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.