Starbucks to Close 600 Stores

Underperforming locations slated for closure; Pike Place pros & cons

SEATTLE -- Starbucks Corp. said it will close approximately 600 underperforming company-operated stores in the U.S. market. This decision is a result of a "rigorous evaluation" of the U.S. company-operated store portfolio and includes the 100 stores targeted for closure in the company's previously announced plans. In addition, Starbucks now expects to open fewer than 200 new U.S. company-operated stores in fiscal 2009.

The majority of the store closures are scheduled to occur during the remainder of fiscal 2008 and the first half of fiscal 2009. The timing of the closures is dependent [image-nocss] on finalizing third-party agreements, and is therefore subject to change. Both full-time and part-time retail positions will be eliminated; however, the company expects to place many of the affected employees into available positions at nearby Starbucks stores.

"In January, we committed to transforming the company through a series of critical and strategic initiatives to improve the current state of our U.S. business and build the business for the long term,"said Howard Schultz, chairman, president and CEO of the Seattle-based coffeehouse chain. "Our executive and field leadership teams conducted an extensive review of our U.S. company-operated store portfolio with a goal of enabling our organization to focus its efforts on locations where we can more effectively improve the customer experience."Bloomberg added that Starbucks will eliminate as many as 12,000 jobs.Schultz said, "We have always aspired to put our people first. This makes our decision to close stores difficult, because it is disrupting the lives of the people who have worked so hard to deliver superior service to our customers [but]…at the same time, we recognize that it is necessary to make decisions that will strengthen the U.S. store portfolio and enable us to enter into fiscal 2009 focused on enhancing operating efficiency, improving customer satisfaction and ensuring long-term value for our partners, customers and shareholders."

The stores identified for closure are spread across all major U.S. markets, with approximately 70% of them opened since the beginning of fiscal 2006. The executive and field leadership teams used several criteria to identify stores for closure that included locations that were not profitable at the store level and not projected to provide acceptable returns in the near future. In addition to site and market-specific criteria, considerationwas given to the impact of current and anticipated economic trends.

Pre-tax charges related to the store closures include approximately $200 million of asset writeoffs to be recognized in the third quarter of fiscal 2008. In addition, a projected $120 million to $140 million for lease termination costs and future lease obligations are currently expected, nearly all of which will be recognized in the fourth quarter of fiscal 2008 and the first half of fiscal 2009. Costs associated with severance are currently estimated to be approximately $8 million, and the company anticipates these charges to be recorded during the same timeframe as the store closures. The aggregate pre-tax charges associated with the planned U.S. company-operated store closures, including costs associated with severance, are estimated to be in the range of $328 to $348 million. Upon the completion of the actions, cash charges are expected to result in a net cash outflow of approximately $100 million, net of related income tax benefits.Meanwhile, a backlash is brewing against Starbucks over its Pike Place Roast coffee, which has perked up the company's sales by attracting new business, but has alienated a small yet vocal group of longtime patrons, reported The Wall Street Journal.

In April, the Seattle-based chain made the new, milder brew the main drip coffee at its about 11,000 locations across the country. The idea was to offer a more approachable cup of java with a smoother finish. But the new strategy, which played down the company's more-established robust roasts, has touched off a debate about what customers think Starbucks should stand for: bold coffee for connoisseurs or a tamer brew for the masses?

Much of that debate is taking place on the company's customer feedback website, which the chain launched in March. The site is littered with thumbs-down verdicts on the new roast. Some small competitors have posted messages there trying to woo away disenchanted Starbucks drinkers.

Starbucks executives say the chain's aggressive marketing of Pike Place Roast has been a success. Since its introduction, Starbucks' sales of drip coffee have risen by between 5% and 15%, depending on the part of the country, the company said. "Our satisfaction metrics are up across the board," Rob Grady, Starbucks' vice president of global beverage, told the newspaper. Most of the sales increase in drip coffee has come from new customers "that historically might have not come into Starbucks," he added.

Starbucks used to brew three types of coffee each day: one bold, one mild and one decaffeinated. The lineup changed weekly. Now Starbucks outlets serve Pike Place Roast in regular and decaf versions every day. In the morning, stores also brew one of the chain's six bold flavors, like Gold Coast or Caffe Verona. But most Starbucks no longer brew a bold coffee after noon. After getting thousands of pleas on its website, Starbucks again started brewing bold-flavored coffee in the afternoon at some of its locations, said the report.

Pike Place Roast, named for the first Starbucks, located in Seattle's Pike Place Market, has been widely interpreted as the company's attempt to address complaints that its coffee tastes bitter or burnt. But its executives say that wasn't their goal. Customers were confused by the frequently changing blends available at the company's outlets and wanted something more consistent, Anthony Carroll, Starbucks manager of green-coffee quality, told the paper. Surveys of 1,500 consumers also showed they wanted coffee with a smoother finish, he said.

The new blend won Starbucks a more favorable review from Consumer Reports than the magazine's 2007 assessment, which declared Starbucks coffee "burnt and bitter."

Grady told the Journal that Starbucks anticipated complaints. "Every time we change something...there will be customers that liked it the way it was," he said.