Starbucks: Third Place Economics

The air carries the faint smell of warmed gouda and ham. A Citizen Cope-Norah Jones-Leon Bridges medley mingles with the bleepy triplets of a TurboChef i1 Sota Microwave Oven in the corner. Customers line from the door to the counter, where employees wear an assortment of beanies, sun hats, and fedoras.

This is the Williamsburg Starbucks, and there is ample seating available.

A large segment of the 20-something community treats Starbucks with an air of condescension. It’s too corporate. Not an “authentic” experience. The coffee is mediocre.

But you know what? When you want to get shit done, Starbucks is the spot. (Also, I like their drip coffee. There. I said it.)

This past weekend, I went to Starbucks. I bought a relatively affordable cup of coffee. I used free wi-fi that didn’t require asking for a password. I sat in a seat that I found quickly and with ease. I was, in short, enjoying what Starbucks calls the “third place” experience. And a thought occurred to me: there are very few players in the retail coffee industry who can afford to play the “third place” game with Starbucks.

The “third place” strategy offers Starbucks locations as an alternative location for customers that isn’t home or the office. Oft cited as a brilliant case study in brand and marketing strategy, it’s too often ignored for what it is from an economic point-of-view: a competitive moat, a barrier to entry for other coffee (or food service) establishments seeking to challenge Starbucks at the local or international level.

Starbuck's advantage sits in its scale and its ability to subsidize the cost of urban flagship stores with lower cost suburban locations. With national store distribution, Starbucks can spend more rent on urban hubs, knowing they’ll make it back on the margins they get from smaller shops.

A local shop or a Blue Bottle doesn’t have this luxury -- if they want to make their urban location a “third place,” the extra cost associated with the larger lease means lower margins. Blue Bottle doesn’t have any Topeka drive-in locations to subsidize their San Francisco Ferry Building shop.

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"Iconic Seattle-based coffeehouse chain", kitty corner from the Cracker Barrel. Topeka, KS.

For these smaller companies without the scale of Starbucks, the only way to make up the lost margins associated with a larger store is through volume. To do this, they employ the “takeaway” strategy. A “takeaway” is that perfect customer who walks in, buys a cup of coffee, and leaves. No wi-fi. No lounging. Just a purchase. Here’s a Quora answer on the takeaway strategy from a guy who has to compete with Starbucks:

“I know all your friends will tell you to get comfortable lounges, free wi-fi, table service and lots of in-house entertainment ... but customers sitting on one cup of coffee for hours enjoying all these benefits, won't pay your rent.

My most financially successful coffee shops had a limited number of not-so-comfortable bench & bar stools to make the coffee shop look lived in and loved, but I concentrated on building the takeaway business.

Takeaway customers pay the same price as the sit-down customer but without any of the occupancy costs and you will serve 10 of them by the time your sit down customer has finished sipping on their first cup of coffee as they enjoy a chat with their friends on Facebook using your free wi-fi service.”

Think about the non-Starbucks coffee shops in your area. Whether big or small, many include minimal seating, usually just stools at a small counter. Some don’t offer wi-fi service on weekends. The goal is high customer turnover. Takeaway customers.

The problem is “takeaway” shops lose a huge segment: any of those customers looking for a place to work or socialize. These are the third placers. They’re the ones who, shunned by the takeaway service of most cafes, flock to Starbucks.

In this regard, the biggest new threat to Starbucks might be shared workspaces like WeWork, those hubs of social activity that draw away the laptop hordes that once rushed the little green mermaid. Of course, with capital looking to tighten up in 2016, there’s a fair chance the laptoppers make a move to reduce costs. If that’s the case, they’ll return to Starbucks. Wi-fi and office space for the easy rent of $2.50 a day. Plus, it comes with a free cup of coffee. And a Wilco soundtrack.