The rise and fall of Starbucks

In August 2024, Starbucks fired their CEO after just 17 months and hired Brian Niccol out of Chipotle to come save them. They were so desperate for a turnaround that they let him commute from his home in Southern California to Seattle by private jet at their expense. Investors were so excited to see change of any kind that the stock jumped 24% on the news. Starbucks is one of the miracles of modern wealth creation and entrepreneurship. It went public in 1992 at $17 a share, and since then the stock has appreciated an astounding 27,800%. But today, Starbucks, the iconic chain that taught all of America what a latte was, is now in trouble. It's seen 6 consecutive quarters of same-store sales decline. Was it oversaturation, competition, bad management, or something else? Well, hold that thought. This video is the rise and fall of Starbucks. And oh, by the way, If you stick around, I'll explain to you why I brought my own coffee today when I came to visit Starbucks. Oh, and by the way, thanks to Monarch Money for sponsoring this video. More on them later. In 1971, 3 friends opened a small coffee shop and distributor of coffee beans in Seattle's Pike Place Market, and for 10 years it was basically just that— one store selling coffee and distributing beans. And in 1982, a young salesman, an ambitious guy named Howard Schultz, walked through the door. And he had grown up poor, destitute to some extent in Brooklyn. His dad had gotten injured as a young man on the job, and that had led to tough times as a young man. And in 1983, on a trip that would kind of change the world forever, Howard Schultz had visited Italy and gone to Milan, and he'd seen coffee shop after coffee shop where Italians were congregating, drinking espresso, and had truly a third place outside of home and work to meet and socialize with friends. He came back and pitched the Starbucks founders on changing their whole approach. Have seats, be better about coffee. And the founders, well, they weren't interested at all. And Howard, he wasn't kind of dissuaded by this whole thing. He went out and famously pitched 242 different investors to give him the money to start up his own version of Starbucks. Out of those 242 investors, 217 said no, but enough said yes for him to raise $4 million, which was enough to go buy all 6 stores that Starbucks had at the time. And remember how Howard had grown up destitute and challenged because his dad didn't have health insurance when he got injured? Well, Howard wanted to change that. One of the first things he did was he become one of the first companies in the world to offer part-time workers health insurance. From 6 stores in 1987 to an astounding 140 by 1992. Howard was an aggressive guy and they were growing quickly and they went public at $17 a share. The stock went up 70%. In the first few months by September of that year. By the year 2000, their hypergrowth continued. They eventually opened 2,500 stores over those 8 years. It was astounding levels of growth, especially when you consider that most of America didn't have an idea about what specialty coffee was. We were accustomed to diner coffee, kind of burnt, whereas when they first opened their first store in New York City, well, the New York Times had to explain to people what a latte was. We just didn't know. Half coffee and half hot milk. And Starbucks embraced this idea of being a third place where you could go and socialize. They had warm armchairs, free Wi-Fi. It was a welcoming environment. It wasn't like your other typical coffee experiences where they wanted to get you in and get you out. Starbucks wanted you to stay. And this was the magic of Starbucks early on. I mean, remember, this is a business that sells you a $4 or a $5 cup of coffee that costs them $0.25 or $0.50 to make. And if they can be geniuses to make you think that you're getting an experience for that level of margin, well, it can work. By 2007, they had gone from those 2,500 locations in 2000 to over 15,000 worldwide. Just an incredible triumph of growth. But growing that quickly, well, it can get kind of messy. They started to hit a wall of growth. In fact, there were often times where people would joke that they would go to a street corner in a major city and there'd be a Starbucks on every single corner. Even today, when I drive to work, I pass 3 Starbucks over 3 miles to get from my office to my house. Schultz by then had stepped aside, and as the 2008 crisis hit, he saw that Starbucks had become kind of a shadow of what it formerly was. You go in and they're serving breakfast sandwiches and doing a bunch of stuff and kind of missing the the core of what had made the chain kind of good in the beginning. I mean, you have burnt breakfast sandwiches that were microwaved, masking the smell of hopefully what would have been good coffee. It was a mess. Schultz tried to bring the chain back to basics. He famously, during