Starbucks
The third place that became a real-estate business
Description
In 1983, a twenty-nine-year-old American businessman named Howard Schultz, who had been working for a small Seattle coffee retailer called Starbucks Coffee, Tea, and Spice for about a year, traveled to Milan on a buying trip and had a kind of revelation. Schultz was walking through the city’s espresso bars on the via Vittorio Emanuele and noticed something he had not encountered in American retail coffee. The bars were not just places where people bought coffee. They were places where people stopped on the way to work, gathered with neighbors, conducted casual business, lingered with newspapers, and treated as social infrastructure. The coffee was the entry point. What the bars actually sold was the experience of being in them. Schultz returned to Seattle and tried to convince the three Starbucks founders that the company’s future was not in selling premium coffee beans for home brewing but in operating American versions of the Italian espresso bar.
The founders declined. They were committed to the bean-roasting business and skeptical that Americans would pay for in-store coffee experiences. Schultz, after a year of arguments, left Starbucks in 1985 to open his own coffee-bar operation called Il Giornale. The new business was modestly successful. In 1987, when the original Starbucks owners decided to sell the company to focus on Peet’s Coffee, Schultz raised the capital to buy them out for $3.8 million and merged Starbucks with Il Giornale. The combined operation kept the Starbucks name and the Schultz vision. Within a decade, what had been a regional Seattle coffee company would become one of the most aggressive retail expansions in American business history. By 2025, Starbucks would operate over 38,000 stores worldwide, would have annual revenues exceeding thirty-five billion dollars, and would have transformed what coffee was as a commercial category in markets across the world.
The transformation Schultz accomplished is the story most readers know about Starbucks. The part less commonly examined is how the company has actually operated as a business what kind of business it has been, what the third-place concept actually meant once the company reached scale, and what the relationship between the coffee, the real estate, and the customer experience has been. Starbucks is, by its own claims, in the coffee-and-community business. By the structure of its actual operations, it has often been in a different business entirely, one closer to real estate and brand-licensing than to specialty food retail. The relationship between the two has been a continuous source of tension in the company’s strategic decisions.
The question we’re asking: what did Howard Schultz actually build at Starbucks, what does the company actually sell, and how has the model evolved across four decades of expansion?
What we’ll see: the Milan revelation, the third-place concept, the real-estate operation that underwrote the growth, and what survives of the original vision.
Table of contents
01Milan, Seattle, and the third place
The concept Schultz built Starbucks around was what the American sociologist Ray Oldenburg, in his 1989 book The Great Good Place, would call the third place. Oldenburg argued that healthy communities required three kinds of social space: the first place (home), the second place (workplace), and a third place where people gathered casually and built the soft connections that made a neighborhood feel like one. The classic third places of European urban life the Viennese coffee house, the French café, the English pub — had been important social infrastructure. American suburban life had largely failed to produce equivalents.
The Italian espresso bars made the concept visible to Schultz. People stopped in multiple times a day, knew the baristas by name, held informal meetings at standing counters. The coffee was excellent but was not the point; the point was the social space the coffee organized. Schultz’s argument was that American cities had the same gap, and that a coffee bar built to serve the third-place function could fill it.
02The expansion and the operating model
The Starbucks growth between 1990 and 2000 was unusually aggressive by retail standards. The company went from about 80 stores in 1990 to over 3,500 by 2000, with most of the growth concentrated in the United States and Canada. The expansion was financed initially through venture capital, then through the 1992 IPO that raised about $25 million, and then through retained earnings as the stores became profitable. The pace of openings was sustained at several hundred new locations per year for most of the decade.
The store economics were specific. A typical Starbucks store required $300,000 to $500,000 in capital investment and reached profitability within twelve to eighteen months. The gross margins on espresso drinks were unusually high the marginal cost of a four-dollar latte was well under a dollar. Throughput per store was the variable that mattered most. Stores in high-traffic areas could serve hundreds of customers per day, generating revenue per square foot that exceeded most competing retail formats.
03The mid-2000s saturation and the Schultz return
The Starbucks growth model began to encounter its limits in the mid-2000s. The aggressive store openings, which had continued at high rates through the 1990s and into the 2000s, had begun to produce cannibalization — new Starbucks stores were drawing customers from existing Starbucks stores, with per-store revenue growth slowing or in some cases declining. The company had been opening stores faster than the customer base was growing, and the saturation was visible in the same-store sales numbers that financial analysts watched.
The 2008 financial crisis accelerated the problem. Premium coffee was a discretionary category consumers cut during the recession, and volume dropped substantially. Starbucks closed about 600 U.S. stores in 2008 and 2009, the first major retraction in its growth history. The stock price fell over 50 percent. Howard Schultz, who had stepped down as CEO in 2000, returned in January 2008 to refocus the company on what he called the soul of Starbucks — the third-place experience eroded by the aggressive growth.
04What survives, four decades on
The Starbucks of the mid-2020s is a substantially different company from the one Schultz built in the late 1980s. It operates at a scale the founding vision did not anticipate, with stores in over eighty countries and a brand recognition that approaches universal in most developed markets. The third-place concept is still part of the company’s stated mission. The actual operations have moved progressively toward what looks more like a beverage-and-snack retail operation than a community-gathering business. The relationship between the two between the vision and the operating reality has been one of the central tensions in the company’s recent strategic decisions.
The mobile-order business has been particularly transformative. The app-based ordering model has reduced the role of in-store interaction, increased the throughput per store, and shifted the customer relationship toward transactional speed rather than community engagement. The economics are favorable; the mobile orders are typically more profitable than counter orders. The strategic cost is the erosion of the third-place experience that the company’s identity rests on. The current leadership has been working through the implications of this shift, with mixed results.
05Starbucks: What the Company Actually Sells
Howard Schultz stepped down as Starbucks CEO again in 2017, returned on an interim basis in 2022, and finally retired in 2023. The company has continued at scale under subsequent leadership, with the third-place rhetoric intact and the operating model continuing to evolve toward the transactional convenience the mobile order has enabled.
Related books
