How Magic Johnson's Starbucks created new neighborhood businesses

Summary

Summary of "How Magic Johnson's Starbucks Created New Neighborhood Businesses" The Indicator from Planet Money, NPR
Release Date: November 20, 2024
Hosts: Weylon Wong and Darien Woods

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Introduction

In the episode titled "How Magic Johnson's Starbucks Created New Neighborhood Businesses," hosts Weylon Wong and Darien Woods explore the impactful partnership between basketball legend Magic Johnson and Starbucks. This collaboration not only revitalized black and Latino neighborhoods but also spurred entrepreneurial growth within these communities. The discussion delves into the socio-economic dynamics of the early 1990s Los Angeles riots, Magic Johnson's strategic investments, and the broader implications for urban entrepreneurship.

Background: The Los Angeles Riots and Community Destruction

The episode sets the stage with a historical overview of the 1991 Los Angeles riots, a period marked by intense civil unrest following the acquittal of police officers involved in the brutal beating of African American man, Rodney King. Darien Woods recounts how these events devastated local businesses and left communities grappling with economic hardships:

Magic Johnson (01:44): "We tore down our own community. Latinos, African Americans, they tore down and burned down our own businesses."

These riots resulted in over $2 billion in damages to black and Latino neighborhoods, obliterating storefronts and jobs alike. Confronted with this crisis, Magic Johnson recognized the urgent need to foster economic revival within these communities.

Magic Johnson's Entrepreneurial Vision

Magic Johnson's response to the devastation was multifaceted. Initially, he focused on building movie theaters in black and Latino neighborhoods during the 1990s, aiming to create vibrant community hubs and generate employment. However, his entrepreneurial vision extended beyond entertainment.

While in New York, Magic Johnson encountered Starbucks during its rapid expansion phase. Intrigued by the bustling lines and the vibrant atmosphere of the coffee shop, he saw an opportunity to introduce Starbucks to underserved urban neighborhoods. This pivotal moment led to a strategic partnership that would have lasting effects on urban entrepreneurship.

Darien Woods (03:05): "I said, man, I gotta try this Starbucks. Everybody waiting in line."

Forging the Magic Johnson-Starbucks Partnership

Magic Johnson approached Starbucks CEO Howard Schultz with a compelling proposal: a 50-50 partnership to establish Starbucks locations in predominantly black and Latino neighborhoods. Despite initial skepticism from Schultz—who viewed these areas as financially risky—Magic's persistence and deep understanding of the communities eventually won him over.

Magic Johnson (03:24): "Magic, we don't have franchisees. I said, I'm not here to become one. You put up half the money, I put up half the money. Let's build these Starbucks, and I tell you, it's gonna be a home run."

The first Magic Johnson Starbucks opened in Ladera Heights, Los Angeles, in 1998, greeted by enthusiastic community support:

Magic Johnson (04:02): "The line was down the block. Man, it was incredible."

Following the success in Ladera Heights, Harlem in New York became the second location, expanding the initiative to include 125 Starbucks across the country.

Impact on Local Entrepreneurship

The core of the episode examines the ripple effects of introducing Starbucks to these neighborhoods. Professor Jorge Guzman of Columbia University conducted research to determine whether the presence of Starbucks catalyzed new business formation. His findings reveal a notable increase in entrepreneurship:

NPR Host (05:02): "For entrepreneurship to work, you need connections. We realize there's a lot less understanding how to form those connections."

On average, neighborhoods with a new Starbucks saw a 6% increase in new businesses annually. More impressively, the Magic Johnson Starbucks locations experienced a staggering 29% increase in entrepreneurship, underscoring the profound influence of these cafes.

Weylon Wong (06:06): "Jorge says that almost 30% is a lot of growth. But given low numbers of businesses formed in these neighborhoods to begin with, it's not so huge that it's outside the realm of plausibility."

