Latest / Building Brands with Fexingo: Identity, Reputation, and Long-Term Business Equity / How Starbucks Built a Brand on the Third Place
Transcript
- Lucas: There's a moment in 1983 that basically created the modern coffee industry. Howard Schultz is in Milan, he walks into an espresso bar, and he realizes — the barista knows the customers by name, people are lingering, the space feels like an extension of their living room. That's the seed of what became the Starbucks brand. Luna: And Starbucks at that point was just a little bean-roasting shop in Seattle's Pike Place Market. They sold whole beans, not beverages. So Schultz had to convince the founders to let him test this café concept. Lucas: Exactly. The founders were skeptical — they thought serving drinks would distract from the coffee purist identity. But Schultz eventually launched a pilot café in 1984, and within months it was outperforming the bean business. So he buys the company in 1987, and his big insight is that Starbucks isn't really selling coffee. It's selling a 'third place' — somewhere between home and work where you belong. Luna: That phrase — 'third place' — it comes from sociologist Ray Oldenburg. But Schultz made it the operating philosophy of a global chain. And it worked because the experience was consistent but also human. Lucas: Right. And that consistency is harder than it looks. You need a store design that feels warm but can be replicated thousands of times. You need baristas who remember regulars' orders — which Starbucks actually trained for, with a whole language around drink customization. The cup becomes a canvas: tall, grande, venti, extra foam, no whip, half-caff. Luna: And they trademarked those terms. Which is genius — it made the ordering ritual feel like an insider code. You weren't just buying coffee, you were participating in a brand ritual. Lucas: So for two decades, that third-place model scaled beautifully. By 2019, Starbucks had over 30,000 stores globally. Same-store sales were growing every year. But then the pandemic hits, and suddenly the third place is closed. People weren't lingering in cafes — they were ordering through the app and grabbing from the counter. Luna: And that shift exposed a tension in the brand. Starbucks had built its identity on human connection, but mobile ordering is optimized for speed and efficiency. The barista can't make small talk when there are fifteen mobile orders and three drive-thru cars. Lucas: That tension is the core challenge of Starbucks' brand today. In fiscal 2024, same-store sales in the U.S. grew only 1 percent. In China, same-store sales actually declined 2 percent. The brand is still huge — revenue was over $38 billion — but the growth engine is sputtering. And a lot of that is because the third-place experience is getting squeezed. Luna: So what do they do? They can't just go back to 2019. People order ahead. People work from home. The store has to serve both the sit-down customer and the grab and go customer. Lucas: And they've been experimenting. In 2023, they announced the 'Reinvention Plan' — $450 million in new investments. They redesigned stores with separate mobile-order pickup areas, so the café feels calmer. They also expanded drive thru only locations, and they're testing smaller stores in suburban areas where more people work from home. The idea is to preserve the third place in some stores, while creating a different experience in others. Luna: But that's a brand risk, right? If the experience varies too much by location — some stores are cozy cafés, others are utilitarian pickup points — does the brand meaning dilute? Lucas: That's the million-dollar question. And it's one that CEO Laxman Narasimhan has been wrestling with. His strategy is to reframe the brand around 'human connection at scale' — not just the physical third place. That means investing in barista training, improving wages, and using technology to personalize the app experience. They launched the Starbucks Odyssey loyalty program in 2023, which uses gamification and offers exclusive perks for frequent customers. Luna: And they've also leaned into the partnership with Nestlé for packaged coffee. That extends the brand into supermarkets, but it also creates a tension — if you can drink Starbucks at home, does the store become less special? Lucas: It's a balancing act. And if today's conversation has been useful to you, maybe it's sparked an idea for how you think about your own brand or your own work. We keep this show free and ad-free because listeners like you support it. If you want to help keep that going, you can find us at buy me a coffee dot com slash fexingo. Totally optional, but it makes a difference in whether we can keep doing deep dives like this. Luna: I think it's a nice way to say — hey, if this podcast helps you think more sharply about business, then we're glad you're here. And we're grateful for any support. Lucas: Alright, back to the brand. So there's another angle to the Starbucks reinvention: the labor front. In 2022, unionization efforts accelerated — over 300 U.S. stores have voted to unionize. Starbucks has resisted, but the public perception battle is real. A brand that sells 'connection' can't afford to seem adversarial to its own partners. Luna: And that's where the brand identity collides with operational reality. If you're a barista trying to make a living wage while the CEO makes millions, the 'third place' can feel like PR spin. So the brand has to walk the talk. Lucas: Narasimhan has publicly committed to raising average wages to $17 an hour by late 2024, and improving scheduling predictability. But the union question remains unresolved. And in a tight labor market, that matters for store performance — turnover in the industry is high. Luna: Let's talk about China for a minute, because it's a whole different brand challenge. Starbucks entered China in 1999, and it became a status symbol — people would take photos with the cup. But now there's local competition like Luckin Coffee, which is cheaper, faster, and has a strong digital app. Lucas: Luckin actually overtook Starbucks in terms of store count in China in 2023. Starbucks has about 6,800 stores there; Luckin has over 10,000. But Starbucks still has higher revenue per store — the brand premium works. The question is whether that premium can hold as Chinese consumers become more price-sensitive. Luna: And they've tried localization — mooncakes, green tea Frappuccinos, store designs that incorporate local materials. But the core brand equity is still the Western café experience. That's a double-edged sword. Lucas: So if we step back, the Starbucks brand story is really about how a powerful idea — the third place — can create immense value, but also create inertia. The brand became so identified with a specific physical format that adapting to digital and remote-work trends is painful. Yet they have the resources and the brand loyalty to navigate it. The next three to five years will tell us if the reinvention works. Luna: And for any business owner listening, the lesson is probably: your brand is strongest when it's solving a real human need — but that need can change. You have to be willing to evolve the expression without losing the core. Lucas: Yeah. Because the core — that sense of belonging, of a familiar ritual — that hasn't gone away. People still want a place where they feel known. Maybe that place is now partly digital, partly physical. But the brand that figures out how to deliver that consistently will win. Luna: And that's the challenge for every brand today, not just coffee. Lucas: Exactly. Alright, I think that's a good place to leave it. Until next time.