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How Starbucks Uses AI and Innovation to Create Their “Third Place” Competitive Advantage

PublishedNov 12, 2021BySubspace Team
As the COVID pandemic wanes and people start regularly congregating again, Starbucks is doubling down on their “third place” concept and using AI technology to push the idea further.

The Third Place

In his book The Great Good Place, urban sociologist Ray Oldenburg first used the term “third place”. Oldenburg explained that our homes are the “first place” in our lives—a place of retreat and privacy. Work is our “second place”—a place that is structured and regulated.
Oldenburg says that a third place is neutral ground where people can relax and enjoy the company and conversation around them. It could be a garden, pub, cafe, gym, or church. Third places are the heart of a community’s social vitality.
Most needed are those “third places” which lend a public balance to the increased privatization of home life. Third places are nothing more than informal public gathering places. -- Ray Oldenburg

Starbucks and the Third Place Concept

Starbucks began in 1971 as a shop in Seattle’s historic Pike Place Market, selling fresh-roasted coffee beans, tea, and spices. The company borrowed the name of the stalwart first mate of the whaling ship Pequod from the novel Moby Dick. The nautical theme also explains the siren in the Starbucks logo.
Howard Schultz joined Starbucks in 1982 as Director of Retail Operations and Marketing. In 1983 Schultz visited Italy for a trade show, and he discovered Milan’s espresso bars. Schultz was inspired by what he experienced and determined that coffeehouses were the future of Starbucks.
In each shop I visited, I began to see the same people and interactions, and it dawned on me that what these coffee bars had created, aside from the romance and theater of coffee, was a morning ritual and a sense of community. -- Howard Schultz
Shultz convinced Starbucks owners to open a coffeehouse in downtown Seattle as a proof of concept. The coffeehouse was a success, but the owners weren’t interested in changing their business model, so Schultz left Starbucks in 1985 to start his own chain of coffeehouses. Only two years later, Schultz’s new company, Il Giornale, acquired Starbucks’ assets and immediately began opening coffeehouses under the Starbucks name.
Schultz wanted to recreate the coffeehouse experience he had in Italy years before. He wanted Starbucks to be a gathering place for the community, where people would be comfortable hanging out and chatting with their neighbors. When Ray Oldenburg’s book came out, Schultz had a name for the experience—the third place.

Starbucks Embraces Technology

Schultz and his team at Starbucks recognized the potential for mobile computing early. In 2002, Starbucks introduced WiFi in its stores. Starbucks instantly became the largest WiFi supplier in the US.
Starbucks continued its investment in technology. In 2007, Howard Schultz appeared on stage with Steve Jobs at the Apple Developers Conference to announce a partnership between Starbucks and Apple to enable Starbucks customers to buy the songs playing in Starbucks stores. The Starbucks Card mobile app for iPhone debuted in 2009, and mobile payment started in 2011.
Deep Brew
Kevin Johnson joined Starbucks in 2015 as president and COO. Just two years later, he succeeded Howard Schultz as CEO. Johnson’s role in Starbucks’ technology journey is important. Before coming to Starbucks, Johnson had a long technology career at IBM and Microsoft. Naturally, he is interested in Starbucks technology. One of the things Johnson initiated at the company is Deep Brew, the proprietary artificial intelligence capability powering changes across the operation. Deep Brew learns systems and behaviors and then uses that insight to find the most efficient action and predict the future.
It would seem that introducing a powerful AI across the operation would run counter to the mission to create a “third place.” However, Starbucks is using a dual-pronged strategy. One is a laser focus on creating unique and relevant experiences that enhance human connections. The other is using technology to enable connections, not replace them.
Deep Brew will increasingly power our personalization engine, optimize store labor allocations, and drive inventory management in our stores. We plan to leverage Deep Brew in ways that free up our partners so that they can spend more time connecting with customers. Deep Brew is a key differentiator for the future. And as we continue our quest to build world-class AI capabilities, to better support partners. -- Kevin Johnson, Starbucks CEO
The goal is to have Deep Brew do many of the routine tasks—such as inventory and scheduling—to free up employees to spend more time with customers.
One of the challenges of Starbucks is how complex an order can be, both for the customer and the employee. “Yeah, I’d like a venti quad, non-fat, one-pump, no whip, mocha at 120 degrees.”
Knowing what to order can be daunting for a new customer, and knowing what to charge can be a challenge for the employee. One of the applications of Deep Brew is a smart menu. As the customer orders, voice recognition listens and adjusts the menu as the customer speaks, showing options available and calculating the cost.
In another use of Deep Brew, Starbucks has installed Mastrena coffee machines in its stores. In addition to being easier and faster to use, the machines connect to the Internet of Things (IoT), transmitting telemetry to the home office, where Deep Brew analyzes the data. The analysis can determine when a machine needs regular maintenance and even predict future breakdowns. Reports sent back to the stores save time and money that would be lost should an unexpected outage occur.
Deep Brew is a partner working beside the employees or in the background to help create the third space.
The Tryer Center
The Tryer Center is a 20,000 square foot space in the Starbucks headquarters. It is a functioning coffeehouse that would be familiar to any Starbucks customer—but this store is built for change.
Employees can easily install or remove machines. It includes a 3D printer enabling the instant production of new tools. Even the walls move to create new spaces. Starbucks tests new ideas at the Tryer Center.
When Schultz wanted to test the coffeehouse concept in 1984, it took tens of thousands of dollars and months to build a store. If it hadn’t worked, the company would have lost that money and time. At the Tryer Center, the company can implement an idea within hours. Johnson wants to move a good idea from creation to test and into stores within 100 days, and Tryer makes that possible.
For me, the Tryer Center is sort of the physical manifestation of a new way of working at Starbucks. Scale and complexity can be the enemy of speed. We realized ... we had to change the way we work in order to be more agile. -- Kevin Johnson, Starbucks CEO
Most people working in the Tryer Center split their time between the center and working in stores. But, even Deep Brew has a place there, modeling processes and analyzing test results. The combination of hands-on employees and using AI helps ensure that the innovations coming out of the center at such a rapid pace enhances the third place and human connection instead of undermining it.

