Latest / The CEO Diary with Fexingo: Leadership Lessons, Executive Decisions, and Corner Office Stories / How Howard Schultz Built Starbucks Third Place Culture
Transcript
- Lucas: So in 1987, a 34-year-old former plastic salesman bought a small Seattle coffee bean roaster with 11 stores and a name borrowed from Moby Dick. That company had about $1.3 million in annual revenue. Today, it's worth over $120 billion and operates 28,000 stores across 80 countries. Luna: You're talking about Howard Schultz and Starbucks. And I think the fascinating part isn't just the scale — it's the philosophy he built it on. Lucas: Exactly. Schultz didn't invent coffee. He invented a context for coffee. He famously called it the 'third place' — that space between home and work where you feel a sense of belonging. And he bet the entire company on that idea. Luna: But he didn't start Starbucks, right? He was employee number something. Lucas: Right. He joined the original Starbucks in 1982 as director of retail operations. The founders were selling whole-bean coffee and espresso machines. Schultz went to Italy in 1983, walked into a Milan espresso bar, and had this epiphany: Americans don't want coffee beans — they want the experience. The ritual. Luna: And the founders didn't buy it. Lucas: They didn't. So Schultz left in 1985 to start his own coffee bar chain called Il Giornale. Two years later, the original Starbucks was struggling, and Schultz raised $3.8 million from local investors to buy the company for $3.8 million. Eleven stores, 100 employees. Luna: That's the moment. And what's remarkable is that he immediately started offering health insurance to part-time employees. In 1987. That was almost unheard of. Lucas: It was radical. Full medical, dental, vision, even for baristas working twenty hours a week. Schultz argued that if you treat employees like partners, they'll treat customers like guests. And that trust would generate loyalty that no amount of advertising could buy. Luna: There's a famous line from his book: 'We're not in the coffee business serving people. We're in the people business serving coffee.' Lucas: And he put dollars behind it. Starbucks now spends about $4 billion annually on employee benefits and stock options for part-timers. Critics at the time said it would destroy margins. But it became the moat. Turnover in retail averages 150 percent annually. Starbucks has historically been under 60 percent. Luna: The irony is that the 'third place' concept is being tested right now. Post-pandemic, people aren't commuting as much. Starbucks stores are redesigning for pickup and drive-through. Does the third place survive? Luna: And that brings up something I think is worth a quick detour. You know, conversations like this — where we dig into the real decisions behind a company's success — they're exactly why we keep this show ad-free. If you've found value in these episodes, consider supporting us at buy me a coffee dot com slash fexingo. It's a simple way to help us keep doing this, and we genuinely appreciate it. Lucas: Yeah, it's listener support that keeps the show going without commercial interruptions. So if the show's been useful to you, that's the place. Now back to Starbucks — Luna, you asked about the pandemic challenge. Lucas: That's the big question. Schultz stepped down as CEO in 2000, returned in 2008 to fix a brand that had lost its way, and then left again in 2017. The third place was under threat even before the pandemic — from drive-throughs, mobile ordering, and competition from independent shops with better coffee. Luna: But the company did something interesting in 2020. They closed 8,000 stores for an afternoon for anti-bias training. That was a Schultz-era move. And they accelerated the shift to pickup-only stores in dense cities. Lucas: Right. The current CEO, Laxman Narasimhan, who took over in 2023, has been refocusing on store experience — renovating cafes, adding more comfortable seating, even testing community boards for local events. The third place isn't dead; it's being redesigned for a hybrid world. Luna: And they're doubling down on China, where the third place concept feels almost like a Western import that's been adapted. There are now over 6,000 Starbucks in China. They serve tea-based drinks, mooncakes during festivals, and stores are larger because Chinese customers linger longer. Lucas: That's a fascinating adaptation. Schultz always said the third place should feel like a 'warm embrace' — and in China, that embrace looks different. But the core principle is the same: a consistent, welcoming environment where the barista knows your name. Luna: Do you think the third place idea works in a world where people are more isolated but also more skeptical of big brands? Lucas: It depends on execution. Independent coffee shops offer a more authentic version, but they lack the consistency that chain customers rely on. Starbucks has been criticized for being too sterile, and Schultz himself acknowledged that in 2008 when he closed all US stores for three hours to retrain baristas on espresso pulling. Luna: That was an incredible PR move. But also a genuine operational reset. The stock dropped something like 50 percent between 2006 and 2008, and Schultz came back and said, 'We've commoditized the experience.' Lucas: He did. He cut breakfast sandwiches because the smell of burnt cheese was overpowering the coffee aroma. He introduced the Clover brewing machine for single-cup pour-overs. He launched Starbucks Rewards, which now has over 30 million active members in the US alone. He rebuilt the third place from the inside out. Luna: So the lesson for other CEOs: culture isn't a poster on the wall. It's a system of decisions about who you hire, how you treat them, and what you're willing to sacrifice for consistency. Lucas: Exactly. And the numbers back it up. Starbucks' revenue per store in 2008 was about $800,000. By 2019, it was $1.5 million. The employee benefits program that critics said would crush margins actually created a premium brand that could charge $4 for a latte because customers felt good about where their money was going. Luna: One more thing: Schultz wrote that the most important decision he ever made was not the acquisition or the expansion — it was offering health insurance to part-timers. That one decision set the cultural DNA. Lucas: And it's a decision that resonates today. Companies like Costco and Trader Joe's have similar models. It's not altruism — it's a long-term bet on retention and customer lifetime value. Starbucks' barista turnover in its first year of the benefit dropped from 150 percent to 60 percent. That's a direct line to better customer service. Luna: So as we think about the future of work and the future of retail, maybe the third place is more relevant than ever. People are craving connection after years of remote work and digital screens. Lucas: I think you're right. The third place may evolve from a coffee shop to a broader concept — coworking spaces, fitness studios, bookstores with cafes. But the core insight from Schultz is timeless: humans need a place to gather that isn't home or office. And the company that provides that space best wins.