Strength in Starbucks

David Gardner: You know, when I think about Starbucks (NASDAQ:SBUX), I think about a brand name, and I think a good brand is one that delivers on its promise day in and day out, and that is always going to be a challenge for a company serving product new to people so many times, day in and day out, over and over. Starbucks has done a wonderful job at that. Earlier you used the phrase, Jim, "surprise and delight" our customers. Is that a Starbucks catchphrase, and is that the way you think about building your brand?

Jim Donald: That is a great question. We like to think of our stores as a respite, a place for people to get away and a place for people to come in to be on their own or a place to connect with our partners. If we can surprise and delight every customer every day, maybe it is a comment, maybe it is a new beverage, maybe sampling something that they have never tried before, we will get that customer to come back. If you look at our transaction growth over the last two to three years, you will see that we are surprising and delighting our customers. So you can call it a phrase that we use a lot, but it is not jargon that you hear in most corporations today.

David Gardner: Jim, if it is fair to describe business as a battle for profits, industry by industry, I want to ask you about a couple of other players and have you rank these. In terms of who you view as a threat in the battle for profits here in the next five to 10 years ... I have four for you. They are in order: 7-Eleven (NYSE:SE), McDonald's (NYSE:MCD), local coffee shops, and then finally I will say Caribou Coffee, for the fun of it. I just presented them to you in that order, but how would you actually order those four in terms of competition posed?

Jim Donald: I would order them all equal. When you look at the competitors, both from a chain as well as and independent, we watch everybody, but you have to realize that we probably pour about 7% of the coffee consumed in the U.S., so when we look at these competitors, we are very mindful of what they are doing, but we also think that we have helped in a way, such as the independents, when we come into certain neighborhoods; ... I have seen articles that the independents are saying Starbucks is bringing more traffic in. So we like to think that we are in that premium coffee segment, and the more we can educate consumers on premium coffee, the better that we all are.

David Gardner: Now, hold on, Jim. You are telling me that Caribou Coffee is as big a competitor to you as McDonald's?

Jim Donald: If you were in the area of Minneapolis, our partners compete with Caribou. I believe that Caribou has approximately the same number of stores that we do in Minneapolis. When I say we manage our stores one partner at a time, one customer at a time, they look at that area as somebody that they are competing with daily. That is why we try, and I will go back to the "surprise and delight." We try to differentiate ourselves, not only with the quality of coffee, but with the experience that they will enjoy at Starbucks.

David Gardner: I need to take a step back here. From a business standpoint, sometimes we make assumptions that everybody understands Starbucks, and they don't. Probably a lot of our listeners have heard about franchise restaurants and franchise chains, and you may be aware that it is possible for local people to open up their own, let's say, McDonald's or what have you. Can you describe, just from a big-picture standpoint, for the average listener here, how much of Starbucks is company-owned and has Starbucks historically franchised? Yes or no?

Jim Donald: Well, we have a company owned in the U.S. primarily, but we also have what we call our licensed operations, which are agreements that we make with major players, other retailers such as Target (NYSE:TGT), Safeway (NYSE:SWY), Albertson's (NYSE:ABS), and Host Marriott. In the international world, where we have company-owned stores, we also have relationships with partners; if you want to call them franchisees you can, but we take an individual like Aponos Marinopolis. He is in Greece, in Athens. He has retail business, but we are partnering with them to put Starbucks up in that area as well.

David Gardner: ... Speaking of franchising and in this case franchising going wrong, at least for now, what is your take on what is happening at KrispyKreme (NYSE:KKD)?

Jim Donald: I don't really have any comments on Krispy Kreme. I have watched Krispy Kreme from afar. Occasionally I like to get a Krispy Kreme doughnut, but I am just not sure what is happening there with all their announcements. I know that they have got some new management in now, so it is hard to put any one particular comment on them.

David Gardner: ... Jim, you will be taking that post starting in March. How much pressure do you feel knowing that you will soon be the CEO of Starbucks?

Jim Donald: Well, I have had the opportunity to be here, at the time in March, it will be two and a half years and working with Orin Smith, the current CEO, and Howard, it has actually been a textbook example of succession planning. It is not like it is going to be stepping right off of a cliff and seeing a new type of environment. Howard and Orin have immersed me in every piece of the operation, but I feel quite comfortable going into it.

David Gardner: ... I am assuming they found you rather than you finding them. Was there a headhunter out there, a search firm that found Jim Donald over at (Pathmark) and said, "Hey, Howard, you gotta meet this guy"?

Jim Donald: Well, Howard and Orin had a friend who kind of ran into me and said, "Hey, I want to try to hook you guys up," and that is kind of what happened.

David Gardner: As the CEO-to-be of Starbucks, Jim Donald, what would you describe as your strongest strength? What is the best thing about you that you can bring to this business?

Jim Donald: I think based upon my experience in the supermarket business and based upon the thin margins that are in that business, you have to run a corporation, whether it is a supermarket or whether it is Starbucks, through people. At the end of the day, everything else is important, but the thing that really matters is that you keep communicating to people both at the Seattle Support Center as well as in the field. Keeping them connected is key to the success of our corporation, but it is not that easy.

David Gardner: And in the theory, and I heard this the other day; I like the line that "There are no perfect people, only perfect teams." Jim, as you assemble, or actually just maintain or work with a management team that already exists at this company, what is maybe a weakness of yours, a blind spot, that you appreciate somebody else on the team helping you with?

Jim Donald: That is a great comment: "No perfect people, just perfect teams." I think that says it all. Everybody has their expertise, and whether it is Michael Casey, our CFO, whether it is Howard on the strategy or whether it is my two presidents of the U.S. and international, knowing they are closer to their business. I think what you have to do is just depend upon those people that are close to the business and know that they are going to make the right decision and have the trust in them that you will believe in them. That doesn't really answer your question, but I guess the worst mistake would be not believing in them and the people you have empowered.

Catch up on the entire interview:

• Starbucks' Success
• Starbucks' Worldwide Growth
• Strength in Starbucks
• Smart Decisions, Expensive Mistakes
• The Future of Starbucks

David Gardner is co-founder of The Motley Fool and is the advisor of Motley Fool Rule Breakers. The Motley Fool isinvestors writing forinvestors.