Latest / The CEO Diary with Fexingo: Leadership Lessons, Executive Decisions, and Corner Office Stories / How Howard Schultz Built Starbucks Third Place
Transcript
- Lucas: If these conversations have moved your work forward in some small way, there's a simple way to keep them going. A couple of dollars a month is genuinely what keeps this ad-free — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's the kind of thing where a small number of people chipping in makes a real difference. And it keeps us independent. Lucas: Exactly. So, Howard Schultz and the third place — let's get into it. When Schultz joined Starbucks in 1982, it was a tiny roaster in Pike Place Market, selling whole beans. He saw something else entirely. Luna: He went to Italy, had an espresso in Milan, and realized that coffee could be an experience, not just a commodity. That was the seed. Lucas: Right. But it took him years to convince the original founders. They thought serving drinks would dilute the brand. Schultz eventually quit, started his own coffee bar chain called Il Giornale, and then in 1987, he bought Starbucks for $3.8 million with local investor backing. Luna: That acquisition price seems impossibly small now. But what was his first big move after taking over? Lucas: He immediately started rolling out the Italian coffee bar concept — espresso, cappuccino, lattes — in the existing stores. But the real genius was in how he structured the company. He decided that Starbucks would own its entire supply chain: sourcing, roasting, distribution, and retail. No middlemen. Luna: That meant they could control quality at every step. And it gave them a cost advantage over independent coffee shops that had to buy from wholesalers. Lucas: Exactly. By 1988, they had about 11 stores in Seattle. But Schultz knew that to build a national brand, he needed a loyal workforce. In 1988, he extended health insurance to all part-time employees working at least 20 hours a week. That was almost unheard of in retail. Luna: And he also introduced a stock option program called 'Bean Stock' in 1991, even before the IPO. Part-timers got equity. That created a culture where baristas had a real stake in the company's success. Lucas: It wasn't charity. Schultz believed that if you treat employees with dignity and give them a piece of the upside, they'll deliver the kind of consistent, friendly service that makes a $4 latte feel worth it. And the turnover rate at Starbucks was a fraction of the industry average. Luna: So the third place wasn't just about the decor or the music. It was about the people behind the counter. Lucas: Absolutely. The physical design mattered too — Schultz wanted stores that felt like a warm extension of your living room, with comfortable chairs, soft lighting, and that unmistakable coffee aroma. But the consistency came from the training and the culture. Every barista went through 24 hours of training before they even touched the machine. Luna: And by 1992, when they went public, they had 165 stores and revenues of about $93 million. The IPO raised $29 million, which gave them the capital to expand aggressively. Lucas: They used that money to open dozens of new stores each year. By 1995, they had over 600 locations. But the expansion wasn't just about quantity — Schultz insisted on clustering stores in dense urban areas so that no customer had to walk more than a few blocks to find one. That cannibalized some sales, but it built market dominance. Luna: There's a famous story about him visiting a new store and noticing the layout didn't match the company standards. He reportedly made the manager close the store and redesign it on the spot. Lucas: He was obsessive. And that obsession paid off. By 2000, when Schultz stepped down as CEO, Starbucks had over 3,500 stores worldwide and revenues exceeding $2 billion. The third place had become a global phenomenon. Luna: But there's a tension here. As Starbucks grew, did the third place become diluted? I mean, in the 2000s, they added drive-throughs, pre-ground coffee in supermarkets, and automated espresso machines. Lucas: That's actually a key leadership lesson. Schultz came back as CEO in 2008, during the financial crisis, when the brand had lost its way. Store sales were declining, and the stock had fallen 50% from its peak. He shut down 7,100 stores for three hours to retrain baristas on espresso pulling. He also closed 600 underperforming stores in the US. Luna: That was a huge signal. He was saying: we got too focused on growth and forgot what made us special. Let's go back to the core. Lucas: He also introduced the 'Starbucks Card' and loyalty program, which deepened customer relationships. By 2010, same-store sales were growing again. The third place wasn't just a physical location — it became a digital one too, through the mobile app and rewards. Luna: So the third place evolved. It wasn't static. And that's a lesson for any leader: the vision needs to be adaptable, but the core values have to stay intact. Lucas: Let's look at the numbers. In 2025, Starbucks had over 38,000 stores globally and revenues of about $38 billion. The market cap is around $115 billion. That's a long way from that $3.8 million acquisition in 1987. Luna: But the big question for today: in a world where work from home is common and people have different routines, does the third place still resonate? Lucas: Starbucks is betting yes, but they're adjusting. They're opening more pickup-only stores, investing in drive-through, and expanding in China where the coffee culture is still growing. The third place now includes the digital ordering experience and the app interface. Luna: So the concept is resilient, but the execution has to change. And that's something every leader faces — how to stay true to the original insight while responding to new realities. Lucas: Which brings us back to Schultz himself. He stepped down as executive chairman in 2023. But his playbook — own the supply chain, invest in employees, obsess over consistency, and adapt without losing the soul — that's still the foundation of Starbucks today. Luna: And it's a reminder that building a hundred billion dollar brand doesn't require a radical innovation. It requires a clear, simple idea executed relentlessly. Lucas: Right. The third place. It's just a coffee shop. But it's also a home away from home, a meeting point, a sanctuary. And that's worth a lot.