Starbucks goes skinny as froth withers
By Jonathan Birchall in New York
Published: July 2 2008 20:05 | Last updated: July 2 2008 20:05
As US consumer demand started to falter last summer, Starbucks was opening new company-owned stores in the US at the rate of three a day.
But on Tuesday the world’s largest coffee retailer decisively put its foot on the brake, with Peter Bocian, chief financial officer, bidding farewell to the era of growth that has made Starbucks’ green and white sign a symbol of urban America.
“We believe with the stores we have today, and incrementally [adding] a couple of hundred more per year, we will have the right answer for Starbucks in the United States,” he said.
In its coming 2009 fiscal year, which starts in October, it plans to open fewer than 200 new US company-operated locations, down from this year’s reduced target of 650, and the more than 1,000 US company-operated stores that opened in both 2006 and 2007.
Starbucks also plans to close 600 stores, many of them less than two years old, leaving a network of more than 6,600 company-run stores in the US, as well as more than 4,000 licensed outlets in locations such as airports, bookstores and supermarkets.
Mr Bocian argued the decision to close stores and slow growth reflected more than the current economic climate, following a detailed review of local market factors by the company’s real estate team.
“We believe absolutely that we’re seeing a major impact from the economy,” he told investors and analysts. But, he added, the decision to close the 600 stores had been taken because of other factors too. “We didn’t believe it was all economy”.
Those factors include proximity to other stores – reflecting Starbucks original readiness to allow new openings to cannibalise about 30 per cent of the traffic at existing stores as a way of reducing lines and improving customer service.
This aspect of the cutbacks in planned growth mirrors similar decisions by two very different but equally ubiquitous US retailers – Wal-Mart, and Home Depot, the home improvement chain.
Over the past year the two largest US retailers have slowed new store expansion plans and capital investment, with Home Depot saying in May it would close 15 of its underperforming superstores. Like Starbucks, both Wal-Mart and Home Depot are approaching saturation coverage of the available markets, with new stores taking some customer traffic away from existing outlets.
But at the same time, the slowdown in demand is manifesting itself in a string of store closures and trimmed expansion plans from retailers that are more clearly linked to economic conditions.
JC Penney, the mainstream department store, said last week, for instance, that it was planning to open 20, rather than 50 stores in 2009, and was halving capital spending plans.
Other retailers have also announced the closure of underperforming stores, including Ann Taylor, Liz Claiborne and Talbots, the women’s fashion retailers and Zales, the jewellers.
Richard Hastings, consumer strategist at Global Hunter Securities, noted that the current inflationary environment, combined with slowing demand, was making capital expenditure reductions increasingly attractive to retailers. Cutting store costs and expenditure on new stores were “the most logical next steps in this story once you saw demand begin to decline in the summer of 2007”.
Starbucks says it is not actively expecting any further closures, but will be closely monitoring the performance of its remaining US store portfolio. Its international expansion plans also remain unchanged, with a further 950 new licensed and company-owned stores opening this year, including its first store in Argentina.
It also argues that its store development team will be more effective, under a new president of global development, Arthur Rubenfeld, a veteran of its 1990s expansion, who recently rejoined the company.
Mr Bocian also said Starbucks would be looking at further cost-cutting measures under Howard Schultz, its chief executive, that are aimed at restoring the reputation of the brand battered by its expansion.
“We understand we are in a tough economic environment and have to innovate and invest but also work on things we can control.”
Copyright The Financial Times Limited 2008
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