one. He’s like, “It’s cold, it’s refreshing, has this rich coffee taste.” He goes, “Wow, it’s just strong coffee, sugar, and ice.” He’s like, “This is amazing.” He tries to make it at home, and it keeps coming out as kind of this slushy mess. So he decides to figure out how to make this better and more scalable, and he spends a year making this right. And the problem was the machine. He found that if you used a frozen yogurt maker, it did a better job.

Dave Young:

Okay.

Stephen Semple:

But it needs a name. This is New England. In New England, guess what a milkshake is called?

Dave Young:

Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.

[Empire Builders Ad]

Dave Young:

Let’s pick up our story where we left off, and trust me, you haven’t missed a thing.

Stephen Semple:

But it needs a name. This is New England. In New England, guess what a milkshake is called.

Dave Young:

Is it a frappé? A frappe?

Stephen Semple:

Well, not a frappé because it’s New England.

Dave Young:

Yeah, a frappe.

Stephen Semple:

A frappe. So blend cappuccino with milkshake. So you were so close, Frappuccino.

Dave Young:

Still the portmanteau, I think is how you pronounce that.

Stephen Semple:

Yeah, but you were so close on the combining, right? And it’s combining the familiar with the unfamiliar. Because people go, “Oh, it’s like a coffee milkshake.”

Dave Young:

And I’d like one of those in the summertime.

Stephen Semple:

Bingo. And so he hands out two-for-one vouchers because he wants sampling to happen, and it takes off. And not only that, it’s a hit with people that don’t normally drink coffee. It expands their business, and it broadens the base beyond these purists.

So back to Starbucks. So Starbucks at this time is focusing on building an empire. They now have coffee shops and they’re really starting to scale. When Howard Schultz started with Starbucks, there were five locations with only one serving coffee. And by 1992, they’re publicly traded with 165 stores.

And enter Greg Rogers at Starbucks, 1994, and he is a barista by day, comic by night. And business at Starbucks is slow in the summer as well. Starbucks runs into the same thing. And it’s not because of students being away, it’s just people drink less hot coffee in the summer. And Greg remembers working at a frozen yogurt place in the summer, and it’s super busy. So he asks his boss, “Can I get a machine to do some experiments?” And they start creating these frozen coffees and giving it away as free samples to get feedback, and starts to change, based upon the feedback. And manager gives him permission then to start selling it in the store. And it becomes 40% of their sales in August is this frozen coffee concoction.

And people start asking for it at other locations in Santa Monica. And Greg starts training other baristas. And the regional manager eventually comes across it, loves it, calls to Schultz and says, “Hey Howard, we should do this frozen coffee thing.” And Howard says, “Hell no.” It’s 1995, there’s 400 stores, this frozen drink is still being offered, and now is starting to be offered in LA just because of word of mouth on it, and it’s gaining popularity. And finally, Howard says, “You know what? We got to roll this out nationally. There’s something to this. But we need a name.”

At this time, George, who’s back in Boston, is struggling because he never wanted to be big, but he saw Starbucks coming. Remember, his whole thing is I just want to create this little coffee culture thing.

Dave Young:

Yeah, this space.

Stephen Semple:

And he saw Starbucks coming, and what he knew he needed to do is get big and established before Starbucks hits. So he got funding, he went from 12 stores to 20 stores, and he realizes his heart is not in running a coffee empire. It’s sampling beans and it’s really the beans that he loves. So when Starbucks comes knocking, he sells to Starbucks for $23 million. And George uses that money to start a wholesaling business, because that’s really where his love and his passion was, the beans and the wholesaling. So now Starbucks has an extra surprise in their hip pocket because when they bought George, what else did they get?

Dave Young:

Frappuccino.

Stephen Semple:

The name Frappuccino. Problem solved, Howard. We’ve got a name.

Dave Young:

That’s great.

Stephen Semple:

And so it was originally just two flavors. They changed a little bit of how to make it so it was more scalable, how to do it with a blender so it was easier to scale, easier to customize. And when they launch in the first week, they do 200,000 drinks the first week, 400,000 the next week, 800,000 the next week. After a year, they’re doing $52 million in sales of Frappuccino, which is 10% of the revenues.

Dave Young:

Wow.

Stephen Semple:

1996, they come up with a bottle version. 1999, they start adding flavors with the dome lid and the whipped cream, and it ends up becoming a major, major, major part of the Starbucks business is the Frappuccino.