Addressing Concerns of Gentrification

A significant concern addressed in the episode is the potential role of Starbucks in gentrification—the process where influxes of wealthier residents transform low-income neighborhoods, often marginalizing existing communities. Critics argue that Starbucks may signal these areas as desirable, attracting outsiders and altering the local demographic.

Professor Guzman approaches this issue by analyzing the types of new businesses that emerge post-Starbucks introduction. Contrary to gentrification patterns, the businesses spurred are diverse, ranging from chiropractors and hair salons to plumbing services, rather than focusing solely on upscale retail or real estate. This suggests that Starbucks acts as a catalyst for broad-based entrepreneurial activity rather than merely attracting gentrifiers.

Darien Woods (06:17): "There's a bunch of reasons to believe that that's the case, but that's kind of the type of work we are also hoping to do in the future."

Evolution of Starbucks' Community Role

The episode also highlights the evolving role of Starbucks as a "third place"—a social environment separate from home and work where community interactions thrive. However, recent corporate strategies have shifted towards pickup-only models, potentially diminishing the cafes' role as community hubs.

Darien Woods shares an on-the-ground observation from the second Magic Johnson Starbucks in Harlem, where seating has been removed:

Darien Woods (07:20): "Waylon. I wanted to find out whether I could see third place synergies happening in the Harlem Cafe... Now it's just a place to pick up coffee and go."

In response to declining earnings and the resultant shift away from community-centric spaces, the new Starbucks CEO, Brian Nicol, has pledged to reestablish Starbucks as community coffeehouses, aiming to create inviting spaces that encourage lingering and socializing.

Darien Woods (08:26): "Brian Nicol... committed to reestablishing Starbucks as the community coffeehouse and to ensure the cafes will be inviting places to linger."

Conclusion: Preserving Third Spaces Amid Change

The episode concludes with a reflection on the importance of maintaining third spaces for fostering community and entrepreneurial growth. Despite challenges, there is a resolute commitment to preserving these vital social environments:

Darien Woods (08:48): "We will preserve our third spaces in the face of adversity. We will fight them in the trash cans. We will fight them in the alleyways."

The partnership between Magic Johnson and Starbucks exemplifies how strategic investments in community-centric businesses can drive economic revitalization and support local entrepreneurship. As Starbucks strives to balance corporate strategy with community needs, the enduring legacy of these early initiatives continues to influence urban economic landscapes.

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Notable Quotes and Attributions

• Magic Johnson (01:44): "We tore down our own community..."
• Darien Woods (03:05): "I gotta try this Starbucks..."
• Magic Johnson (03:24): "Magic, we don't have franchisees..."
• Magic Johnson (04:02): "The line was down the block..."
• NPR Host (05:02): "For entrepreneurship to work..."
• Weylon Wong (06:06): "Jorge says that almost 30%..."
• Darien Woods (08:26): "Brian Nicol... committed to reestablishing Starbucks..."
• Darien Woods (08:48): "We will preserve our third spaces..."

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Production Credits

• Produced by: Angel Carreras
• Engineering by: Valentina Rodriguez Sanchez
• Fact-Checked by: Sierra Juarez
• Edited by: Kate Concannon
• Production Team: The Indicator is a production of NPR.

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This comprehensive exploration underscores the symbiotic relationship between community-focused businesses and local entrepreneurship. By weaving together historical context, empirical research, and on-the-ground observations, the episode provides valuable insights into how strategic partnerships can transform communities and foster economic resilience.

Transcript

[NPR Host]

Npr.

[Darien Woods]

To start a business, you need money, you need skills, you need to know suppliers and where to find customers. And what can also be very helpful is a third space.

[Weylon Wong]

Yeah, a third space is a place that isn't the home and it's not the work site. It's somewhere where the main activity is conversation. So that could be a bar, a park, or a coffee shop. There's been a lot of research showing how these spaces have brought communities together or even catalyzed revolutions. New research is showing that coffee shops could be key to sparking new businesses too. This is the indicator from Planet Money. I'm Weylon Wong.

