Latest / The Pivot Podcast with Fexingo: How Businesses Change Direction and Survive Disruption / How Starbucks Rewrote the Third Place During the Pandemic
Transcript
- Lucas: So in March of 2020, Starbucks closed over half of its US company-operated stores. That's more than eight thousand locations. And for a brand that had built its entire identity around what it called the 'third place' — that warm, comfortable space between home and work — that was a fundamental crisis. Luna: I remember walking past my local Starbucks in Manhattan that spring. The chairs were stacked on tables. The whole vibe was gone. It felt like the company had lost its reason for existing. Lucas: Exactly. And that's what makes this pivot so interesting. Starbucks didn't just survive by cutting costs and hoping for a vaccine. It actively rewrote the definition of the third place. It turned a temporary emergency measure into a permanent strategic shift. Luna: Walk me through the specifics. What actually changed on the ground? Lucas: The most visible change was the acceleration of pickup-only stores. Before the pandemic, Starbucks had opened a few express stores in dense urban areas — think of them as high-foot-traffic locations with no seating, optimized for mobile orders. By the end of fiscal 2020, the company had committed to opening hundreds more, particularly in cities like New York, Chicago, and London. The idea was to strip out the cafe experience entirely for a subset of locations. Luna: But isn't that basically becoming a fast-food coffee chain? I mean, that's what Dunkin' already was. Lucas: That's the tension. Starbucks CEO Kevin Johnson framed it differently. He argued that the third place doesn't have to be a physical space you sit in. It can be a digital ecosystem — the app, the rewards program, the feeling of being connected to the brand. So the third place becomes your phone, not the leather armchair. And the store is just a fulfillment center. Luna: That's a massive philosophical shift for a company that literally designed its stores to have a specific smell, lighting, music. They used to have a vice president of store atmosphere. Lucas: Right. And Johnson made a very deliberate choice. He said in an April 2020 investor call that the pandemic was a catalyst for changes Starbucks had been considering for years. The company had already been testing curbside pickup and mobile order-only lanes. The crisis just forced their hand. By the end of 2020, Starbucks had added over eight hundred new drive-thru locations — some of them were existing stores retrofitted with a drive-thru lane, which is a huge construction project. Luna: And the financial results backed them up. In the fourth quarter of fiscal 2020, US same-store sales were down only 4 percent — which, given the circumstances, was a remarkable recovery from the 40 percent drop in April. By March 2021, they were back to growth. Lucas: Yeah. And by June 2021, same-store sales were up 13 percent year-over-year in the US. The pivot worked, at least in the short term. But it came with trade-offs. Starbucks effectively abandoned a segment of its customer base — the people who came for the ambiance, the remote workers, the readers, the people who would nurse a single latte for two hours. Luna: That's a real loss. And it might be permanent. Even as offices reopened, Starbucks didn't fully restore seating in many locations. They kept some tables removed to maintain throughput for mobile orders. The cafe experience became secondary to speed. Lucas: Let's talk about a specific example. In the fall of 2020, Starbucks opened what it called a 'pickup store' in a former bank building in New York's financial district. It had no seating at all — just a counter, some shelves for mobile orders, and a barista station. The company said it could serve up to four hundred customers per hour, compared to maybe a hundred in a traditional cafe. That's a quadrupling of throughput per square foot. Luna: And that efficiency is what drove the margin improvement. Starbucks' operating margin in the US went from 14.5 percent in fiscal 2019 to 18.2 percent in fiscal 2021, even as total revenue took a hit. The leaner store model was more profitable. Lucas: But here's the longer-term question: can Starbucks sustain that growth without alienating its core customers? I think about the loyalty program. Before the pandemic, Starbucks Rewards accounted for about 40 percent of US sales. By 2022, it was over 50 percent. That's a massive increase. But the rewards program is designed to incentivize frequency and higher spend, not loyalty in the emotional sense. You're buying a drink because you get stars, not because you love the environment. Luna: And that brings us to Howard Schultz's return in April 2022. He came back as interim CEO and immediately started talking about restoring the soul of Starbucks. He closed down the pickup-only stores in some areas, added back