Starbucks is struggling—why are they opening so many stores?

Let's talk a bit about the dumpster fire that is the Starbucks business. If you've been watching the news, they fired their CEO. They brought in a new guy late last year in 2024. They're closing thousands of stores. The stock is getting pummeled and something weird is happening. They're opening thousands of new stores. It just kind of doesn't make sense when your business is struggling like that and you're putting a ton of money into expansion. Well, actually, it does kind of make sense. So in this video, I will talk about why this paradox exists and what we can learn from it as business owners and tell you the story of how Starbucks got itself into so much trouble despite being a huge success up until recently. Hi, my name is Michael Girdley. If you're new here, other people have normal hobbies like golfing or going on travel and stuff like that. Me, I like business. I like to talk about business. So I study business and study markets. And then I share what I learned from it with folks on videos when I find an excuse to go for a walk. So if you are interested in that kind of stuff, do me a favor, interact with this video, leave a comment, follow me, whatever it is. It would do a lot so more people can see it, and it would make me keep doing more of these because it would make me happy. Starbucks itself is a huge success story here in the US, starting from kind of humbling, you know, beginnings back in the early '80s. By the year 2000, the chain had over 4,000 stores and it was a publicly traded company. And between 2000 and 2010, Starbucks grew by 400%. They went from 4,000 stores to nearly 16,000 in a decade. Just incredible levels of growth. And, you know, if you look at typical Main Street America, like where I live here in San Antonio, you cannot go a single direction in any given mile without running across a Starbucks. There's exactly 5 Starbucks within 2 miles of this house. Just kind of absolutely nuts the level of saturation and growth that they've experienced. And a lot of what drove this growth was a combination of different things. And the two main factors were really interesting to watch. Number one was this idea that Starbucks came along at a time when Americans were starting to lose their third place. And the third place is this idea that you have home, you have work, and then there's a third place that you go, right? For example, historically, you would go to church or you'd go to the Elks Lodge or something along those lines. And those things have started to decline as people got more secular and less community involved and more digitally involved in the US. So Starbucks came along at a perfect time when people were hungry for like a third place to go. And in the 2010s, the American populace was hungry for this, and Starbucks was kind of the perfect answer to the whole thing of a third place. You could go there, you could hang out, the Wi-Fi was good, the coffee was there, the baristas were smiling at you, they had clean bathrooms. Uh, it was just kind of a good scene, and it totally worked. I can I remember personally in the 2010s and early 2000s even just going to camp out at Starbucks for the day, and it was a pleasant experience. And the second thing that Starbucks did that drove all this growth, which was super smart, was realizing the value of premium real estate. Basically, if you owned a building and you owned commercial real estate or a strip center or something along those lines, there was something that was a guarantee for you, which was the number one highest paying tenant almost always was a Starbucks. And Starbucks would come in and they would just outpay everybody else to have the very best, best locations. And look, if you're selling a commodity product like coffee with sugar in it, like Starbucks does, being in a great location is important because people want convenience above all when they're buying their daily coffee. And the third thing that drove them was especially interesting, which was the millennials and Gen Z now came out of a situation where they felt like they were economically disadvantaged. They lived through the Great Recession in 2008. It was tough for them to buy houses. And look, what do natural human tendency always want to do? We want to have some sort of kind of achievable luxury. And Starbucks was great. It was a way when you had your Starbucks cup to show, hey, I spent $5 on coffee today and I totally can. And so Starbucks ended up with this amazing flywheel of great locations that people wanted to go to. They had a premium perceived product that that people could use as kind of an achievable luxury that they would buy each day and treat themselves. And then they had great locations to lock all that in. So it was really hard for competitors to come in and compete with them. And through to the 2010s, Starbucks just continued to steamroll along. By today, 2024, 2025, they have 40,000 stores. Put that in, in context. Like, it's just an incredible amount of growth at that scale. Mind-boggling. And leading through the 2010s, they did things to really engage their customers even more. Lots more options for customizing your drinks. And then they went digital really hard. I mean, people really underestimate and under— don't understand the value and scope of the Starbucks reward program. And fascinating enough, they get a huge amount of their revenue just from having people leave their dollars on the Starbucks app, ready to sell those later. It's basically called float. It's the idea when you sit on somebody else's cash, you can loan it out to other people. And that can turn into just great— another great revenue stream for you. Fast forward to today, over 60% of their customers for Starbucks are enrolled in their loyalty