[Darien Woods]

And I'm Darien Woods. Today on the show Fueling Entrepreneurship One Coffee at a Time. We're gonna go back a few decades for the story of how Magic Johnson partnered to build Starbucks cafes in black and Latino neighborhoods. And how new research has shed light on how Magic's plan changed entrepreneurship in those communities. In 1991, basketball star Magic Johnson announced his retirement from the LA Lakers. He had tested positive for HIV. Months later, Los Angeles was engulfed in riots. An amateur videographer had captured the brutal beating by police of African American man Ro. It was one of the first videos of this kind to go viral. And when police officers involved were acquitted in a much publicized trial, Los Angeles erupted.

[Magic Johnson]

We tore down our own community. Latinos, African Americans, they tore down and burned down our own businesses.

[Weylon Wong]

This is from an interview Magic Johnson gave to NPR in 2022. In today's dollars, the riots cost these communities more than $2 billion.

[Magic Johnson]

So now we had a problem because now all these storefronts were gone, but also all these jobs were gone. And so I said, I gotta do something about that.

[Weylon Wong]

And he did. Starting in the 1990s, Magic Johnson built a line of movie theaters around the country in black and Latino neighborhoods. The idea was that not only would these movie theaters be vibrant places to visit, but that the construction and operations of the businesses would help bring jobs to the communities.

[Darien Woods]

During this period, Magic was on the east coast in New York, and he noticed a long line of people going somewhere. Starbucks had been on this tear, expanding across the country. And this was Magic's first introduction to the Seattle Coffee Shop Company.

[Magic Johnson]

I said, man, I gotta try this Starbucks. Everybody waiting in line.

[Darien Woods]

Magic got his security guard to grab him some peach tea.

[Magic Johnson]

Man, I tasted that tea. I said, oh, that's it. I said, this is the next thing I'm taking to the hood.

[Weylon Wong]

That must have been some tea.

[Darien Woods]

It must have been.

[Weylon Wong]

He didn't even try the coffee. So Magic thought he needed to go to the Seattle headquarters. He called Starbucks CEO Howard Schultz and met with him. There, Magic made his pitch. Just as he'd been doing with his movie theaters. He could help open Starbucks in urban neighborhoods. To use his parlance, he said, look.

[Magic Johnson]

Magic, we don't have franchisees. I said, I'm not here to become one. You put up half the money, I put up half the money. Let's build these Starbucks, and I tell you, it's gonna be a home run.

[Darien Woods]

Howard Schultz wasn't fully convinced. The company had mostly viewed minority neighbourhoods as risky financial bets. But Magic persisted. He invited Howard to one of his movie theaters. And sitting there, Howard started to realize that Magic Johnson really knew these majority black and Latino communities well. So Starbucks and Magic Johnson's company partnered 5050 on a new series of Starbucks.

[Magic Johnson]

And now the hard part comes, which is me proving to everybody that this thing could work in urban America.

[Weylon Wong]

In 1998, the first magic Johnson Starbucks was opened in Ladera Heights in la.

[Magic Johnson]

The line was down the block. Man, it was incredible. And sure enough, Howard looked at me and said, you called it. You said it was going to be successful.

[Darien Woods]

Harlem in New York was the second cafe. Eventually, Magic Johnson would invest in 125 Starbucks across the country.

[Weylon Wong]

Okay, so he managed to get Starbucks to Ledera Heights in Harlem. But would a few cafes really have a lasting effect on the local economies? Could they help grow businesses or even entrepreneurship in the neighborhoods?

[Darien Woods]

Jorge Guzman is a business professor at Columbia University. He and two other academics wanted to answer this question.

[NPR Host]

For entrepreneurship to work, you need connections. We realize there's a lot less understanding how to form those connections.

[Weylon Wong]

To answer this question, he investigated how many new businesses were formed after the introduction of a Starbucks to a neighborhood that previously didn't have any coffee shops.

[NPR Host]

Entrepreneurship goes up. The average is about 6% increase.