seating, and emphasized the craft of coffee making. It was almost a direct repudiation of the pandemic-era pivot. Lucas: Yeah, Schultz's return was fascinating because he was essentially saying, 'We went too far.' He argued that the third place is not a transaction — it's an experience. And he saw the drive-thru and mobile order focus as dehumanizing the barista-customer relationship. But here's the problem: the numbers showed that the pivot was working. Starbucks' stock price more than doubled between March 2020 and Schultz's return. Investors loved the efficiency. Luna: So what's the right answer? Can you have both? Can you have a high-volume drive-thru store and also a cozy neighborhood cafe under the same brand? Lucas: Starbucks is trying. They've introduced a store format called 'Starbucks Pickup with Curbside' in some suburban markets. And in cities, they're opening larger flagship stores that emphasize the cafe experience — like the Reserve Roasteries — while the smaller pickup stores handle the volume. But it's a delicate balance. If you're a regular who sees your local Starbucks turn into a pickup hub, you might feel abandoned. Luna: And that's the real lesson of the pivot. Sometimes survival requires you to change something fundamental about who you are. And once you change it, you can't always go back. Starbucks as a company is more efficient, more profitable, and more digital than it was in 2019. But it's also less magical. Lucas: Look, these are the kinds of conversations we try to have on this show — dissecting the trade-offs, not just the wins. And if these conversations have moved your work forward in some small way, we'd love for you to consider supporting the podcast. It keeps us ad-free and independent. Luna: Yeah. It's a small gesture, but it really does make a difference in keeping this going. Lucas: If today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. And thank you to everyone who already does. It means a lot. Luna: Absolutely. So coming back to the Starbucks story — I'm curious about the competitive landscape. How did Dunkin' and McDonald's react to Starbucks' drive-thru push? Lucas: Great question. Dunkin' actually doubled down on its own digital transformation, but it had a built-in advantage: it already had drive-thrus at almost all its locations. Starbucks was playing catch-up. What's interesting is that Starbucks' pivot forced Dunkin' to innovate on the mobile order experience as well. By 2021, Dunkin' had revamped its app and integrated it with its loyalty program. The whole category moved toward contactless, app-based ordering. Luna: So in a way, Starbucks' crisis became a catalyst for the entire quick-service coffee industry. Lucas: Exactly. And I think the Starbucks case is a textbook example of how a company can use a crisis to make structural changes that would have taken years otherwise. The key decision was leadership's willingness to let go of the sacred cow — the third place as a physical sanctuary — and redefine it digitally. Not every company can do that. Many try to preserve their core identity and end up failing. Luna: What do you think is the one thing that other companies can learn from Starbucks' pandemic pivot? Lucas: I'd say it's this: your most cherished asset — your brand identity — might be the thing that's holding you back. Starbucks had to admit that the third place wasn't working in a pandemic. And once they admitted it, they could build something new. But they also had to be willing to take a hit to their brand in the short term. Some customers were furious. Some still haven't come back. But the company survived and is now stronger financially. Luna: And that's the tension: do you preserve the brand or the business? In Starbucks' case, they temporarily chose the business, and then tried to recover the brand later. Not every company gets that second chance. Lucas: Right. And as Howard Schultz found out, recovering the brand is harder than it looks. The company is still grappling with the legacy of that pivot. Unionization efforts, barista turnover, customer complaints about wait times — these are all downstream effects of the operational changes made in 2020. The pivot solved one problem and created others. Luna: So the real takeaway might be that a pivot is never a one-time event. It's a constant process of adjustment. Starbucks will likely never return to its pre-pandemic model. It's now a hybrid company — part cafe, part drive-thru, part digital platform. And that's the new normal. Lucas: Yeah. And as we look forward, the question is: what's next? Will Starbucks invest more in automated drive-thrus? Will it open more pickup stores in suburban areas? Will it double down on the Reserve brand to recapture the luxury feel? All of these are on the table. But one thing is clear: the company that emerges from the pandemic is not the same one that entered it. And that's the story of a successful pivot.