Sunday, September 21, 2008

Bad News If You Are Looking For a $5 Latte

From Morning News Beat ( and the Wall Street Journal, a large blast of bad news from the purveyor of $5 lattes, Starbucks.

Starbucks, 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.

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