🇺🇸 The CEO That Changed America

🌎 The Rise And Fall Of Starbucks

50 years ago, ‘going out for coffee’ looked something like this…

Coffee was bought in cans or bags and was drunk at home.

That was until the early 1970s when 3 university students opened their first coffee shop in Seattle.

Each founder invested $1,350 and borrowed $5,000 from a bank

This is the beginning of Starbucks, and the end of coffee as we knew it in America.

Since the first tiny Starbucks in 1971, Starbucks has evolved into a $53B company.

Today, there are more Starbucks locations in the world than:

  • Target (2000)

  • Walmart (10,586)

  • Chick-fil-A (3059)

  • Chipotle (3,200)

  • Taco Bell (8000)

Combined.

But recent numbers show a dark future for Starbucks, and its ability to expand into new markets…

This is the story of Starbucks and why this market leader might be facing a dark truth in the next decade.

Here’s what we got for ya:

  • 🇺🇸 The CEO That Changed America

  • ☕️ The Sound Of Coffee

  • 🔮 The Future Of Starbucks

Read Time: 5 min 49 sec

🇺🇸 The CEO That Changed America

The first Starbucks opened in Seattle, Washington 1971.

The 1st Starbucks in Pike Place Market, WA

At the time, coffee shops were a place to buy specialty coffee beans in a can or bag. It was more of a task on a to-do list than an activity.

But the 3 young founders had a different vision for Starbucks...

They wanted to transform the way Americans drink and buy coffee. They wanted to create a ‘third place.’

AKA a home away from home. A place where customers can sit for hours and talk while drinking coffee.

Investors called them crazy…

Americans drank coffee with breakfast and were used to spending less than a dollar per cup.

Not to mention, Americans have never been known to sit around...

Howard Schultz - The CEO who changed the American coffee industry

But these 3 founders proved everyone wrong and built a $53B company that holds almost half of the retail coffee market share.

But Starbucks didn’t get to a multi-billion dollar company by selling great coffee.

In 2013, The Bold Italic held a blind consumer taste test for major coffee brands.

Starbucks ranked last every time, falling behind supermarket brands like Folgers.

(The internet has given them the name “Charbucks” because their coffee ‘tastes burned’)

Yet, Starbucks charges almost 25% more than other cafes.

How is this possible? How can Starbucks hold almost half the market share selling ‘average’ coffee at a higher price?

Well, in the same way that McDonald's is not a burger business, but instead a real estate business that sells burgers to afford the best properties…

Starbucks doesn’t sell coffee. They sell the experience of drinking coffee.

“We’re not going to get sucked into the ‘my coffee is better than yours’ game… We’re going to play at a much higher level.” - Shultz

Coffee just happens to be the vehicle that Starbucks uses to sell the real product - The third place.

Here’s how. 

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☕️ The Sound Of Coffee

To convince Americans to pay to waste time at a coffee shop was not easy…

But Shultz was determined.

Shultz couldn’t do anything about the price. There was no way he would beat homemade instant coffee…

But he might be able to convince people that Starbucks is a better place to be than at home.

Here’s how he did it:

#1 - Newspapers

Up until 2019, Starbucks sold major newspapers in stores to read with your coffee.

It was the perfect morning habit.

Go to Starbucks → Order your coffee → Read your newspaper →Talk to a few friends → Do it again tomorrow

#2 - Replaced square tables with round ones

You don’t feel alone at your dining table drinking coffee, so Shultz can’t have customers feeling alone at his cafe either.

So he replaced the square tables with round ones.

#3 - Super loud coffee grinders

Starbucks would save millions a year using pre-ground coffee beans.

Yet, they shell out millions on loud grinders that make the cafe smell like coffee.

Why?

Because it proves Starbucks coffee is fresher than the cheap instant coffee you make at home.

Shultz went as far as to ban employees from using strong perfumes, and all strong-smelling food was removed from the menu.

(That’s also why Starbucks banned indoor smoking way before it became a law.) 

We see this idea of selling the third place on almost every Starbucks ad, even today…

So how do you get people to pay 6x more for something they could make at home?

You sell them on the feeling they get with your product - one that can only be given by you.

More on this:

🔮 The Future Of Starbucks

Starbucks’ share price has dropped, costing them an estimated $11B in market cap.

What’s happening?

Well, it starts with Australia…

Starbucks began to expand into Australia in the early 2000s.

Logically this was a good move. Australia has the 13th largest economy and is one of the top coffee consumer markets in the world.

By 2008, Starbucks had 87 Australian locations.

But by 2009, Starbucks was forced to close over 2/3 of its Australian locations, costing them $105M in losses.

A similar thing happened later in Vietnam…

And again in China…

Why did Starbucks fail so miserably in these countries?

Because they didn’t adapt to each location’s culture.

  • Every menu is in English

  • They don’t sell local’s favorite coffee drinks/ snacks

  • Don’t offer specials for the local holidays

By trading culture for efficiency, Starbucks is seen as ‘too American’ and lost to local coffee shops that were cheaper.

Today, we’re seeing a similar habit form in the West.

Starbucks has begun to pull out of ‘restaurant’ style cafes with a lot of seating areas and trade them in for ‘grab and go’ shops.

In the locations they have kept, most have cut down on seating to encourage fast customer turnover.

And like a catastrophic cherry on top…

Starbucks has so many locations that they’re ‘cannibalizing their sales.’

Locations are pulling sales from each other, resulting in less profitable stores.

(I can think of 6 Starbucks in my hometown within a 1-mile radius of each other!)

Data via ScrapeHero

We saw this happen with RadioShack in 2015.

They had too many US locations that were close together, leading them to cannibalize sales from each other.

Radioshack had 4,000 US locations before they closed.

Starbucks has over 16,000.

(There are over 38,000 stores worldwide)

What is Starbucks doing to stop it?

Internationally, they’ve moved to high-tourist spots and rely on Western tourists for sales.

But nothing has been said about their plan to regain US sales.

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