Social spaces — and face-to-face connections — are crucial to economic development.
Sometimes, a cup of coffee is more than just a cup of coffee. In the right neighborhood, it can represent the spark that stimulates economic development.
Consider some history: In the 1980s, major coffee shop chains in the U.S. focused on maximizing revenue by rushing customers through their locations, mimicking fast-food efficiency. The more quickly coffee drinkers could walk in, pay and rush out, the more space for other drinkers to rush in and do the same. But Howard Schultz, founder of Starbucks, drew inspiration from the Italian cafés he had visited during a business trip to Milan. He envisioned a welcoming environment where people lingered, connected and built community — the kind of environment that sociologist Ray Oldenburg called a “third place,” a space which, after home (first place) and work (second), provided a respite where people could recharge, gather and socialize.
The model succeeded, and a practice common in other countries and in small U.S. coffee shops eventually went mainstream. Starbucks expanded rapidly, and coffee drinkers across the country embraced the ritual of staying, reading, working on laptops and scheduling meetings.
When Starbucks arrived in a neighborhood, residents and others took notice, as the shop became a signal of changes to come. Realtors coined the term “the Starbucks effect” to describe how neighborhoods would gentrify after a Starbucks shows up, attracting affluent residents who would willingly spend $5 (or, these days, a good deal more than that) on a latte.
But in research with Columbia Ph.D. student Jinkyong Choi, we recently discovered that this “third place” model yielded greater benefits than even Schultz anticipated — benefits that can be quantified.
What defines a neighborhood?
Neighborhoods are not merely geographic locations. They are social and organizational ecosystems with residents, visitors and workers whose constellation of activities may alternatively nurture, stifle or have no impact on economic growth. One important source of economic growth is entrepreneurship — the decision made by people with initiative to start a new economic venture such as a local retail shop, a skilled service like tax preparation or dentistry, an establishment doing manufacturing and repair, or even, occasionally, a high-tech startup.
Startups account for a disproportionate share of job creation in the United States and places that have more startups experience higher economic growth. Entrepreneurs hire largely through their own personal networks, making their hiring more local to the neighborhood. They are also more likely to identify local problems and to benefit from local connections. In addition, the profit generated can be assumed to remain in the neighborhood given that, when a large corporation moves in, part of its goal is to generate profit that moves back to headquarters, whereas this is not the case for entrepreneurs.
But some neighborhoods see far more entrepreneurship than others. Why? Entrepreneurs, as everyone knows, need networks — to gain resources, to borrow money, to brainstorm ideas, to develop strategies. And networks are formed, and maintained, in third places. Every entrepreneurial phase — from ideation to team formation, funding acquisition and customer attraction — thrives on robust social connections.
Our research examined whether introducing third places — specifically, neighborhood cafés — into neighborhoods boosts entrepreneurship through these network effects.
We investigated one of the most significant transformations in U.S. neighborhood social spaces in recent decades: Starbucks’ large-scale expansion of the third place model. We asked what happens to neighborhoods after a Starbucks arrives, focusing on neighborhoods that, before the company’s arrival, had no coffee shops. Our question was whether the arrival stimulated entrepreneurship.
Our inquiry faced a problem, however. Starbucks spends a lot of time, energy and resources deciding where to locate. Even if we were to see a rise in entrepreneurship following Starbucks’ arrival, we would not have known whether the cause was Starbucks’ impact or other factors we did not observe that convinced Starbucks to select the neighborhood in the first place. So we designed a quasi-experiment, taking advantage of the fact that sometimes, Starbucks identifies a neighborhood and tries to enter but fails to do so — because of community opposition or other idiosyncratic reasons. Therefore, rather than studying all neighborhoods without coffee shops, we compared those where Starbucks opened to those where Starbucks had planned to open but failed to do so.
We found that neighborhoods gaining a Starbucks experienced 5% to 18% increases in new firm registrations annually, for each of the subsequent seven years.
