Starbucks Confronts Major Challenges as Howard Schultz Returns
The coffee giant, once the unassailable third place between home and office, finds itself buffeted by changes in the way it operates
Change is brewing for the coffee goliath Starbucks.
From the return of ex-presidential hopeful and former company CEO Howard Schultz to a national unionization campaign, Starbucks’ workers and leadership are in a time of transition. The pandemic has forced the chain to adapt to new ways of doing business — and to close 424 stores nationwide between September 2020 and October 2021 while opening 449, gaining six in the United States, according to its 2021 annual report.
So what’s next for the coffee giant in this brave new world where caffeine-addicted commuters are no longer commuting, CEO Kevin Johnson is departing, and its workers are unionizing? You’d probably need more than one red eye to figure it out.
Cafe and company culture are shifting alike — and the future of Starbucks might not lie in cafe seating, but in pickup orders. Starbucks will continue to expand its pickup-only locations past the pandemic, said David Firestein, managing partner at SCG Retail and the man behind the lease-up of more than 400 Starbucks locations — including the 20,000-square-foot Starbucks Reserve Roastery in the Meatpacking District, which opened in 2018 at 61 Ninth Avenue.
Demand for grab-and-go ordering existed before COVID-19 — about 80 percent of Starbucks transactions in U.S. company-operated outposts were on the go, from drive-thrus to pickup orders. But Starbucks fast-tracked the stores’ rollout during the first year of the pandemic — after it transitioned all of its locations to to-go only outposts on March 15, 2020. The coffee colossus planned on opening 40 to 50 new pickup locations in the U.S. and Canada between June 2020 and the end of 2021, but those locations are a fraction of the company’s 16,826 licensed and company-operated stores in the two countries. Only about 5 percent of Starbucks stores in New York City, for instance, are pickup-only locations, Firestein said.
“I think the pickup stores are here to stay,” Firestein told Commercial Observer. “We’re doing cafes as well, but the pickup store is not just here for the pandemic. We’ll keep doing those — the customer seems to like them.”
Starbucks concentrated new store openings on more residential areas during the pandemic, as life in the city’s central business districts slowed thanks to an absent crop of office workers. It permanently shuttered around 40 locations in New York City in the last two years, even while it opened another 20, according to a source familiar with the company’s dealings.
The pandemic is still impacting the Starbucks Reserve Roastery between West 14th and West 15th streets, even two years in. Part of the store shut down on March 23 due to confirmed COVID-19 cases and exposures that sent around 15 workers home to isolate. The store’s employees, who had planned a rally on March 25 in support of their unionization vote from March 31 to April 1, canceled that event as well, according to a representative for the union drive.
The Meatpacking District roastery has seen fewer visitors in the past two years due to the surrounding offices — including Google’s New York headquarters — postponing their return-to-office plans, but was propped up by local tourism to Chelsea Market and the High Line, according to Aurora Capital President Jared Epstein, whose company co-owns the building that houses Starbucks Reserve Roastery with Vornado Realty Trust.
“The Starbucks Roastery was shut down at times and under operational and capacity restrictions at other times over the past two years,” Epstein said over email. “As Manhattan continues its comeback, the Meatpacking District will flourish and so will the Starbucks Roastery.”
But by mid-March, the two-year anniversary of lockdowns, quarantines and more or less all-out panic, office occupancy still hovers just below 40 percent nationally and normalcy can still feel a lifetime away. Occupancy ticked above 30 percent in February in New York City, after the omicron wave of coronavirus cases altered return-to-office plans. For those Starbucks locations in more residential areas like Gravesend, Brooklyn, and Astoria, Queens, however, the customers have kept on coming.
“It’s way busier now during the pandemic than it was before,” Cynthia Villafane, a six-year veteran of the company and a barista at Starbucks in Caesar’s Bay Shopping Center along Bay Parkway in southern Brooklyn, told CO. “Now we have Uber Eats. … I can’t remember the last time it’s been slow; unless it’s pouring rain, it is not slow.”
Starbucks introduced Uber Eats for pickup and delivery on April 29, 2020, and pivoted to a drive-thru model for many of its stores that had the ability, according to the company. It aggressively pursued its drive-thrus during the pandemic, something Starbucks will likely continue in the coming years, according to the source familiar with the company.
But, if customers are getting delivery, pickup or drive-thru, Starbucks’ identity as a third place may change. When Starbucks first reopened 85 percent of its stores in May 2020, it did so in part to “reinforce the concept of the third place — a warm and welcoming place, outside of our homes and our workspaces, where we connect and build community,” Johnson wrote at the time. That customer experience may change, at least temporarily, according to Johnnie Rush, chief business innovation officer for concept and design firm the McBride Company, who has spent his career as an architect and interior designer for major companies like The Walt Disney Company.
“As the pandemic becomes endemic, consumers will normalize to cyclical social distancing,” Rush said via email. “Starbucks will learn to ramp up operations for increased pickup, labor flexibility and outdoor facilities.”
Starbucks’ identity as a brand has changed significantly since the company went public in 1992. Similar to computer company Apple, Starbucks transitioned from being just a coffee seller to being a luxury brand — customers could buy things used in the store, like mugs, coffee and even CDs of music a location would play, and the coffee was an Instagrammable product, Rush said.
But what Starbucks needs to improve about its design ties into one of the reasons behind its growing labor movement. While Starbucks makes more than 70 percent of its revenue from drink sales, its drinks are infinitely customizable and, as a result, labor-intensive to make, Rush said. At the same time, Starbucks has expanded its menu to include more food options without growing its physical kitchen space to accommodate the new offerings, putting more pressure on staff.