[Weylon Wong]

So here's one way to think about that 6% increase. A neighborhood might normally see 35 new companies a year. The introduction of that new Starbucks, it added two extra new businesses each year.

[Darien Woods]

Now, you might argue that Starbucks are just picking neighbourhoods that seem to be on the rise anyway. But Jorge gets around this. He compares the neighbourhoods that welcomed a new Starbucks with communities that blocked them.

[NPR Host]

From the Starbucks side, they must have been equally appealing if they were interested in entering both. And that's one kind of much more precise comparison, if you see what I mean.

[Weylon Wong]

Another check zooming in on just the Starbucks that Magic Johnson brought in. Remember, those were neighborhoods that Starbucks initially didn't even want to enter.

[NPR Host]

These Magic Johnson cafes have a much larger effect. We actually see a 29% increase in total entrepreneurship.

[Weylon Wong]

Jorge says that almost 30% is a lot of growth. But given low numbers of businesses formed in these neighborhoods to begin with, it's not so huge that it's outside the realm of plausibility.

[Darien Woods]

Now a big elephant in the room is gentrification. Starbucks, to some people, is the poster child of a gentrifying neighborhood. When richer, often whiter residents come into a low income income neighborhood and it's changed forever, could Starbucks be signaling gentrifiers? Come here.

[Weylon Wong]

Jorge thinks about this issue in two ways. First, if the neighborhood was becoming a hot new destination, he would expect growth to be especially hot in retail or real estate companies. He doesn't see this when Starbucks enters. We're talking anything from chiropractors to hair salons to plumbing businesses, all kinds.

[Darien Woods]

And as for whether these new businesses are formed by existing residents or by newcomers who are attracted by the Starbucks, that's something Jorge doesn't know.

[NPR Host]

It's a limitation of our study because, well, we don't know if the people that are starting the businesses, they were the ones that have been resident there before. We think they are. There's a bunch of reasons to believe that that's the case, but that's kind of the type of work we are also hoping to do in the future.

[Darien Woods]

Waylon. I wanted to find out whether I could see third place synergies happening in the Harlem Cafe, you know, the second ever Magic Johnson Starbucks. And to my surprise, the seats have been taken away, the tables have been taken away. Now it's just a place to pick up coffee and go. I chatted with one of the baristas, Ron Dixon, as he was making coffee.

[Magic Johnson]

We had a redesign a couple years ago, you know, kind of keep it a little more urban for the busy.

[Darien Woods]

Area that we're in.

[Weylon Wong]

You know, a lot of times a redesign a couple of years ago, like a lot of Starbucks corporate strategy in recent years has emphasized pickup only. It's convenient. But if Jorge's research suggests anything that could be at the expense of neighborhood entrepreneurship.

[Darien Woods]

This summer, Starbucks CEO Lakshman Narasimhan was ousted following disappointing earnings. The new CEO, Brian Nicol, wrote a letter to staff. In it, he committed to reestablishing Starbucks as the community coffeehouse and to ensure the cafes will be inviting places to linger.

[Weylon Wong]

Oh, do you think he read Jorge's paper?

[Darien Woods]

I hope so. Especially if they want to fuel entrepreneurship for the neighborhoods.

[Weylon Wong]

Do you think he read it standing up while picking up his coffee at a to go only Starbucks and was like, oh, we need a place to sit down.

[Darien Woods]

You know what? Some people were chatting over the rubbish bins. They were doing the best of what they could.

[Weylon Wong]

Third place of our dreams. A trash can.

[Darien Woods]

Yeah, the third place. Look, I mean, it's convenient for when you finish your coffee, but it's not quite the same. We will preserve our third spaces in the face of adversity. We will fight them in the trash cans. We will fight them in the alleyways.

[Weylon Wong]

This episode was produced by Angel Carreras with engineering by Valentina Rodriguez Sanchez. It was fact checked by Sierra Juarez. Kate Concannon edits the show and the indicator is a production of npr.