What Magic’s got to do with it
Another interesting initiative helped us answer our question: Starbucks’ partnership with basketball legend Earvin “Magic” Johnson to establish cafés in underserved urban neighborhoods. In 1987, Johnson started a company focused on urban redevelopment. One of the things he did was convince Schultz to open shops in the kinds of neighborhoods that Starbucks, to that point, had typically avoided. Starbucks tended to open shops in highly affluent parts of cities and suburbs, not high-poverty neighborhoods. Johnson convinced Schultz to broaden its reach.
When the first coffee shops from the Johnson-Starbucks partnership debuted in Ladera Heights, California, in 1999, Johnson expressed its community role: “The store accomplishes exactly what we hoped — providing not only the best coffee, but also the best hangout spot in town.” The location evolved into a neighborhood institution where people worked on their computers, played chess, networked with potential clients and built connections.
We compared neighborhoods where coffee shops from the Johnson-Starbucks partnership opened to demographically similar neighborhoods where they did not. We found that neighborhoods that open a Starbucks increase the number of new registered businesses by almost 30% per year. We interpret this as evidence that those areas most desperately needing social spaces reaped larger entrepreneurial benefits from these third places.
Networks, not just signals
These and other analyses convinced us that something happened to neighborhoods after Starbucks arrived that helped entrepreneurship flourish. But still, we had work to do to isolate what that effect might be. The coffee shops could be benefiting neighborhoods through several different mechanisms. The presence of Starbucks might attract other businesses or indicate rising real estate values, both of which might stimulate entrepreneurship. In addition, features such as Wi-Fi might help entrepreneurs at the coffee shop get on the internet and start their business. These features have nothing to do with the networks people might form in the cafés, so if they were the driving forces of growth, they’d challenge our hypothesis.
So next, we focused on coffee shops themselves. Unlike Starbucks, Dunkin’ Brands, the company behind Dunkin’ Donuts, did not invest in warmly lit, comfortable spaces for people to spend hours at a time. Instead, they stuck to the quick turnover model. If networks are playing a role, then it would follow that the arrival of a Dunkin’ coffee shop should have no impact on entrepreneurship. That is exactly what we found.
In contrast, we examined another company that embraces the third-place philosophy like Starbucks, a smaller coffee shop chain called Caribou Coffee. We found an effect comparable in size to that of Starbucks.
In addition, Starbucks locations that encourage more people to socialize — those with heavier foot traffic or larger floor space — had stronger impacts on entrepreneurship than smaller ones. And the entrepreneurial growth spanned beyond the retail, food or real estate sectors, suggesting effects extending beyond the local retail economy. Finally, we saw our positive estimate remained of a similar order of magnitude before 2010, when Starbucks first introduced unlimited free Wi-Fi; before 2008, when Starbucks first introduced two hours of Wi-Fi for Starbucks Rewards members; and before 2002, when Starbucks first introduced paid Wi-Fi.
What it all adds up to
Social spaces are crucial to revitalizing neighborhoods. They contribute to the local community, to quality of life and to civic engagement. Our research suggests that, provided they are truly social, they also contribute to economic development. And while we haven’t researched this part yet, it stands to reason that the significance of coffee shops and similar places might increase as remote work increases and traditional office-based socialization declines.
Starbucks has been criticized as an agent of gentrification, and our research neither engages nor disputes that conclusion. Instead, our research adds elements to understand what is clearly a more complicated reality. In neighborhoods severely lacking social spaces, a Starbucks, or any other coffee shop committed to a “third place” model, strengthens the local economy through enhanced social networks.
Ironically, as Starbucks has struggled financially over the past few years, some have attributed its challenges to abandoning the “third place” model that originally powered its success. Many locations now prioritize online ordering and quick service over functioning as community-gathering spaces. Whether the company can reconnect with its neighborhood-centric roots remains uncertain.
In a world increasingly dominated by digital interactions, physical third places such as coffee shops continue to matter mightily. It’s face-to-face connections that ignite innovation, entrepreneurship and community vitality. When we invest in these spaces — through public initiatives or private enterprise — we strengthen the social infrastructure that enables neighborhoods to flourish.