What Starbucks should do is redesign its existing kitchens and expand its new ones, as well as automate more of its drink-making process, Rush said. He also thought the company could improve its drive-thrus, taking lessons from companies that use multiple car lanes, or send staffers out to take customers’ orders while in a drive-thru line.
In what would represent a bigger leap for the java giant, Starbucks could consider getting into content, in the same way Apple moved from selling computers to selling computers and making television shows, Rush said. The company should try to sell its identity in more ways than just coffee, he added.
“If I were running that company, I’d be thinking to myself, ‘How do I get into the content business?’” Rush said. “It could be media, it could be digital engagement, it could be gaming, but once that piece falls in place, and they’re able to tackle this growing problem of providing more service than they can accommodate in the existing facilities, then I think [the] company has the potential to exponentially grow.”
While online ordering and outdated store design have contributed to more pressure on employees, understaffing is one of the major complaints of Starbucks workers seeking to unionize. The unionization effort is unlikely to impact the company’s leasing, at least according to Epstein, but Starbucks itself has claimed that unionization could hurt its business.
“If a significant portion of our employees were to become unionized, our labor costs could increase and our business could be negatively affected by other requirements and expectations that could increase our costs, change our employee culture, decrease our flexibility and disrupt our business,” reads the company’s 2021 annual report, released in November 2021. “Further, our responses to any union organizing efforts could negatively impact how our brand is perceived and have adverse effects on our business, including on our financial results.”
Strongly opposing unionization may contradict Starbucks’ goal to create a friendly brand identity. It calls its employees “partners,” not workers, and all employees at company-owned locations can become stockholders after two years of employment through a company program. Starbucks offers free tuition to more than 20,000 staffers through a program with Arizona State University, and is raising its starting wages from an average hourly pay of $14 to a range of $15 to $23 an hour beginning this summer, according to the company’s earnings call in February.
Josue Cruz, a shift supervisor in a Starbucks at 3018 Astoria Boulevard in Astoria, Queens, has loved working at the company ever since he started in 2017, and enjoys building relationships with customers. At the same time, he wished the company would listen to its baristas more.
“The community is there — you make all these moments and these [customers] want to be involved in your life. And you want to be involved in their life as well,” Cruz said. “I just wish that management would be more transparent with their partners.”
Online ordering has made Villafane, who is on her Brooklyn store’s organizing committee for a union, busier, and has limited the in-person interactions she loves, she said. The company has begun to feel more corporate than friendly over the past five years, she added.
“You don’t have time to talk to people as much because you’re trying to catch up,” Villafane said. “I hope that they start treating it more like they treated it when I started, where it was something you could see as long term and something you could plan as a career. … It’s a great place — that doesn’t mean it can’t be better.”
Schultz, the new (and old) Starbucks CEO, has argued that Starbucks doesn’t need a union. He authored a letter in November 2021 to employees before the first unionization votes in Buffalo, N.Y., saying he was “saddened and concerned” that workers thought they needed a union. He will take over as head of the company in April on an interim basis and forgo the $1.5 million base salary that comes with it, after Johnson told the company he planned to retire early last year, Mellody Hobson, chairwoman of Starbucks Corporation, said in the company’s annual shareholders meeting on March 16. Schultz previously fought unionization efforts at Starbucks stores after he first bought the company in 1987.
It’s unclear how Schultz will react to the union campaign in his new role, though the National Labor Relations Board (NLRB) has already found that the company unlawfully retaliated against two Philadelphia baristas attempting to unionize, per the Associated Press. And the battle over unionization represents a larger conflict within the company — mainly, can it have the trust of its nearly 400,000 employees, earning somewhere between $15 and $23 an hour, while raking in $29.1 billion in profits? Can Starbucks have its coffee and drink it too?
Many stores have decided to take matters into their own hands, rather than wait for Starbucks to act. The unionization efforts have spread fast — more than 145 stores have filed for a union vote with the NLRB in the U.S., according to Workers United, an arm of the Service Employees International Union seeking to represent the workers. At least five have filed to unionize in New York City, per Workers United. And a seventh store — in Seattle — unanimously voted to unionize on March 22.
At the same time, Starbucks has shied away from certain policies designed to protect workers — like a proposal to require the conglomerate to author an annual public report outlining its efforts to prevent discrimination and harassment at the company. The company’s board of directors, saying the report wasn’t necessary, advised its shareholders to vote against the proposal, and they did — with about 70 percent saying nay. The proposal was introduced by New York State Comptroller Thomas DiNapoli, who serves as trustee of the New York State Common Retirement Fund with its more than 2.5 million shares — or about $300 million — of Starbucks stock.
“[The proposal] would provide a window into company culture, which is an intangible but a very important factor in valuation, and it would also shed light on the company’s spend to resolve issues,” said Gianna McCarthy, director of corporate governance for the comptroller. “Particularly at this moment in time at Starbucks, poor labor relations also pose difficulties in recruiting new employees.”
In choosing a path forward, Starbucks will have to reconcile its identity as a progressive company with the desire of many of its employees to unionize — all while adjusting its operating model for customers on the go, and out of the office, in a post-pandemic environment. The task is something like ordering a triple-iced blond ristretto, with four pumps of sugar, cinnamon powder, oat milk and a dash of whipped cream — it’s complicated.
Celia Young can be reached at email@example.com.