What We Can Learn from Starbucks

The third place is a crucial competitive advantage for Starbucks, but other big players are also working to leverage the third space. Although it is no longer in operation, The Lounge by AT&T was a similar concept. People could work or relax and it included free WiFi and a coffee bar. Customers could shop for AT&T and order from a self-service kiosk.
Office Depot offered a space called BizBox targeted at small business owners. People could drop into Office Depot and talk with consultants and other business owners in a casual atmosphere.
JOANN’s Fabric and Craft Stores encourages crafters to come into their stores and sit with other crafters, get expert advice from staffers, and share tips with other crafters. These companies are learning from Starbucks’ example and success but making the experience their own.
Here are a few tips to guide other specialty restaurants and retailers as they work to combine technology and third place.
Keep Your Eye on Company Values
Don’t ever forget why your company exists. It can be easy to let technology and shiny toys distract you from your mission. The third place is about making your customers feel comfortable in a casual space. Never lose sight of that. Starbucks is on the cutting edge of AI technology, but they don’t let that distract from their mission to inspire and nurture the human spirit.
Starbucks Values With our partners, our coffee and our customers at our core, we live these values: Creating a culture of warmth and belonging, where everyone is welcome. Acting with courage, challenging the status quo and finding new ways to grow our company and each other. Being present, connecting with transparency, dignity and respect. Delivering our very best in all we do, holding ourselves accountable for results. We are performance driven, through the lens of humanity.
Listen to Customers and Employees
Starbucks pays close attention to its customers and employees. The people on the ground know what the pain points are better than anyone. They also often know best how to solve particular problems. No matter how hard a company might try, headquarters staff always remains somewhat disconnected from what’s going on in the real world. Data collection and AI analysis can provide powerful insight into the needs and wants of people. Trying to blend AI with customer service is at the heart of why Starbucks invites front-line workers into the Tryer Center.
Always Innovate
Never standstill. Even if you have your processes and policies dialed in, the world is changing around you. What works today probably won’t work as well tomorrow. Starbucks is constantly working on its product mix, procedures, and improved convenience.
Use Technology to Speed You Up, Not Slow You Down
Johnson’s goal of 100 days from idea to implementation is something that everyone should be trying to meet or improve. It is all too common for great ideas to die in endless bureaucratic meetings and reviews in the corporate world. With today’s world changing so fast, the greater risk is often implementing an idea too late rather than too early.

Network Speed is Key to Customer Interactions

A common problem holding back the implementation of real-time interactions between technology and people, like Starbucks’ interactive menu, is the public internet’s limitations. The internet was built for reliability, not speed. One or two seconds can seem long when a customer is at a counter or in a drive-thru waiting for a response. In natural conversation, about 250ms is the gap expected between responses. Anything longer feels awkward.
Internet service providers have attempted to help the problem by increasing bandwidth. However, the amount of data you can push through a wire at one time is not as important to real-time interactions as how fast the data travels.

Subspace is the Best Network for Real-Time Applications

When your company develops AI and real-time applications to improve your customer’s experience, you can’t afford to let the public internet drag you down. Your application needs to be on Subspace—the world’s fastest, secure network designed for real-time applications.
Subspace provides real-time application publishers with a platform to operate, deploy, and scale their software. Our groundbreaking real-time network infrastructure and services platform provide the lowest latency, most reliable real-time, and fully controllable network possible for the world’s biggest applications.
Subspace delivers the experience users demand today—across the world and across all titles and platforms.

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