this time in 2008, shuttered Starbucks' entire chain for 3 hours so every staff member could learn how to make espresso again. They'd come that far and fallen that far from what their core was. And also, in all this hypergrowth, the chain had gotten really bloated. At that point, he reduced over $400 million in costs. It worked. By 2010, the chain's profits went from about $315 million to close to $1 billion a year. From 1992 to 2018, Starbucks stock appreciated an astounding 21,000%. Just incredible wealth creation. Conventional wisdom these days is that Schultz saved the chain back in 2008. But at the same time, a lot of the moves they made back then were things that would basically start to lead us to where we are today with the chain in trouble. Schultz, in order to drive growth around that time, doubled down on two things. Mobile ordering, and the rise of drive-thrus. Starbucks famously became one of the most forward-thinking companies in terms of mobile and e-commerce. Their app year after year is number one in terms of retailer apps that were downloaded and installed, and it showed in the results. Over half of the transactions involved points of some sort for the chain being redeemed by customers. Starbucks Rewards takes everything you already love about Starbucks and makes it even better. This proved great for retention, especially when you remember that Starbucks would have all that, all that cash basically stored on the app. Well, there's a thing called float. When you're sitting on other people's cash, you get to keep the interest from it. And Starbucks was doing really well just from keeping other people's money installed on their apps. But besides doing that, the other thing they started to do was install drive-throughs and basically have them at every single one of their locations. You know what you don't do when you're in a drive-through? Socialize with other people or hang around a Starbucks location. By 2022, 90% of locations would have a drive-thru. And today, over 70% of transactions combined have a drive-thru and a mobile app involved in them. The reality is there is no third place in the drive-thru lane. People are sitting in their cars and then heading home or wherever they're going. Starting in 2020, Starbucks started to pull back from urban locations without drive-thrus. They closed over 400 of them, replacing plush chairs with, you know, uncomfortable metal stools, closing bathrooms. It's basically retreating from what the chain had always been. In fact, here in San Antonio, there are some recent construction of Starbucks where they have built chains with no seating at all. It's basically just a drive-thru and a window and that's it. You can't even go inside. And the CEO at the time, Lakshman Narasimhan— I apologize for mispronouncing, I'm really trying— basically came out and said like the idea of the third place, which Starbucks was built on in the old days, wasn't relevant anymore. They were basically giving up on it. But before we get into that, I want to talk about today's video sponsor, Monarch Money. Most people do not struggle with money because they are irresponsible. They struggle because their financial information is scattered. One app for checking, another for credit cards, another for investments, and no single place where it all actually comes together in a way that makes sense. Monarch solves that by giving you one private ad-free dashboard where everything lives. Accounts, spending, network goals, and recurring bills are all visible in one place, so you're not piecing together your financial picture from memory or spreadsheets. 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He felt comfortable sharing his thoughts on every single one of them. Same-sex marriage, gun control, government shutdown, homeless policies. If it was out there and it was part of the culture war, Starbucks was going to have an opinion on it, especially from Howard. At a shareholder meeting around this time, a shareholder complained that the company's position on divisive issues was hurting sales. Howard famously told him, "Well, you can sell your shares and go buy some in another company." In 2015, Starbucks decided to have a Race Together campaign, which would basically encourage baristas to write things on cups to get the customers having discussions about differences in race in the United States. I had faced enormous backlash. And for me personally, like, last thing I want with my coffee is a bunch of politics. Can I just enjoy it for once? I'd love to live a little life without politics in front of me. And they were going the exact opposite direction at Starbucks. They got caught up in the War on Christmas in 2016, same-sex marriage issues. Heck, even Howard went so far as to decide he was going to run for president in 2016. When customers really wanted just a coffee company and a nice place to spend time, they were instead installing drive-throughs, focusing