Latest / The CEO Diary with Fexingo: Leadership Lessons, Executive Decisions, and Corner Office Stories / How Starbucks Howard Schultz Forged the Third Place
Transcript
- Lucas: There's a moment in 1983 that changed how most of us drink coffee. Howard Schultz is in Milan, walking through a neighbourhood espresso bar. He sees the barista pulling shots, calling regulars by name, people standing at the counter chatting. And he thinks — this is not a transaction. This is theatre and community combined. Luna: And at that point Starbucks was still just a small roaster in Seattle's Pike Place Market. They sold beans, not drinks. Lucas: Right. They'd been around since 1971, founded by three teachers — Jerry Baldwin, Zev Siegl, and Gordon Bowker. They were purists. They wanted people to brew coffee at home with fresh beans. When Schultz joined as director of retail operations in 1982, the company had maybe five stores. Luna: So Schultz goes to Italy, gets this vision, comes back and says 'we should serve espresso drinks' — and the founders basically say no. Lucas: They said no twice. They were worried it would dilute the brand. So Schultz left in 1985 to start his own coffee bar chain called Il Giornale. That's Italian for 'the newspaper.' And he modelled it exactly on those Milanese espresso bars. Luna: And Il Giornale did well enough that by 1987, Schultz was able to buy the original Starbucks assets for about $3.8 million. He merged the two companies and rebranded everything as Starbucks. Lucas: Exactly. And from day one, he was betting on something that didn't exist in America: a third place. The idea that your life has home, work, and then a third space where you feel welcomed and can linger. A living room away from home. Luna: That phrase — 'third place' — actually comes from sociologist Ray Oldenburg. But Schultz made it a business model. He understood that the product wasn't really coffee. It was the experience of sitting in that chair, hearing the hiss of the espresso machine, feeling like you belong. Lucas: And he backed that up with very specific operational decisions. One of the most important was that Starbucks would own its stores directly. No franchising. That gave them control over every detail — the layout, the music, the training, the smell. Luna: It also meant they had to invest heavily in real estate and store labour. A franchisee would absorb those costs, but Schultz wanted consistency. He called it 'the Starbucks Experience' and he wrote a whole book about it. Lucas: The other big bet was on employee benefits. In 1988, Starbucks became one of the first retail companies to offer health insurance to part-time employees. And in 1991, they introduced Bean Stock — stock options for every employee, including baristas. Schultz called them 'partners,' not employees. Luna: That was radical. Retail turnover in food service was — and still is — brutal. But Schultz realised that if you want a barista to remember a customer's name and drink order, you need that barista to stay. And you need them to care. Lucas: And it worked. By the time they went public in 1992, they had around 165 stores. Wall Street didn't fully get the story at first. But the numbers spoke. Same-store sales were growing at 5 percent a year, year after year. The stock tripled in the first year. Luna: But here's the tension. The third place is inherently local. How do you scale neighbourhood intimacy to thousands of locations? Schultz was stepping down as CEO in 2000, and the company started to drift. Lucas: By 2007, they had over 15,000 stores globally. And the experience was degrading. Stores started smelling of burnt coffee because they switched to automated espresso machines. They introduced breakfast sandwiches that overpowered the coffee aroma. Same-store sales growth had stalled. Luna: And Schultz came back as CEO in 2008 — right as the financial crisis hit. He didn't just cut costs. He closed all 7,100 US stores for three and a half hours one afternoon to retrain baristas on pulling the perfect shot. Lucas: That cost them about $6 million in lost sales. But the message was clear: we're going back to the essence. He also killed the automated machines, removed the breakfast sandwiches temporarily, and redesigned stores to feel warmer. Same-store sales turned positive within a year. Luna: It's a great turnaround story. But I want to push back a little. The third place only works if people actually feel welcome. And Starbucks has had real struggles with that — accusations of racial bias, stores calling the police on Black customers. In 2018, they closed 8,000 stores for an afternoon of anti-bias training. Lucas: That's a fair point. The third place ideal is aspirational. In practice, it's been uneven. Schultz himself acknowledged that the training was a first step, not a solution. And the company has