Feature

Issue of the week: Starbucks’ expansion hits the wall

Starbucks will close 600 company-owned outlets and lay off 12,000 employees by March 2009, but will this be enough to improve the company's profits and prevent the stock price from falling further? And is Howard Schultz really the right CEO for t

Starbucks CEO Howard Schultz boasted last year that his com­pany’s ubiquitous coffee shops were “recession-proof.” He might want to take that back, said Melissa Allison in The Seattle Times, in the wake of last week’s announcement that Starbucks would close 600 company-owned outlets and lay off 12,000 employees by March 2009. That’s 500 more stores than Schultz originally planned to close when he retook the company reins in January (his first run as CEO ended in 2000). The bulk of the closings will occur among the 2,496 Starbucks outlets in California and 625 in Florida. Many of those stores were built to capture customer traffic from new housing developments that now stand unfinished or empty, victims of the credit crisis. But most customers still will be within easy walking distance of a Starbucks, “because many of the unprofitable stores were being cannibalized by nearby Starbucks locations.”

Those stores should never have opened in the first place, said Brad Stone in The New York Times. Starbucks “has long been known in the world of commercial real estate for its expertise at selecting prime locations.” But in its rush to double the number of U.S. locations to 15,000, “the company strayed from the exacting real estate science that it had perfected.” Many of the unprofitable locations were hurriedly rented near the end of a calendar quarter, so that Starbucks could say in its quarterly financial reports that its expansion was proceeding according to plan. “There was a little bit of a frenzy to get locations open,” admitted Matt Dougherty, whose Nevada Commercial firm consulted with Starbucks on its Las Vegas locations.

The question now is whether the store closings will prop up Starbucks’ stock price, which at $15.20 is less than half its all-time high of $39, said Jessica Mintz in the Associated Press. They might not. While “the move is expected to help improve the company’s profit margins and sales at its older stores,” it won’t convince consumers to shell out $4 for a latte when they’re paying more than that for a gallon of gas. That’s why Starbucks stock barely budged after the closings were announced, said Duane D. Stanford and Joseph Galante in Bloomberg.com. The lack of movement “indicates that investors, who are already nervous about the economy’s effect on consumers, aren’t yet ready to wager” that Schultz’s turnaround plan will succeed.

Schultz may not even be the right CEO to execute that plan, said David Margolick in Portfolio.com. Once he was widely praised for creating Starbucks’ employee-friendly culture, which included giving part-timers access to company-subsidized health care. But now, turning around Starbucks may call for harsh measures—even harsher ones than the tough moves just announced. Laying off 12,000 employees may be almost “more than he can bear.”  So how can Schultz bring himself to lay off still more, if that’s what it will take to right the ship? Fixing Starbucks is a job for a ruthless CEO, not one who believes in his own “fundamental benevolence.”

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