on apps and separation, and being divisive on politics, like just going against who they were supposed to be and what customers wanted. In April 2018, two Black men were at a Philadelphia Starbucks and they were arrested while waiting for a friend. One had asked to use the bathroom and management had refused. No longer, no further. Protesters calling for justice today. We want the manager fired. After the arrests of two Black men at this Philadelphia Starbucks on Thursday. Starbucks closed all 8,000 stores so everybody could go through racial bias training. And they suddenly announced that everybody, no matter what, would be allowed to stay as long as they want and do whatever they wanted inside of Starbucks. Heck, you didn't even have to be a customer or buy anything. Just come on in and hang out. Time spent in stores after this period dropped an astounding 6% across the chain. Uh, and that number was 84% higher if the Starbucks location was near a homeless shelter. And look, the homeless shelter and homeless problem in the United States, it's a big one and it's real. There's people who are without homes. Uh, in reality, like the Starbucks near me got basically taken over by folks who just turned into a place to hang out all day. Uh, and it made it basically not a very welcoming place for customers. The coffee chain giant has reversed its policy for letting people linger. So this also includes using the bathroom. Some stores actually had to go install needle disposal boxes. Uh, other ones installed blue lights, which made it harder for basically people injecting themselves to find their veins. Starbucks is adding needle disposal boxes in some of its bathrooms. Business Insider reports that many Starbucks workers were concerned after finding discarded needles in the restrooms. Suddenly Starbucks had put itself smack dab in the middle of the mental health crisis and the homeless crisis, uh, in the United States. In 2022, Schultz basically came out and said, hey, things are so bad, I don't know if we'll be able to keep our bathrooms open at our stores. That summer, things got so rough that the chain had to close stores across cities like Portland, Philadelphia, and Chicago because basically they couldn't operate them safely anymore. In January 2025, Nichols would reverse this policy entirely. In reality, it's tough to have a viable third place if people don't feel safe. And a lot of people felt like I did, didn't want to go into Starbucks anymore if that's what was going to be going on inside of those places. Meanwhile, there was an inherent conflict of interest between the mobile app and the in-store experience. What would happen is, is people would put in orders like crazy, all expecting to be ready at once, and they would flood it and basically create a mosh pit inside of Starbucks. The apps would allow people to create what were basically Franken-drinks, these crazy combinations. In fact, the typical app for Starbucks allowed 170,000 different combinations, slowing down the prep time. And suddenly you have customers standing there in line who've placed an order waiting behind a virtual line of people who aren't even in the store yet. It was a mess. In 2019, it would be typical for a customer to wait 15 to 30 minutes, 8% of the time. That was very common for that to happen. Whereas before that, that kind of wait was virtually unheard of. The wait was forever, no matter how you ordered. And with this app performing the way it was, and over half of customers with stars and rewards sitting in their app, basically the company was stuck with an app they couldn't change much and a rewards system they couldn't do much about without alienating existing customers. And while growth had stalled in the United States, One of the places Starbucks had looked for growth was in China. And when they had opened their very first store in China in 1999, tea-drinking China, well, they didn't know much about coffee. That would come to change over the next coming decades. And in China, while today Starbucks is trying to charge $4 per cup, Luckin Coffee is charging under half of that. And it shows in the number of stores. Luckin has nearly triple the number of stores that Starbucks has there with over 22,000 in China versus just 7,000 or so. For Starbucks. And it's worth noting that Luckin had an accounting scandal that plagued them in 2020. They fabricated over 314 million in sales. They got delisted, but they went back and kind of cleaned house and have come back stronger. Starbucks market share in the coffee business had been 42% in 2017. That number had been cut in over half within a few years. And by 2025, they basically threw in the towel on Starbucks in China, selling the entire footprint that they have there to local investors and retaining 30% of the chain themselves. And remember all of the progressive politics and stuff that Howard Schultz had promoted? Well, that attracted a