program. Just an amazing amount of penetration. And things went terrific until they didn't go terrifically anymore for Starbucks. By Q4 2024, their same-store sales went down 6% by store. And so far, if you look at what had gone on with Starbucks, their situation was that growth and rapid growth was covering up a lot of ills. They were growing these new stores, they were expanding, and the stock price kept going with it. But then investors started to look at something also important, which was, okay, you've built all these stores, you've invested all this money. What's happening to those stores' performance? And by 2024, the cracks were showing and things were, well, just not good. And Starbucks is a business with a great franchise. I mean, you put together the real estate, the brand knowledge, and the fact they also just sell 30 cents worth of coffee for $5 to people every single day. That's just like an amazing business. You can't go wrong with that. Well, actually you can go a little wrong and Starbucks proved it. And I think this is lesson number 2 of the Starbucks story, which happened next, which was it wasn't a single thing that started to make things go poorly for Starbucks. Um, like most big businesses with a great franchise who go south, uh, or start, have things start to go poorly, it's a combination of bad decisions one after another that compound over time and start to ruin the business. And one of the strengths of Starbucks was the fact that you could customize all of your orders. You could go in, you could get your name written on the cup, and you get your triple shot Frappuccino, whatever your mama drink. Like, I don't drink any of that crap because I'm not interested in a caffeinated sugar drink, but that was part of the appeal and part of why it won, right? People could feel like they could go into a Starbucks and get the drink that was made precisely for them, often by a barista that they got to see every single day. And what that leads to when you have— when you offer everybody everything they want is eventually your menu can get so complex that it starts to weigh you down. And that choice, for example, letting their menu get too complex and too big, is precisely one of the things that started to hurt Starbucks. And you saw that in their prep times. You know, coffee has to be convenient. You need to be able to go in and go out, get your job done and leave. Well, that complexity of the menu and all that customization started to slow everything down and make working there kind of a hell. And prep times increased 60% over the previous decade inside of Starbucks. Just crazy what this small decision of letting the complexity basically steamrolled into a horrible customer experience. And then by 2020, COVID came at basically the worst time for Starbucks possible. You started to see inflation and pressures on people who were able to spend $5 or $6 on a coffee. Suddenly Starbucks was charging maybe $6 or $7. And if your salary hasn't gone up as a working person, it makes it much more difficult to justify and afford those inflationary prices that Starbucks was seeing. At the same time, the inputs that are coming into Starbucks, everything from coffee prices going up to milk prices to labor prices, you end up kind of in this rough situation where that's going to put pressure on your profits and margins as Starbucks itself. And the other thing they did in the stores, which I think just totally killed this idea of Starbucks being the third place that you could go to, was they started to do things like locking down the bathrooms and letting the stores get tired and not worrying about how the store smelled. Frankly, I don't go to Starbucks much anymore because the stores just smell so bad, like airplane bathroom bad. And there's a store near me that I used to go to often here, here in San Antonio. Basically, it turned into a homeless shelter. People were parking there all day. They smelled bad, made the store smell even worse. And at the time, like Starbucks was just like, cool, like, come on in. Hang out all day, we welcome you. And I was like, well, like, I'm a paying customer. Can I get some service too? And it was just a mess. And then the COVID era also brought really the last and most interesting headwind for Starbucks, which is just competition is fierce. You're seeing Chinese chain Luckin Coffee coming in. You're seeing the Dutch Bros and Seven Brew of the world. They're coming in hardcore with tons of money behind them. Dutch Bros raised hundreds of millions of dollars in their IPO during kind of the zero interest rate time. Post-COVID. And, you know, all of this kind of just divides up a fixed pie, which is there's only so much money being spent on coffee and Starbucks just isn't getting as much of it as they used to. This is hurting Starbucks internationally as well. China is a huge market for them. Starbucks sales went from $3.7 billion in 2020 to just over $3 billion a year in 2024, despite it being a real focus for them. Like they're just getting competed out of the market. And it really doesn't help that it's seen as an American chain when Well, frankly, China isn't that happy with America these days. And then in 2022, founder and significant owner Howard Schultz, who led the chain from the '80s up until now, he came back in as interim CEO while they were trying to start to figure out what to do with the chain. And they brought in a CEO who only lasted for about 15 months before he was fired. And his name was Laxman Narasimhan. I may pronounce it incorrectly, but fortunately it's easier to read numbers than it is to pronounce people's names. So Laxman, if you're watching this, I apologize. Thanks for mispronouncing your name. And look, for a company this size, for the CEO to only last about 15 months, that