Starbucks Cuts More Stores and Workers Amidst Recession and Lower Earnings

Posted by: David Kiley on January 28, 2009

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By David Kiley and Burt Helm

Starbucks said Wednesday that it will close another 300 stores and cut nearly 7,000 workers as it continues to stagger from overexpansion and a sharp sales slowdown.

The iconic coffee chain reported that revenue in its fiscal first quarter ended Dec. 28 fell 6% to $2.6 billion, with sales at stores open more than a year falling 9%. To cope with the downturn, CEO Howard Schultz said an additional 200 U.S. stores will close in 2009 on top of a cut of 600 stories announced in 2008. An additional 100 stores overseas are closing.

The Seattle-based coffee seller posted net income for the fiscal first quarter of $64.3 million, or 9 cents per share, compared with a profit of $208.1 million, or 28 cents per share, in the year-earlier period.

Shares fell 23 cents to $9.52 in after-hours trading after closing the regular session up 50 cents to $9.65.

Some 700 corporate employees will be cut, the CEO said, while some 6,000 store employees will be eliminated.
The coffee chain is suffering from consumer cutbacks in spending on its pricey coffee, as unemployment and consumer anxiety continue to rise.

Schultz said that the company has found an additional $100 million in cost cuts to add to the $500 million already targeted for 2009. The CEO said that marketing efforts would continue to attack two problems—“misperceptions about affordability,” and attracting customer traffic at different times of the day, especially in the morning.

One of the new cost cutting moves announced was the elimination of ready-brewed decaf coffee after noon. Last year, Starbucks cut back on the number of rotating daily coffees it offered, choosing instead to make Pike Place its daily house brand always available.

Starbucks last year launched a new business of Vivanno fruit smoothies. It also began selling hot oatmeal. Schultz said a big push would begin in March to make Starbucks “more of a breakfast destination” by promoting “value pairings” of food and coffee for breakfast to attack the perception that Starbucks has become an unaffordable luxury during the Recession.

Schultz indicated a push behind greater franchising and distribution of Seattle’s Best coffee, such as the addition of the brand into Subway shops this year.

Starbucks has long touted its offering of healthcare benefits to qualifying full and part time employees. Schultz said that the company would continue that benefit in 2009, but had already announced that the company would cut back or eliminate 401K contributions this year.

The company also said it was limiting executive compensation. In addition to eliminating 2008 bonuses for senior executives and holding their base salaries steady in 2009, Howard Schultz cut his own annual salary from $1.2 million in 2008 to under $10,000 a year in 2009. Meanwhile, the company said it would aim to sell all but one of its private planes.

Reader Comments

don v

January 28, 2009 7:39 PM

Paid cash for my home,
paid cash for my air craft
paid cash for my corvette
paid cash for my van.
how did i do it.
I NEVER WAS DUMB ENOUGHT TO PAY 5 BUCKS FOR A CUP OF COFFEE.

Marianne Paskowski

January 28, 2009 7:39 PM

Glad to see the return of Howard Schultz at the helm of Starbucks.

I always thought there were too many Starbucks outlets. Expanding the franchise to Subway makes a lot of sense, with no overhead.

I feel for all the employees who are losing their jobs, but this company slid into the gutter during Mr. Schultz's absence.

Now he faces competitors like McDonalds and Dunking Donuts, of all places, that actually offer up a pretty good cup of Java for far less money.

Denise Lee Yohn

January 28, 2009 7:41 PM

re: "misperceptions about affordability"

i'm not sure misperceptions are starbuck's issue -- the truth is, dollar for dollar, starbucks costs more than other coffee options -- and if we're honest about it, starbucks is a luxury brand (luxury defined as "something inessential but conducive to pleasure and comfort.")

so rather than trying to combat "misperceptions", i recommend starbucks work on changing reality while reinforcing existing positive brand perceptions.

back when the fast food 99-cent menu wars were raging, jack in the box had more expensive, more unusual menu items than its basic burger competitors -- it chose to introduce "jack's under a buck menu" in a homage to the chain's fictional CEO character, jack -- the menu included some more basic offerings as well as smaller portions of the chain's more unique items -- in doing so, they provided their customers lower-priced items that improved the brand's overall value perception, while continuing to reinforce the unconventional brand personality and more interesting menu that defined the brand.

starbucks could take a similar approach and provide some lower-priced options in a brand-appropriate way, perhaps in a special "piccolo" ("small" in italian, i think) menu, with smaller tastes and bite-sized treats?

a thoughtstarter...

denise lee yohn
www.deniseleeyohn.com/best-bites

HVA

January 28, 2009 8:27 PM

The closing of Starbucks will stop some to drink expensive coffee, will make them go for cheaper cup somewhere and spend the money saved somewhere else supporting other person's job!!
Do you get the hint?

Stephen Griffith

January 28, 2009 9:08 PM

All but one of its planes? FAA records show only two registered to Starbucks Capital Asset Leasing LLC - a 2004 vintage Bombardier Challenger and a newly acquired (2008) Gulfstream V. Sounds like more spin and less reality.

Great Depression

January 28, 2009 10:55 PM

Great depression version 2.0 .....

RN

January 28, 2009 11:23 PM

Starbucks is a premium level coffee for higher income groups.. as demonstrated by the pricing as well as initial customer base/value proposition....That would make it unaffordable for middle class people and hence limit the overall growth options... The fact that middle class thought that they could afford this took us to this day..

Freddie

January 28, 2009 11:34 PM

I commend this CEO. While he has to make difficult choices, he takes the lumps himself by cutting his salary dramatically.
This is in stark contrast to the self-absorbed charlatans at financial houses such as at Merrill Lynch, awarding themselves 4 BILLION while they lost 20 billion in value. With "people" like this at the helm, how could you want to support the financial system with huge bailouts?

For now, I will still have my morning coffee at SB when I have time...

Yvette

January 29, 2009 1:18 PM

Yes their coffee costs a little extra but I'll never forgo my morning Venti latte!

Jeremiah

January 30, 2009 9:53 PM

This is another classic case of taking the worst and turning it for the best.

Starbucks has a unique opportunity to reach out to new customers, yes. However, it must stay focused and devoutly concerned with its loyal consumer base--placing their best products with their best consumers that is.

Their delivery of this clear-cut surface strategy will be the subject of true concern. Losing the millions who are "addicted" and picking up those "conflicted" will be a true test of fortiude.

Jeremiah
adlifetime.blogspot.com

virginia

January 31, 2009 2:22 PM

Everything happens for a reason,the downturn of this economy will teach starbucks CEO HOWARD SCHULTZ to understand people's needs not to only target their wallet,like he's been doing for the past years. Starbucks even tryied to sell more coffee for the same ridiculous price using the term "help our military heros" (starbucks never reduced the price of their coffee to help our troops).

All comments are nice except the ones that are promoting their selves.

denise lee yohn dont promote your self. a simple comment's always nice.

TB

February 3, 2009 2:24 AM

Well, I think you can see there are misperceptions about Starbucks... just read the first comment from Don who thinks people pay $5 for coffee. Starbucks is about .10-.20 CENTS more than McDs and worlds apart in quality. Apparently Don V got his brains on credit.

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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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