certain type of person to come and work at Starbucks, and they began to unionize different stores. Back in December 2021, the very first store voted 19 to 8 to unionize. And since then, over 500 stores have followed suit and unionized themselves. Schultz came back in again And a guy who had once been very progressive and forward-thinking about promoting health care and benefits for folks, well, suddenly he was engaging in practices that the National Labor Relations Board would describe as, well, basically not good and egregious. And the stuff's gotten so rough and tumble that even 4 years later, those workers don't have a union contract with Starbucks. Baristas start to strike. My store, this store, unionized in 2022. And my previous store that I was at also unionized in 2022, and we still don't have a contract. Along the way, competition has stepped up as well. You have the Dutch Brothers of the world, Seven Brew and those guys targeting the drive-thru market, especially the youth consumer. In the specialty coffee section, you have all kinds of folks, including Luckin Coffee, by the way, who is now opening up in New York and has totally gamified the experience in a way that works well for young people. They're coming after Starbucks from all directions. In 2024, all the chickens came home to roost. Revenue declined 6%. Customer transactions declined 10% total, meaning 10% fewer visits. And basically the company had it so bad that they suspended guidance to the stock market. CEO Nir Eshelmon lasted a brief 17 months, basically nothing in the world of Fortune 500 CEOs. Meanwhile, the stock lost $34 billion in valuation. Over that period. Schultz, who is now off the board, publicly went after the company for poor performance, which is a pattern you see often. These like highly smart, highly driven founders, a lot of times they leave the company, they get really public. It's going on with Lululemon right now as well, just as we speak in 2025. Activist investors like Elliott Management were involved and they basically wanted to push for change at the chain. And they did so with the hiring of Brian Niccol from Chipotle. His plan is to go back to basics. He cut 30% of corporate staff, shed over 1,100 jobs, brought back ceramic back mugs at the stores, which was one of my favorites of all time, getting to sit there with a real mug rather than a paper cup, and trying to go back to simplifying the menu, getting rid of a lot of this stuff that was just clogging up everything, including the mobile app. Change has been slow. This is a big chain. Profits are down 47%, 6 quarters of declining same-store sales, and Nichols is saying that chains might not even show up for the chain until 2026. So to go back to the original question that we asked, what killed Starbucks, or what's killing Starbucks? Was it competition? Was it, uh, Bad management decisions? Was it all this kind of stuff? Well, it turns out the answer is pretty simple. Along the way, they forgot they were a coffee company. They got involved in politics. They got involved in all kinds of messes that were beyond just satisfying their core customer day after day. They were a brand that had been built on being a third place and a destination. So they focused on being an e-commerce company and getting people out the door as quickly as possible. Today, they're stuck in the middle. Whereas once it was seen as a premium brand— hey, I paid $6 for this cup of coffee— today, a lot of that's been tarnished because of some of the stuff that happened in the late 2010s. And it'll be interesting to see where they end up. It's still a big chain, tens of thousands of stores, $36 billion in sales. It'll be interesting to see if they turn it around. I think you have to understand as a business why you exist all the time. What is the core job that you do for people? It's very easy to get distracted from that. In the case of Starbucks, they forgot that they were about serving people and keeping them happy and being a bright part of their day each day. And instead they got distracted by the shiny objects of drive-thrus politics, different types of stuff, the mobile apps, like all that took away from the soul of what the thing was and it's cost them in the end. All right, if you want to see a video about a brand that lost its way, check out this one right here I did about Lululemon. I think you'll see some parallels there. And let me know what you think in the comments below. I try to read them all. Catch you next time. Oh, and I forgot to tell you why I brought my own coffee to Starbucks. The reason is I don't like the way it tastes. I buy beans that are softer and smoother and the beans that they sell at Starbucks when I drink it black, It's just really heavy, dark coffee designed to overpower the amount of sugar and milk that most people are putting in their coffee. And for me, like, I just like the taste to be better, so I don't drink there much.