The Fall of Starbucks

Brian Niccol is a smart guy. He’s the new CEO of Starbucks, the fourth one in 2 years. He came after turning the tables for Chipotle. The strategies he proposed turned out to be efficient. Chipotle employees were left satisfied and its sales increased by up to 30% in 2021.

Brian now has to do the same at Starbucks. The company is in a mess. It was a 1% drop in the first 2024 quarter, declining store sales in the US.

Starbucks has lost $11 billion in its value, that’s 9.4% of the company’s total. 11$ sales drop has been observed in China, its second-largest market.

The founder Howard Schultz had written on LinkedIn about the business’s state. In short, the biggest coffee chain in the world is in the worst of its times.

For that, we need to go a bit back in history. In 1971.

Its first-ever store in the US city of Seattle sits comfortably in the quaint and historic Pike Place marketplace. It’s called the 1912 Pike. It’s where it all started.

Starbucks was never a coffee shop in the beginning. It was a simple wholesaler of coffee beans. The name was inspired by the seafaring culture described in the iconic  “Mobi Dick” novel by Herman Melville.  Back in those days, Sailors would bring traders to Seattle who would buy and sell coffee beans.

Howard Schultz joined Starbucks ten years later. Then it happened in 1983 when he took a trip to Italy.

Howard became fascinated by the classic coffee cafes in Milan. They offered more than just aromatic coffee. It was their design the vibe and the way they integrated into the life of the people. Howard wanted to bring it to America.

It was then in 1987 that Starbucks became a coffee house. Its signature was not just basic espresso-based beverages, something else was there too. It was unique.

It was how it was prepared. In front of the customers. They could literally enjoy the aroma of the beans getting smashed. It was the working of the baristas that enticed them. It was the mixing of the ingredients that tool people by charm. It was the artistry and the warmth of the interior that made people hard to leave the shop. It was more than a cafe. It became a place to spend time in loneliness, in happiness, in celebration, with loved ones and close ones. The cafe soon became a part of people’s walk of life. It became the place like a small casual townhouse where everything was discussed and you could easily get a hint of what’s been going on in the city or the area.

After establishing multiple stores across the US and Canada, Starbucks’s first international cafe was in Japan in 1996, then in China in 1999.

“Over the next two decades, we would grow to welcome millions of customers each week and become a part of the fabric of tens of thousands of neighborhoods all around the world” – Starbucks website.

Starbucks started promoting not just coffee but human connection. That would provide not just energy but comfort and a place to use that energy with your fellows. Not just in the US but in 80 countries.

The place had become “The third place” which is a place beyond home and office where people could meet and have a nice time. It had turned into a key socializing spot where people would linger and experience the best of warmth and ambiance.

It was a combination of coffee and warmth and the message that shaped Starbucks into a never-stopping giant. Fast forward to today all that seems hard to believe. It’s like seeing the Titanic, a ship built in glory and vision, sinking down the Atlantic.

This is not something completely out of the blue. It happens to businesses all the time once they start going huge. Once they start putting profits over people. Once they start self-commoditizing.

What happens when you’re the biggest coffee chain in the world with more than 35,000 stores and a grand market share a name under the Fortune 500? You start to make decisions in greed of higher margins and volumes and less expenses. You believe that no matter what decision you make, people will still be flocking to your stores cause you’re this big unforgettable name now with fancy social media and commercials popping up right?

Brands do this all the time despite the proof that it leads them nowhere and devalues their product and services.

At Starbucks, it started getting worse when they decided to spend less on their quality cafes. The warmth these interiors provided was replaced by the artificial feeling that is present in many Starbucks stops. This includes placing uncomfortable chairs, reducing space for people to sit, and laser-focusing on cutting out things that were signature of what was it like visiting Starbucks.

They used to write customers’ names on cups which was personal and appreciative. The baristas were super professionals and highly valued like chefs and artists who would handcraft coffee and the customers could feel and smell the scent of all the ingredients involved.  The staff was super friendly and welcoming. In a few years all this changed.

The staff became underpaid. Manual preparation was replaced by ready-to-use sealed ones. Instead of writing names, printed slips were turned in. And in-person experience was abandoned in pursuit of much more sounding efficient takeaways and home/office deliveries. The human element no longer exists.

The loyalty program and customer tracking became a disaster. It narrowed on the amount of money customers were spending instead of what items they loved the most. Plus if people spend more, they would be offered free edibles that were very basic and weren’t up to the taste. The proverbial quality destroyed.

Value meals were announced this June with even less money to the masses. This would mean lesser quality and damage the existing standards a brand could move forward with.

“The explicit bargain of “you buy more, and we’ll give you something for free” comes with the implicit message that “you’re overpaying on each cup, so we can afford to throw in a freebie every once in a while.” 

– How Starbucks Devalued Its Own Brand- Harvard Business Review

Drive-throughs were added throughout the US. This eliminated the in-person experience with fast and convenient service. The human socializing element was gone. It became worse when Barristas turned too busy. Yes, it did increase sales initially but the staff was too busy serving the drive-throughs and the takeaways instead of people who have visited the place and are awaiting their orders.

The coffees were now substandard with staff working extra hours with no good customer experience.

Starbucks prioritized mobile orders. For too busy people who order in advance and just visit the place for a minute or two to grab their coffee and head off to wherever they were going.

This again increased sales but in the long run, entirely wiped off the in-person experience. The sales then started going down. People were complaining they had to wait too long in lines even though they’d made the order in advance. In greed of volume, Starbucks was now facing loss in profits, quality, and experience all combined. Customer retention turned an all-time low. The company lost its touch.

This flaw was quickly picked by the competition. Local coffee shops and cafes started emerging. They started offering what Starbucks once offered. This reduced the market share of the once-known coffee giant.

Starbucks doesn’t offer franchising. But the greed of opening up mass outlets and not paying attention to all of them turned into a mistake.  They had to close down more than 100 stores in 2022. In 2021 more than 400 stores closed.  Howard says in his book that how franchising is a bad thing and is a concerning factor in destroying customer relations.

Since 2016, Starbucks employees have been complaining about extra working conditions and unfair pay. This has been a major element in lessening the customer experience.

Brian Niccol said in his first meeting that he wants to bring back the “soul” of the business. He wants to bring Starbucks back to the days when it was called the third place where people would visit to talk and relax. He wants to get out of this Faustian Bargain and pay heads to what matters: True authenticity. It’s coffee, it’s people, and its employees.

Time will tell whether he will revamp the coffee chain.