Latest / Building Brands with Fexingo: Identity, Reputation, and Long-Term Business Equity / How Starbucks Built a Brand on the Third Place
Transcript
- Lucas: If you buy a cup of coffee at Starbucks, you're not just paying for the beans, the water, and the paper cup. You're paying for something Howard Schultz called the 'third place' — a space that's not home and not work, but something in between. Luna: And that idea is worth billions. But I think a lot of people roll their eyes at it now. 'Third place' can feel like marketing jargon. Lucas: It can. But the numbers tell a different story. When Schultz bought Starbucks back in 1987, it had 11 stores. By 2026, it's over 38,000 stores globally. The average Starbucks store generates about $1.2 million in revenue per year. That's not just coffee margins — that's brand margin. Luna: So how did they get from a few Seattle stores to that kind of scale? Was it really just the third place concept? Lucas: It started with an observation. In 1983, Schultz was in Milan for a trade show, and he walked into an espresso bar. He saw the barista pulling shots, the regulars chatting, the sense of community. He realized that Americans didn't have that. They had diner coffee, which was terrible, and they drank it alone. Luna: Right. So he brought back the idea of the Italian espresso bar. But he didn't just copy it — he adapted it. Lucas: Exactly. He made it scalable. The original Starbucks was a bean retailer. Schultz transformed it into a cafe experience. But here's the key: he insisted on vertical integration. Starbucks roasts its own beans, trains its own baristas, designs its own stores. Every touchpoint is controlled. Luna: That's unusual in food and beverage. Most chains franchise or license. Starbucks owns nearly all its stores. Lucas: And that ownership lets them enforce consistency. A latte in Shanghai tastes the same as one in Chicago. The music, the lighting, the seating — all designed to make you linger. And the longer you stay, the more you associate the brand with comfort. Luna: But there's a tension there. If you want people to linger, you need seats. But if you want high revenue per square foot, you want turnover. Starbucks has struggled with that balance. Lucas: Especially in the last few years. Mobile ordering exploded — by 2024, about 25% of US transactions were mobile. That creates bottlenecks. People order on their phones, show up, grab their drink, and leave. They don't sit. So the third place becomes more of a pit stop. Luna: And drive-thrus. I think Starbucks has over 60% of its US stores with drive-thrus now. That's the opposite of the Italian espresso bar. Lucas: It is. Schultz stepped down as CEO in 2017, came back in 2022 during a tough period, and then handed the reins again. The brand has had to evolve. The core insight — that people want a comfortable, consistent place — still holds. But the execution has to adapt to how people actually live. Luna: So what's the lesson for other brands? If you're building a brand today, can you deliberately create a 'third place'? Lucas: You can try — but it's expensive. Starbucks spends about $500 million a year on store design and construction. They have a whole team of architects. Most brands can't do that. But you can learn from the principle: make your product a vehicle for an experience. Luna: Give me an example of a smaller brand that does this well. Lucas: I'd point to a local coffee shop in my neighborhood — they know my name, they remember my order, they have a shelf of books you can borrow. That's the same emotional hook, just at a different scale. The brand isn't the logo — it's the ritual. Luna: And I think that's why Starbucks still works, despite the drive-thrus. They've trained millions of people to expect a certain quality and a certain feeling. That's hard to replicate. Lucas: It is. And it's worth defending. Speaking of value — if these conversations have moved your work forward in some small way, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah. It's the smallest possible ask, and it keeps the show ad-free. We really appreciate it. Lucas: So back to Starbucks — one of the interesting recent developments is the pressure from activist investors. In 2025, a group pushed for more cost-cutting, arguing that the third place model was too expensive to maintain. Luna: What happened? Did Schultz push back? Lucas: The board largely sided with the long-term brand strategy. They argued that stripping away the experience would destroy the premium pricing. A Starbucks latte costs about $5 on average. A McDonald's coffee is $2. The difference is the brand. Luna: But can that premium hold as inflation stays elevated? People are cutting back. Lucas: Some are. But Starbucks has pricing power because of habit. They found that even when they raised prices by 5% in 2024, same-store sales barely dipped. That's brand equity. Luna: Let's talk about the darker side. Starbucks has faced criticism for union-busting, for understaffing, for the feeling that the third place is now just a transactional machine. Lucas: That's real. And it's a tension at the heart of the brand. The third place was supposed to be warm and human. But when you have 38,000 stores and a margin target, humanity can become a cost. In 2023 and 2024, barista turnover was over 100% in some markets. That destroys consistency. Luna: So the brand promise — consistent comfort — depends on happy, well-trained employees. If you underinvest in them, the experience erodes. Lucas: Exactly. And that's the takeaway for any brand. You can't fake the experience. If the reality doesn't match the marketing, people notice. Starbucks is still one of the most valuable brands in the world — Interbrand valued it at over $60 billion in 2025. But that value is fragile. Luna: So what's next? Do you think the third place model survives the next decade? Lucas: I think it evolves. We're already seeing Starbucks piloting smaller formats — pickup-only stores, drive thru only locations. The third place might become a network of different places, not just one template. The brand idea is flexible; the physical form doesn't have to be. Luna: That's a smart way to frame it. The core insight — people want belonging — doesn't change. But how you deliver it can. Lucas: Exactly. And that's the real lesson for business leaders. Don't get attached to the specific tactic. Get attached to the emotional outcome. Starbucks sells a feeling of warmth and familiarity. As long as they deliver that, they'll find a way. Luna: And as long as they remember that the barista is part of the brand. Lucas: Right. The brand is what happens when the customer interacts with the employee. Every other detail supports that moment.