Once, Starbucks enjoyed the reputation of a "third place," a traditional European café setting where people could enjoy barista-made lattes with friends and associates away from home and the workplace.

Starbucks' reputation as a "third place" wasn't a spontaneous act but the result of a three-fold strategy. First, proper market segmentation. The company stayed with the upper-scale of the coffee market, competing on comfort rather than convenience, which is the focus of its closest competitors, McDonald's and Dunkin Donuts.

The second is execution. The company stuck to its original product package, including good coffee, quality service, and a friendly environment.

The third is innovation. The company came up with innovative products and expanded the company's product portfolio, keeping the hype for the brand alive.

Today, Starbucks continues to carry this reputation as a third place in its early stores, but it begins to look more like a fast-food driving place in its newly-opened stores.

"Starbucks' biggest problem is that it has lost its charm," Michael Ashley Schulman, CFA Partner / Chief Investment Officer Running Point Capital Advisors told International Business Times. "Starbucks used to not only sell coffee but also used to provide a fun, relaxing atmosphere and gift shop with sodas, coffee bags, tumblers, cups, and decorations to browse while waiting in line. It used to compete with a few other companies. Now, it is all about the drinks, food, drive-through, and pickup rush like any fast-food establishment."

That's a significant change in Starbucks' business model, which threatens to turn its unique value proposition into a "commodity."

What's behind the change in Starbucks' business model? The first thing that comes to mind is market saturation. After 40 years of feverish expansion, Starbucks turned into the world's largest coffee-shop chain running out of profitable opportunities to open large stores. But it can still capitalize on its loyal following by opening up smaller, drive-through stores.

Starbucks cups are pictured on a counter in the Manhattan borough of New York City, New York, U.S., February 16, 2022.
Starbucks cups are pictured on a counter in the Manhattan borough of New York City, New York, U.S., February 16, 2022. Reuters / CARLO ALLEGRI

Then there's competition from start-ups. For instance, in Europe, Starbucks faces competition from Mikel Coffee Community, which has opened over 300 coffee shops in the last decade. In China, Starbucks' second-largest market, Starbucks, faces competition from Luckin coffee, which beats the American coffee giant in-store counts.

And there are the pandemic lockdowns, which turned coffee shops and restaurants into pickup places, changing consumer habits. But that's already over, at least in the US, Starbucks' home base market. So, there must be a few additional reasons compelling the company to change its business model, like staff shortages in a tight US labor market.

"It had been a rough ride for Starbucks for some time. Among other issues, staff shortage had been quite severe, which the management acknowledged last summer," said Kunal Sawhney, CEO of Kalkine Group.

Then there are rising costs due to inflation, which forced Starbucks to cost cuts that undermined the performance of its teams.

"Their biggest problem is cutting costs and not watching or providing what their team needs under the outgoing CEO," Tim Murphy, CEO at Boomers Parks told International Business Times. "Howard Schultz, although temporarily coming back in as Interim CEO, is focused on what the previous CEO did not watch that caused an issue with having unions coming in – building employee morale. The previous CEO allowed this to happen by cutting employee costs which in turn created the biggest headache and allowed unions to come in."

What's the solution? Return to its traditional core competencies and values to deliver superior services, according to Sawhney.

"Customer service and staff recruitment may have been the weak links to the company's processes in recent times," he says. "So, it may try to gather more personal customer feedback across the chain over the next few months to get a detailed picture. Supply issues also have been important. Still, the company's enormous brand equity on a global scale is certainly an advantage. Hopefully, it will emerge stronger after these shortcomings are addressed."

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