An Analysis Of The Failure Of Starbucks – CoffeeTalk

The Real Reason Starbucks is Failing

Starbucks, a global icon in the coffee industry known for its upscale coffee and cozy atmosphere, is facing a significant crisis. Customers are turning away, sales are plummeting, and the brand is struggling to maintain its foothold in new markets. In the third quarter of 2024, Starbucks’ same-store sales fell by 7%, and the number of customers visiting its North American stores decreased by 10%. So, how did this once unstoppable coffee empire find itself on such shaky ground? Let’s delve into the reasons behind Starbucks’ current predicament.

Changes in Store Atmosphere

A Shift from Cozy to Clinical

Remember the days when Starbucks was characterized by its inviting and comfortable environment, complete with cozy armchairs and warm, rich décor? Customers enjoyed spending hours at a time working, socializing, or simply relaxing with a good book while savoring their favorite coffee. Unfortunately, those days are a distant memory for many.
In recent years, the interior of Starbucks stores has undergone a dramatic transformation. The previously cozy nooks and armchairs have been replaced with minimalistic, clinical, and uninviting spaces. Wooden stools and an abundance of empty space now dominate the scene. This alteration in physical space has left many customers yearning for the homely, welcoming atmosphere that once defined Starbucks.

The Impact of the Pandemic

The COVID-19 pandemic forced Starbucks to pivot its business model to adapt to new consumer behaviors. With the lockdowns and social distancing measures in place, Starbucks had to focus on drive-thru and mobile orders to survive. By the end of 2023, mobile app purchases made up 31% of all transactions. The emphasis on quick turnover meant that the cozy, stay-for-hours environment was no longer feasible, leading to the removal of much of the seating and lounge areas.

Overcomplicated Menu

A Growth in Options

Starbucks has always been known for offering a wide array of beverages, but its menu has now expanded to over 100 drink options. This includes everything from hot coffees to iced teas, energy drinks, and an extensive list of customizable toppings and syrups. While the vast menu choices are part of what makes Starbucks popular, it also contributes to increased wait times and operational complexities.

The Issue of Wait Times

In 2022, almost 16% of Starbucks customers reported that their wait times were longer than usual. By 2024, this number had risen to 26%. The extensive menu and the surge in mobile and drive-thru orders have overwhelmed the baristas, thus prolonging the time it takes to serve customers and diminishing the overall customer experience.

Labor Challenges

Understaffing Issues

The increase in mobile and drive-thru orders has placed a significant strain on Starbucks’ workforce. An internal survey conducted among more than 10,000 U.S. locations revealed that only one-third of the staff believed their store had enough workers. As a result, baristas are often overworked, stressed, and juggling multiple roles at once. The combination of increased responsibilities and insufficient pay has led to a demoralized staff, affecting their interaction with customers and the quality of their service.

Unionization and Labor Disputes

The stressful working conditions have led to increased efforts to unionize. In 2021, Starbucks employees began organizing for better pay and benefits. Although only about 2% of the U.S. workforce had unionized by the end of 2022, the company, led by then-CEO Howard Schultz, responded antagonistically. Schultz outright refused to embrace the union, which clashed with Starbucks’ progressive image. This has led to further tension, bad press, and strikes, discouraging customers from frequenting Starbucks locations.

Rising Prices

The Cost of a Cup of Coffee

Starbucks has always been on the pricier side, but in recent years, the cost of their beverages has increased significantly. The average price of a Starbucks latte in the United States rose from $3.95 in 2020 to $4.95 in 2024 – a 25% increase in just four years. At a time when inflation affects customers worldwide, this increase is hard to swallow, particularly when the overall Starbucks experience has diminished.

Price Perception Issues

Inflation has made value more important than ever to consumers. A survey found that Starbucks ranked the worst among major North American coffee chains regarding price perception, with only 51% of Americans viewing it as affordable. In contrast, Dunkin’ Donuts and Pete’s Coffee were seen as affordable by 74% and 73% of Americans, respectively. Historically, customers were willing to pay a premium at Starbucks for the ambiance, but with the welcoming environment largely gone, the higher prices no longer seem justified.

Shift in Customer Preferences

Rise of Independent Cafés

The transformation of Starbucks to a more fast-food-style service has coincided with a rise in the popularity of independent coffee shops. More and more customers prefer the personalized service, unique ambience, and often more affordable options offered by local cafés. From 1990 to 2022, the number of independent cafés in the U.S. skyrocketed from 1,650 to 65,500. These are significant figures, highlighting the mounting competition that Starbucks faces in this space.

Outperformed by Global Competitors

Starbucks’ change in business model has not been well-received in international markets either. In countries with strong coffee cultures like Italy, Australia, and Greece, Starbucks has struggled to find its footing. In Australia, Starbucks closed 61 of its initial 87 stores due to its failure to align with the local sit-down coffee culture, while in China, local competitor Luckin Coffee has surged ahead, opening 8,000 new stores in 2023 alone.

Public Image and Brand Identity

The Progressive Employer Reputation

Starbucks has always prided itself on its progressive policies, such as offering full health benefits to both full-time and part-time employees and covering 100% of tuition costs at Arizona State University for eligible employees. However, the company’s recent actions—like refusing to raise pay for unionized workers—have tarnished its reputation. This disconnect between the company’s past image and current practices has led to growing dissatisfaction among both employees and customers.

A Fixit CEO’s Approach

In response to these challenges, Starbucks has brought in Brian Niichel, known as a “Fixit CEO,” who successfully helped Chipotle navigate corporate troubles in the past. Niichel has indicated his intent to listen to both staff and customer complaints and is advocating for a return to Starbucks’ roots as a community coffeehouse. However, even he acknowledges that these changes won’t happen overnight.

Conclusion

While Starbucks still retains 40% of the café market share in the U.S., it is clear that significant changes are needed to restore the brand to its former glory. From addressing staffing and labor issues to revisiting its in-store atmosphere and reevaluating its pricing strategy, there is much work to be done. As Starbucks seeks to navigate these turbulent times, the company faces the fundamental challenge of remaining relevant in a rapidly changing coffee industry landscape.