Published on: July 2, 2008Starbucks, the onetime darling of the gourmet coffee business that has fallen on tough times because of over-expansion and what the New York Times aptly referred to as “a cavalcade of economic troubles” that have pinched consumer spending and reduced the appeal of $4 lattes, announced yesterday that it plans to close 600 US stores and eliminate as many as 12,000 jobs within the company. The move is a dramatic increase over the 100 stores that Starbucks previously had announced would be closed.
The soon-to-be-closed units represent about 8.5 percent of the company’s global fleet of 7,100 units and five percent of its US stores. It was not that long ago that the company had a stated goal of having a total of 40,000 stores, with half in the U.S. and the rest abroad.
Starbucks said that it would open fewer than 200 new stores in the US during the 2009 fiscal year, down from the 250 originally slated to be opened.
The Seattle Times notes that Starbucks actually will open 350 new stores in the US during the coming fiscal year, but that only 200 of them will be owned and operated by the company; the other 150 will be operated by outside firms in places like bookstores and airports.
The stores that will be closed between August 2008 and April 2009, according to the company, have been identified as being unprofitable. While specific units were not identified by the company in the announcement, they are said to be in virtually every major US market, and 70 percent of them have been opened since the beginning of fiscal 2006 – a clear sign that Starbucks believes that its onetime strategy of domination through ubiquity no longer is viable.
In its coverage, the Wall Street Journal noted that “the closings are bad news for commercial real-estate developers who have relied on the cachet of Starbucks to attract other tenants. Starbucks said the sites earmarked for closure include those that aren't profitable at the moment or aren't expected to provide the company with acceptable returns on its investment.”
CEO Howard Schultz said in a prepared statement that the company’s new focus will be on improving efficiency, the customer experience, and boosting shareholder value. Once the stores have been closed, he said, it is expected that the move will boost earnings by as much as $100 million.
Starbucks shares are down about 40 percent over the past year. While Schultz retook the CEO’s office earlier this year with the intention of reviving the company’s fortunes in the stock market, that has not yet happened…and the new announcement clearly is an effort to demonstrate that the company is serious about its new path.
- KC's View:
- One of the nice things about MNB has been that the audience always has been generous about sending along tips and links about stories that it thinks are worth making the cut each day…but I can’t remember ever having gotten as many emails about a single story as I did yesterday when this news broke.
In part, I think, this was because we’d had a Starbucks story on MNB yesterday that talked about the balancing act the company was attempting between satisfying its core customer and attracting new patrons with coffees that are less, shall we say, robust. (Got a number of emails on that one, which you can read in “Your Views.”) And, I think it is because I’ve been sort of fixated on the Starbucks story…in part because I’m a regular customer, in part because my son has worked at the local store as a barista, and because they were wondering if my local store would close, leaving me bereft and doomed to buying my coffee at Dunkin’ Donuts. (I doubt it…my store has been there a long time and is always busy, so I’m guessing that it is profitable. But thanks for your concern.)
I do think that this probably is a smart move by Starbucks. It is like being willing to cut off a cancerous limb before it metastasizes to the rest of the body. Economic realities have changed since Starbucks management – and I would suggest that this would include Schultz, the entire board, and deposed CEO Jim Donald – envisioned the “domination through ubiquity” strategy that would have had the chain at 40,000 stores worldwide. And it is up to management to deal with changed realities, not to go blindly forward as if nothing has changed.
What we don’t know at this point is whether this will be the definitive move that puts Starbucks on more solid ground, able to move forward more deliberately, productively and profitably, or whether this is a desperation ploy that masks greater ills that we don't know about. I don't think it is the latter; there would seem to be too much residual affection and loyalty to the brand for this to be the case. But I don't know for sure.
If indeed this is the masterstroke that puts the company on firmer ground, I hope that management takes the time to let this play out, and that they don't make other, desperate moves if the stock market doesn’t reward this right away. After all, this is a long-term play, and a company has to be both viable and sustainable for years, not months. So this remains a delicate balancing act.
I remain convinced that Starbucks continues to be a great American brand…and that it is by no means beyond salvation. But I also think it has become a cautionary tale for marketers.
At the end of the day, you can't just dominate by being ubiquitous. You have to dominate by being great and by being relevant.