The news: Starbucks said it would lay off about 900 workers and close 1% of its US and Canada stores—including its flagship Seattle Roastery—as part of a $1 billion restructuring plan.

This is the second round of layoffs since CEO Brian Niccol took charge, reflecting the deep-seated challenges Starbucks is facing as it grapples with soft demand and fierce competition.

The big picture: Progress at Starbucks has been slow-going. Niccol’s attempts to restore the chain’s role as the community coffeehouse have had limited sway with customers. Same-store sales have fallen for six straight quarters, although the CEO remains emphatic that the turnaround is proceeding ahead of schedule.

However, the latest layoffs and store closures belie that optimism. While the company’s North America business performed better than expected in the previous quarter—the sales decline was smaller than analysts forecast—it is still struggling to engage consumers.

• Starbucks’ premium pricing is a liability at a time when consumers are hyper-focused on value. And unlike many operators in the food and beverage space, Starbucks is actively reducing discounts, putting it further out of reach for cost-conscious customers.
• Compared with competitors like Dutch Bros or Chinese import Luckin Coffee, Starbucks’ menu innovation is lacking. The company is leaning into established trends—like protein and matcha—rather than introducing unique products that could draw customers.

A morale problem: It’s not just customers that Starbucks is struggling to win over: Its efforts to improve the customer experience are creating friction with store workers.

• The imposition of a more restrictive dress code triggered a walkout by thousands of baristas, and caused some employees to question why Starbucks appeared more focused on cosmetic issues like store uniforms than on operational challenges like staffing problems.
• The requirement that baristas write a message on each customer’s coffee cup is also fueling angst. Not only does it add to employees’ already-stretched workloads, it also heightens a creeping sense of corporate surveillance. Baristas can be written up—or even terminated—should they fail to write notes, while the guidelines around acceptable messages have become stricter.

Our take: Turning Starbucks around was always going to take time, due to its sheer size as well as the magnitude of its problems. Niccol’s strategy banks on restoring the chain’s reputation for stellar customer service—an advantage that could help it stand out in a space increasingly oriented toward convenience. But the company remains vulnerable to upstarts like 7 Brew and Dutch Bros that are more tuned into beverage trends.

• Whether the company can deliver will depend on improving worker morale, given that baristas are the front line of customer contact with the brand.
• Starbucks will also have to keep up with the menu innovation of its rivals—and find hits akin to the Pumpkin Spice Latte to renew consumer interest.