Dave Young:

All because this guy couldn’t figure out how to sell some coffee in Harvard in the summertime.

Stephen Semple:

Bingo. And that’s what my favorite lesson was, was looking at this decline in the summer, and instead of going I have to convince people to buy more hot coffee in the summer, what can I come up with that actually somebody will want in the summer. He realized that to fix the problem, he needed to actually do something different. It wasn’t about educating the consumer that coffee’s still really enjoyable in the summer, it was create something different, create something that is more of a summer drink. Now the weird thing is Frappuccinos sell year round now, but it started off as being the solving of the summer problem.

Dave Young:

Yeah, cool story. It brings us back to the old Starbucks episode.

Stephen Semple:

Way back in episode five.

Dave Young:

Way back then. I probably edited that one back when I was doing that.

Stephen Semple:

You actually did. You actually did.

Dave Young:

I love telling people, “No, really all I do is show up.” That’s my role.

Stephen Semple:

Yeah, Dave, it was fun because I think it was the first, it was certainly the first ten, but I think it was the first dozen that you did because a lot of the format and how this was done was you and I working together to create that. And once that got locked down, it was like, “Yeah, Dave’s not doing any more editing. We’re going to outsource that.”

Dave Young:

Yeah. I’m an old radio guy, so it’s like I know how. I just don’t.

Stephen Semple:

Look, it’s not your passion. And this is an interesting thing. I’m going to go on a podcast sidebar here for a moment because I get lots of people asking me about podcasts and doing a podcast and things along that lines. And what I’m always saying to them is, “You got to think about this from the perspective of if I’m going to do this, I want to be doing this on a continual basis.”

So let’s say it’s three years, and let’s say you’re doing it weekly. Well, that’s 150 times. We’re north of 200 now. It’s got to be sustainable. And the only way it’s sustainable is it’s got to be enjoyable, which is the reason why, Dave, you don’t do production. You could, but you don’t enjoy that. There’s a certain point, no matter how dedicated you are and how much you care about it, there’s a certain point where you would’ve tapped out because it would’ve just been exhausting to you.

Dave Young:

Yeah.

Stephen Semple:

Like the thought of editing another podcast would’ve been like, “Man, I really don’t want to do that.” And that’s then when it becomes taxing, and that’s then when it falls off. The reason why you continue to have a passion for this is that what we’ve done is engineered this to keep you in your fun zone.

Dave Young:

Yes, yes.

Stephen Semple:

No research, show up, and just be Dave.

Dave Young:

I like doing that.

Stephen Semple:

Right.

Dave Young:

Yeah.

Stephen Semple:

So now instead of it being a taxing thing, it’s something where you go, “Oh, this is going to be fun. This is going to be fun. I get to just be me.” And I think when people launch these things, they don’t give that enough consideration.

Dave Young:

I agree. I agree. Creating content is not easy.

Stephen Semple:

No.

Dave Young:

There’s something that’s super easy about doing what I consider to be sort of live content, and that’s my role in this is show up. And so as far as I’m concerned, this is doing a morning show on the radio live. Because if you’re on the radio doing it live, you’ve got some prep to do, you need to plan a little bit. You don’t have to go back and edit it because it was live. And that was always the fun part to me.

Stephen Semple:

And here’s something that’s really interesting. This almost parallels our story of George Howell. Because if you think about it, George started his thing because he wanted that coffee culture and he had this love of beans. Then he saw Starbucks coming and he had to become bigger to defend his position from Starbucks. And then he just suddenly realized this is not what I want to do.

Dave Young:

This is not what I want to do.

Stephen Semple:

So sold to Starbucks and then went and followed his passion. But good for him in terms of following the passion and recognizing, no, this is the thing I actually want to do. I don’t want to actually run this coffee. I don’t really want a coffee empire. I want to just do my thing with beans. Cool.

Dave Young:

Good lesson. Good lesson. Well, thank you for the Frappuccino story, Stephen.

Stephen Semple:

There we are.

Dave Young:

We’ll talk to you next time.

Stephen Semple:

All right. Thanks, David.

Dave Young:

Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app, and leave us a big fat juicy five-star rating and review at Apple Podcasts. And if you’d like to schedule your own 90-minute Empire Building session, you can do it at empirebuildingprogram.com.