Howard Schultz vs. Ray Kroc: Who's the Greatest of All Time?

By Jeremy Bowman Markets Fool.com

Last Thursday marked the end of an era forStarbucks(NASDAQ: SBUX).

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Howard Schultz, the man who took the company from a handful of stores in Seattle to the 25,000-store giant it is today, said he would be stepping down from the CEO role in April, leaving COO Kevin Johnson in charge of the company. Schultz will remain with Starbucks as executive chairman and chairman of the board, and will focus on the high-end Reserve brand, or the "premiumization" of Starbucks, as he calls it.

Image Source: Getty Images.

Johnson called Schultz "iconic" when asked about filling his shoes on the conference call. Along with Schultz building a global brand matched by only a handful of companies, Starbucks stock has gained 17,000% since its IPO, with a market cap of more than $80 billion today. Probably not since Steve Jobs left Apple has such a transformative leader stepped away from the leadership role.

In the history of restaurants, onlyMcDonald's(NYSE: MCD) pioneer Ray Kroc can compare. Perhaps not surprisingly, these two entrepreneurs have a few things in common.

The genesis story

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Neither Schultz nor Kroc founded their respective companies, but both recognized opportunities for expansion in small businesses in similar ways.

Schultz first encountered Starbucks when he was working for a coffeemaker supplier called Hammarplast, and noticed that Starbucks was buying a large number of coffee machines.Schultz visited the company in Seattle and met with the owners, becoming fascinated with gourmet coffee. He eventually persuaded the company to hire him, and on a trip to Italy in 1983, he was inspired to bring the Italian coffeehouse concept back to the U.S. At the time, Starbucks sold whole bean coffee, but did not brew it, believing the beverage was meant to be consumed in the home. Schultz was unable to convince the founders of the opportunity he started, and instead started his own coffeehouse, called Il Giornale. In 1987, he put together a team of investors and bought out the four-store Starbucks chain, and turned the small company into the foundation of today's retail powerhouse.

Much like Schultz, Kroc discovered McDonald's in a similar way. Kroc was a milkshake machine salesman and went to a visit McDonald's in California after noticing that they had purchased several of his machines. Kroc was impressed with the operation run by the McDonald brothers, and, noticing the franchise potential of the brand, offered to be an agent in 1955 for a cut of the profits. The McDonalds weren't interested in expanding the company. Kroc ultimately bought the company six years later. He expanded it to 700 restaurants by 1965, and by the 1970s, it was the biggest restaurant chain in the country.

Innovation

While both Schultz and Kroc found success by recognizing opportunities in existing businesses, both also added a number of innovations along the way.

Perhaps Schultz's most important innovation was recognizing the need for a "third place," not home or work but another place you feel welcome. While there were a number of other coffee chains that sprung up at the time, Schultz seem to best understand the affordable luxury that his customers were looking for, and put a premium on customer service. The company has always valued its workers better than the average restaurant chain, paying above average and offering benefits like company stock, healthcare, and now even a college education. More recently, Schultz was early to recognize the promise of mobile payments, and the company now processes more than a fifth of its domestic transactions through its app. Mobile Order & Pay is its latest innovation in that area, adding another level of convenience for the customer. Finally, Schultz has brought his most recent idea, to build a "Willy Wonka of coffee" factory, to light, and Starbucks now plans to have dozens of Roasteries and more than 1,000 Reserve bars as Schultz moves to focus on the premiumization of the brand.

Kroc, meanwhile, did not invent the franchising concept, but he pursued it in a way that no one had before. To increase his profits he purchased the land that franchised McDonald's would be built on, and ensured that franchisees would follow his protocols through strict guidelines. He came up with Hamburger University, which trained franchisees in McDonald's operation, making Kroc became most associated with automation, standardization, and discipline. The well-known idea that a Big Mac should taste the same anywhere in the world was his.

Over the years, McDonald's has expanded its menu, adding iconic items like the Egg McMuffin, Chicken McNuggets, and the Big Mac, as well dozens of other selections, many of which were taken from franchisees. Kroc, who died in 1984, might only partially recognize the restaurant giant he built today, but the core ideals of the company remain his.

A comparison between the two entrepreneurs may not be entirely fair, as the two competed in different eras. Both seemed to best understand what the culture of their day demanded. Kroc pioneered the modern fast-food experience with the assembly line operation and food standardization. But the concept that's taken off more recently has been the Starbucks' coffeehouse, and the company's trademark beverages like the Frappuccino and Pumpkin Spice Latte, which have been widely imitated. Its inroads into technology are also catching on across the industry.

Kroc came to McDonald's much later in life than Schultz found Starbucks; as Kroc was in his 50s while Schultz was in his late 20s. When Kroc died in 1984, the chain had just 7,500 stores compared to 25,000 for Starbucks today.Since then, McDonald's has grown to more than 35,000 locations, and the Golden Arches is the more valuable of the two today, with a market cap of $99 billion vs. $83 billion for Starbucks. But the coffee giant is fast gaining on it, with plans to open 2,000 stores annually, and will likely replace McDonald's as the world's most valuable restaurant company within the next decade.

In terms of influence on the restaurant industry, it's hard to beat Kroc, as McDonald's has served as a template for so many other chains and his core beliefs have been repeated endlessly. But ultimately, Schultz, I believe, will be the one who will have fathered the bigger company, both in terms of market value and store count.

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Jeremy Bowman owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.