Starbucks is planning to close 600 stores, eliminating 12,000 retail and non-retail positions. Starbucks is taking the $348 million hit in broken lease agreements and asset write-offs. Starbucks has also announced that their only going to be opening 200 new stores this fiscal year. These closures are only a small part of the ‘multi-faceted plan to transform the company’.
Starbucks has seen some hard times recently and would of continued to have their bottom line cut at if they didn’t do anything drastic soon. The economy isn’t going to bounce back to the rapid growth Starbucks needs to makes their stores profitable. Even after all the income tax benefits Starbucks will lose a cash outflow of $100 million dollars, which will be evened out by the lack of costs produced by the closed stores.
Death of Over Saturation, Birth of Profit
Upper management is willing to understand the general public perception of Starbucks and react. Starbucks has been seen for years as the ever expanding corporation opening stores on every corner causing canalization of other stores which decreases profit margins. The growth of customers expected to decrease the chances of canalization is little to none in some areas. The reality is that store openings cost Starbucks large amounts of money in the short term, and right now Starbucks is not willing to gamble with the possibility of long term growth in areas of over-saturation to compensate for the upfront costs of openings new stores.
Closing stores shows growth for Starbucks due to projected increase of profit margins. This can be done by funneling customers from closing stores to existing stores, in some ways it’s the backwards canalization effect. Instead of stores taking away business from other stores, closures will simply boost the customer count in the surrounding stores. This increase in traffic will call for more labor which is readily available by the displaced employees of the closing stores. While Starbucks is cutting fixed costs such as leases, utilities and materials, the largest cost Starbucks is going to manage is labor. Instead of outright cutting labor, they are going to place it where the demand is greatest.
Tags: Close·profit·Starbucks·Stores·Turnaround
1 response so far ↓
1 Paul // Jul 9, 2008 at 3:36 pm
Closing stores will not restore profitability. Starbucks will take a number of charges that will severely impair profitability (over $300M worth, according to them), and then they’ll pay the social cost for downsizing, where employees lose motivation, wonder if they’ll have a job tomorrow and so spread gloom and doom instead of happiness, and spend the rest of their time gossiping about what’s next. If there are no further shakeups, the negatives will take at least 18 months to be worked out of the system, which will hurt the customer experience and therefore loyalty and sales.
This is a necessary rationalization because the stores never should have been opened in the first place, and Starbucks is clearly trying to anticipate the full magnitude of the hit they’ll take, and get it over with as quickly as possible. On the other hand, this is an internal correction, not a response to a weak economy as the memos state (you shouldn’t lie to stakeholders if you’re trying to build trust and enthusiasm).
The real issue at Starbucks is market disruption, which they’ve never completely faced up to and acknowledged. Many of the changes Schultz has introduced so far have been great and exactly what the disruption doctor ordered, but a few don’t fit and we aren’t sure that the rationale behind the changes is disruptive response strategy, or if Starbucks continues to ignore that the market has changed. Read more about this here: http://www.anti-marketer.com/2008/07/has-starbucks-g.html
Leave a Comment