How Magic Johnson's Starbucks created new neighborhood businesses

0:01NPR

0:11To 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. 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 Waylon Wong.

0:50And I'm Darian Woods. Today on the show, fueling entrepreneurship one coffee at a time. We're going to 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.

1:15This message comes from NPR sponsor Zendesk. Introducing the next generation of AI agents built to deliver resolutions for everyone. With an easy setup that can be completed in minutes, not months, Zendesk AI agents resolve 30 % of interactions instantly, quickly giving your customers what they need. Loved by over 10 ,000 companies, Zendesk AI makes service teams more efficient, businesses run better, and your customers happier. That's the Zendesk AI effect. Find out more at Zendesk.com. In 1991, basketball star Magic Johnson announced his retirement from the LA Lakers. He had tested positive for HIV.

1:54Months later, Los Angeles was engulfed in riots. An amateur videographer had captured the brutal beating by police of African-American man Rodney King. 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. We tore down our own community. Latinos, African Americans, they tore down and burned down our own businesses. 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. So now we had a problem because now all these storefronts were gone.

2:38But also, all these jobs were gone. And so I said, I got to do something about that. 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. 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.

3:17I said, man, I gotta try this Starbucks. Everybody waiting in line. Magic got a security guard to grab him some peach tea. Man, I tasted that tea. I said, oh, that's it. I said, this is the next thing I'm taking to the hood. That must have been some tea. It must have been. 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, we don't have franchisees.

3:57I 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 going to be a home run. Howard Schultz wasn't fully convinced. The company had mostly viewed minority neighborhoods 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 50-50 on a new series of Starbucks. And now the hard part comes, which is me proving to everybody that this thing could work in urban America.

4:40In 1998, the first Magic Johnson Starbucks was open in Ladera Heights in L.A. 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. Harlem in New York was the second cafe. Eventually, Magic Johnson would invest in 125 Starbucks across the country. OK, so he managed to get Starbucks to Ladera 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? Jorge Guzman is a business professor at Columbia University.

5:21He and two other academics wanted to answer this question. For entrepreneurship to work, you need connections. We realized there's a lot less understanding how to form those connections. 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. Entrepreneurship goes up. The average is about 6 % increase. 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.

5:58Now, you might argue that Starbucks are just picking neighborhoods that seem to be on the rise anyway. But Jorge gets around this. He compares the neighborhoods that welcomed a new Starbucks with communities that blocked them. 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. 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. These Magic Johnson cafes have a much larger effect.

6:31We actually see a 29 % increase in total entrepreneurship. 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. 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 neighborhood and it's changed forever. Could Starbucks be signaling, Gentrifiers, come here! 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.

7:18He doesn't see this when Starbucks enters. We're talking anything from chiropractors to hair salons to plumbing businesses. All kinds. 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. It's a limitation of our study because 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.

7:51Weiland, I wanted to find out whether I could see third-place synergies happening in the Haaland 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. We had a redesign a couple of years ago, you know, kind of keep it a little more urban for the busy area that we're in. 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.

8:29It's convenient, but if Jorge's research suggests anything, that could be at the expense of neighborhood entrepreneurship. This summer, Starbucks CEO Lakshmin Narasimhan was ousted following disappointing earnings. The new CEO, Brian Nickel, wrote a letter to staff. In it, he committed to re-establishing Starbucks as the community coffeehouse and to ensure the cafes will be inviting places to linger. Oh, do you think he read Jorge's paper? I hope so, especially if they want to fuel entrepreneurship for the neighborhoods. 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?

9:09You know what? Some people were chatting over the rubbish bins. Wow, just the third place of our dreams, a trash can. 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

9:37this episode was produced by Angel Carreras with engineering by Valentina Rodriguez-Sanchez it was fact checked by Sierra Juarez Kate Kincanon edits the show and the Indicators are production of NPR