Starbucks to Close 600 Stores - Will It Be Enough?

Posted by: Burth Helm on July 1, 2008

Is this the end of the old Starbucks-on-every-corner joke? It should be. It’s time to stop thinking about Starbucks as a hot growth company and more like a (sorry, Howard) McDonald’s-like blue chip that posts strong numbers, suffers through hard times, and, yes, fires folks sometimes.

In an aggressive move to boost profitability, Starbucks just announced it plans to close some 600 under-performing stores in the U.S. over the course of its fiscal 2008 and 2009. We knew some store closures were coming, though not this many - CEO Howard Schultz originally said only 100. Now, some press reports estimate it could mean the elimination of as many as 12,000 jobs.

On Wall Street, after a quick jump in after-hours trading right yesterday, the stock (as of 1pm) is trading about 8 cents, or 0.5% higher than yesterday’s close. Over on Starbucksgossip.com, a site popular with baristas, there’s a healthy debate over whether it’s a good idea.

Let’s do some quick analysis. In a conference call right after the announcement, CFO Peter Bocian wouldn’t give specifics about what kinds of stores are closing (rural? drive-thrus?) or how it will affect earnings. But he did say he expected profits would improve, and - pay attention to this part — that much of the revenue will be recovered by nearby Starbucks locations.

In other words, cannibalization and market saturation have been very real problems for Starbucks. 70% of the closing stores will be ones opened since 2006. I think we can infer that sales at each new store have been softer than the last one than many parts of the country.

Everyone used to marvel at Starbucks’ ability to boost each store’s sales every year while it added new stores across the street. And internationally, they’ll still grow like this. But here in the U.S., Starbucks ain’t a fad or a craze anymore — on Main Street or on Wall Street. It’s a big, ubiquitous, fast-coffee chain, and no new drink or new espresso machine will budge a ship this big in the near future.

Reader Comments

krisss

July 1, 2008 6:42 PM

This should not be too distressing to those that did not loose employment. Starbucks moved too fast with alot of competition in the field; not seeing the forest for their trees they overgrew their niche. It is enough to have good coffee shops in the community without the stress of which one is best. This is a place where variety is good.

Jorge Batista

July 1, 2008 6:58 PM

GOOD! So tired of their over-priced nasty coffee. And now that Schwartz is shoving the PIKES PEAK blend down our throats after 1:00pm, the only thing nice about them I can say is that I like their napkins. That's the only reason I continue to buy my Venti Bold(when I can get it). Of course, I'd rather be drinking Peat's.

Tom Cloyd

July 1, 2008 7:17 PM

So, those with investments gain ground, while low-income workers lose ground. Sounds about right for our country, where human welfare priorities are rarely allowed to preempt dollars. How sad.

JADE RENO

July 1, 2008 7:30 PM

THOSE IDIOTS COULD HAVE HAD FREE INTERNET SERVICE BUT IN THEIR OVERWHELMING GREED AND POOR MANAGEMENT THEY'VE BURNED THEIR OWN BRIDGES.AS SIMPLE A THING AS HAVING TO PAY TO USE THE INTERNET HAS BROUGHT A GIANT DOWN AND ALL THE LITTLE DAVID SHOPS OFFER FREE INTERNET. ALSO, THEIR MUSIC IS ALWAYS TOO TOO LOUD AND ANNOYING.

larry

July 1, 2008 7:47 PM

If the executives are laid off, executive offices are closed to save money, the saving may be as much as closing 600 stores, layying off 12000 workers. And Starbucks coffee may even taste better.

Peteyy

July 1, 2008 7:47 PM

Ah Tom, those evil capitialist, the free market system and how dare a company make a profit. What other economic system do you propose?

bmrowe23

July 1, 2008 7:51 PM

So at 5 Starbucks per mall, divided by 50 states, that comes to about 2.4 malls per state. I expect there are that many malls in any given state having trouble. What is the big deal? Has anybody considered that a Moca Late goes for about $40 a gallon? At that rate it would cost $1000 to fill up your basic SUV. Also at $5 a day for every working day of the year for $25 at 8%, given tax and inflation, I am coming up with about $92k in 25 years. I have no idea how many calories there are in one of those things, but I expect someone could figure out how many fewer dead fat people there would be. I'm glad Starbucks is seen as excessive.

Kevin

July 1, 2008 7:52 PM

This is terribly sad for the workforce of America, but I'm confident it will mean more opportunity for mom-and-pop coffee shops. There were too many Starbucks anyway.

Dominique Bourdier

July 1, 2008 8:01 PM

Bye bye nasty and so expensive coffee ....Enough of this invasion...I go to my local coffee shop like many of my American friends in San Francisco and this morning we were laughing about it...

Michael Limberg

July 1, 2008 8:06 PM

Starbucks is screwed. I don't know for certain, but if they expanded during the peak of the real estate boom, and now need to sell off property, it will eat them alive....

Starbucks was just a flash in the pants... who in their right mind pays $5 for a cup of average coffee? I never did....

bmrowe23

July 1, 2008 8:23 PM

What is the big deal? Has anybody considered that a Moca Late goes for about $40 a gallon? At that rate it would cost $1000 to fill up your basic SUV. The ride is over.

Milos Sugovic - Peppercom

July 3, 2008 1:41 PM

The decision by Starbucks to scale back comes at no surprise given the monopolistically competitive market and economic downturn. Starbucks successfully used market characteristics and consumer behavior to its advantage over the years. But the slump has a reverberating effect on consumers’ price sensitivity across virtually all goods and services, as many are switching away from luxury items to inferior goods, which I’ve discussed on http://peppercomblog.typepad.com/ in greater detail.

Henry Welt

July 5, 2008 7:36 PM

I was hoping that a fellow like Schultz, who has much more than a financial stake in seeing his company flourish again might have the backbone to tell the financial community that maybe there are limits to the number of Starbucks stores that the world will support, that Starbucks might attract more business by looking deep into the company’s core to find additional offerings. I was hoping that Schultz would do more than the tired Wall Street two –step of cutting employees and shuttering stores. The company has a stellar reputation for how it treats its people and its customers. Now, it's time to live up to its own values, not those imposed by others.

I am still hopeful, Mr. Schultz. At one time you built a truly world class brand. Let’s see what you can do if you put your mind to it!

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News, opinions, inflammatory meanderings and occasional ravings about the world of advertising, marketing and media. By marketing editor Burt Helm, Innovation Editor Helen Walters, and senior correspondent Michael Arndt.

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