says something about the state of the company and the worry that the board has for what's going on. And they went so far as to pay up pretty incredibly for a guy that's turned around big chains before. And I think this is the next lesson, big lesson from the Starbucks story, which is leadership really freaking matters. People undervalue how important it is to have the right leader at the helm. And the Starbucks board, I think, gets that. And in 2024, September, they brought in this guy named Brian Nichols. And if you're not familiar with Brian Nichols, he's the guy that went in and fixed Chipotle. And remember, Chipotle for a while was having all that kind of stuff with food poisoning and all kinds of weird things where people weren't getting equal portions and the chain was just really struggling. And Brian, well, he's the guy that came in and fixed it. And what I think is exciting about kind of Brian's plan to fix everything and that he's already starting to put into place is he realizes what got the chain in trouble is not just a single bad decision. It's a combination of some big but individual decisions that altogether started to put this— put the chain and put Starbucks in a pretty bad place. And for example, you know, we talked about some of the things that got them in trouble. Like one of them was getting away from this idea that Starbucks could be a great third place for you as a consumer. Well, one of the things they're doing is starting to return to having seating in their stores and allowing people to go through and stay for a while, buy your coffee and sit down, enjoy the Wi-Fi and the air conditioning. Like, sounds pretty good to me. That's why I love Starbucks back in the day. And tied to that, he's going back to this thing they call the Green Apron model, which is being a welcoming place. And part of that is how the staff treats you when you're there and making sure that the customers kind of feel valued and have a good throughput, good product, and, uh, kind of feel appreciated. And he's also going through and simplifying the menu. They've cut about 30% of the items off the menu. I don't know if you've been into a Starbucks recently, but it's confusing as hell. Like, I can't figure out what the order, like, I don't need that stuff. I just want a coffee and I want it to not taste like dirt. And the last thing they're doing as part of the turnaround is, frankly, they understand the real estate angle of what they're doing. Premium locations where people want to buy in a good welcoming place, that's super important. And the reality is, when you grow this fast, there's a number of locations that Starbucks has, well, they're probably regrettable. They don't want to have them anymore. And that explains this paradox that I talked about at the beginning of the video, which was, wait, this company's pretty screwed up. It's not going great. The stock market hates what they're doing and just hired a new CEO. Like, why are they building a bunch of new stores? Well, this is why. That's part of the strategy to turn the business around. And Brian's also smart, right? Brian knows when you have a business like Starbucks or any business in general, growth hides a lot of problems. If you just keep growing your top line, people will give you the benefit of the doubt that you're going to find out how to make that profitable later on. And you can see it all the time with businesses that are growing really quickly in the stock market, but they're not making much money. Well, investors realize growth is really good because you can get big and then maybe figure it out later. And so that's why Starbucks is still, well, frankly, building stores. So in closing, I mean, some of what Brian's starting to do is starting to show up. You're starting to see better performance in same-store sales. You know, they're beating guidance in some situations, but they're still not out of the woods. The reality is, and this is something when you start to deal with big hairy problems, a big hairy problem that kind of comes together over years. Well, you can't expect it to get fixed in 6 months or 9 months or even a year. It takes years to fix that stuff. Trust me, I've been involved in stuff that took years to get broken. It takes years to fix it. There's nothing you can do about it. And you're starting to see the numbers of the turnaround kind of look up, right? You're seeing same-store sales flatten out and you're seeing the shrinking in terms of international sales growth, which would have been predicted to be -4% this year to go to -1%. So pretty good in terms of kind of what we call green shoots. I mean, when you start to put things out in a field, you want to see if you're gonna have anything grow and see if anything starts to come out of the ground. Well, Starbucks is seeing that. In the end, what Starbucks is trying to do is balancing a tightrope, right? They're trying to fix their existing portfolio and have it operate better and not be, well, frankly, so depressing, and at the same time pushing hard on growth. China is a focus for them. They're opening 500 stores in Middle East this year, like just kind of crazy expectations and tough to do. So look, if I I'm Mr. Nichols. I bet he's working pretty damn hard, which he should. They paid him a $10 million signing bonus and opened an office for him so he could work from Southern California when he joined the company. So yeah, he's getting paid pretty well for working his ass off. All right, so that's it for how Starbucks got itself into trouble and what it's doing about it. Let me know what you think in the comments below. Do you agree with how they got in trouble? And if so, do you agree with how they're gonna get out of it? Curious what you think. All right, catch you next time. Thanks for being here.