since made changes to its policies — like allowing anyone to use the restroom or sit in the cafe without making a purchase. Luna: And then there's the recent unionization push. Since 2021, over 400 company-owned stores have voted to unionize. That's a small fraction of the total, but it's a direct challenge to Schultz's vision of a partnership between the company and its baristas. Lucas: Yeah, Schultz testified before Congress in 2023 about that. He's always argued that the direct relationship with partners is better than a union intermediary. But the fact that hundreds of stores felt the need to organize suggests that for many baristas, the third place wasn't extending to their working conditions. Luna: There's a deeper lesson here for any CEO trying to build a culture-driven company. The values that make a brand special at 50 stores can become constraints at 30,000 stores. The intimacy you bake into the model — that's hard to maintain when you're serving 100 million customers a week. Lucas: And that's the thing that strikes me about Schultz. He stepped down as CEO again in 2017, then came back in 2022 as interim CEO when the board needed stability. He finally left the board in 2024. The man has basically spent 40 years trying to protect the soul of a company that keeps getting bigger. Luna: It's almost like he's trying to bottle a memory — that moment in Milan in 1983 — and keep it fresh across continents and decades. Can you actually do that? Lucas: I think the honest answer is: partially. Some elements — the quality of the coffee, the store design, the partner benefits — those can be systemized. But the spontaneous community feel? That's harder to engineer at scale. Starbucks today is still a remarkable business — over $35 billion in annual revenue. But it's not the same as that single espresso bar in Milan. Luna: Maybe the real legacy of Schultz is not that he perfectly preserved the third place, but that he proved a public company can prioritize experience and employee investment without sacrificing profitability. That's a rare combination. Lucas: Yeah, I think that's right. He showed that treating your people well and creating a premium customer experience can be a durable competitive advantage. And that lesson has ripple effects far beyond coffee. Luna: And speaking of ripple effects — these conversations we have, they take a lot of research and prep on our end. If they've ever made you think about your own work or career in a different way, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, that's the thing — we keep this ad-free so we can dive deep into stories like this. And listener support directly pays for the time it takes to dig into a Howard Schultz biography or pull the numbers on store growth. It makes a real difference. Luna: Absolutely. So, back to Starbucks. One thing we haven't touched on is the international expansion. Starbucks today has more stores in China than in any country outside the US — over 6,000. That's a whole different third place challenge, adapting to tea-drinking culture. Lucas: Right. And they did it by localizing the menu — green tea frappuccinos, red bean drinks — while keeping the core service model. It's been a massive growth driver. China now accounts for about 20 percent of their revenue. Luna: So the third place concept did travel, just with local accents. That seems like a testament to the strength of the original idea. Lucas: I think the biggest lesson from Schultz's career is that a strong vision can attract capital, talent, and customers, but it requires constant vigilance to maintain. He was never satisfied. He kept coming back because he saw erosion that others missed. Luna: What do you think he would say about the current state of Starbucks? Lucas: He'd probably say they need to refocus on the in-store experience. The mobile ordering explosion during the pandemic created bottlenecks — cafes full of people waiting for drinks, not lingering. That undercuts the third place. I suspect he'd push for store formats that separate mobile order pickup from the sit-down experience. Luna: They've actually started experimenting with that in some markets — pickup-only stores in dense cities. So maybe the third place evolves into a multi-format model. One version for grab and go, one for lingering. Lucas: Exactly. The core philosophy stays the same — create a space where people want to be — but the execution changes with context. That's the hallmark of a durable business idea. It adapts. Luna: Alright, so next time you walk into a Starbucks and hear that espresso machine, you can think about Schultz in Milan, 1983, and the long chain of decisions that brought that moment to your neighbourhood. Lucas: And maybe appreciate that it's not just coffee. It's a 40-year experiment in whether you can scale warmth. The results are still coming in.