Hit hard by a slowing economy, Starbucks Corp. is closing 600 stores, or 8.5 percent of its U.S. company-operated portfolio, signaling an end to the Seattle company's U.S. boom, at least for now.
From 1982, when the company had just four stores, until just two years ago, when Starbucks announced plans to triple its number of stores, it seemed as if Starbucks demand knew no bounds.
But economic pressures such as rising gas and food prices, combined with increased competition from Dunkin' Donuts and McDonald's, are taking their toll.
The closures announced Tuesday will affect about 12,000 employees, or 7 percent of Starbucks' global work force, based on estimates that each store employs 20 people full and part time.
While news of the closures was not a surprise -- the Seattle coffee company has warned that it was keeping a "watch list" of stores and might close more than the 100 previously announced -- the number was larger than expected.
"It's a pretty aggressive move on the company's part," said McAdams Wright Ragen analyst Dan Geiman. "This is an indication on the storefront that they're pretty serious about turning this thing around."
About 70 percent of the stores designated for closure opened after October 2005. They represent about one in five of the new stores opened during that period. Collectively, the stores that will close were not profitable.
Starbucks is not releasing a list of which cafes are targeted. However, the company said that many of them are near another cafe, so customers will not be left without a Starbucks close by.
Some of the stores were so close that they were cannibalizing each other, said Chief Financial Officer Pete Bocian.
"We believe we've improved the profit potential of the U.S. store portfolio," he told analysts on a conference call. "You should view today's decision as a very hard one for us to make, but one where we did look very hard at the store economics. We ended up taking a bigger action than you might have expected going in."
Starbucks said that it hopes to absorb some of the affected employees. The closures will start in late July with most of them complete by mid-2009.
The closures are part of Starbucks' larger transformation strategy, which is threefold: Improve the state of U.S. business, make customers happy and focus on long-term sustainability. Starbucks reinstated Howard Schultz as chief executive in January, and he has since been shaking things up by adding new product lines, slowing U.S. store growth and ramping up international expansion.
It's normal for a rapid-growth retailer to step back and evaluate profitability at individual locations. McDonald's Corp. and Wal-Mart Stores Inc. have done so, said Patricia Edwards, a retail analyst at Wentworth, Hauser and Violich in Seattle.
"It sounds like they're getting serious about return on investment," Edwards said. "It actually makes a lot of sense. You almost have to applaud them. It's the retailers and the restaurants that take the correct yet painful steps first that do better in the long run."
The fact that the closures are mostly new stores is also logical, she said. A company starts by opening in fabulous locations and then less fabulous once the best spots are taken.
"Build all the A's first, then you build the B's," Edwards said. "By the time they got as big as they were, they had to be looking at a lot of C, D, E and F locations."
Starbucks also cut the number of company-operated stores it will open in fiscal 2009 in half, to fewer than 200. The company did not adjust its plan to open fewer than 400 stores in 2010 and 2011.
Will a slightly more rare Starbucks bring it more cachet?
"The question is, is it about cachet anymore, or is it about selling and making good return on that investment in that store location?" Edwards said. "This is not the era of $4 coffee. We're in the era of $1.50, $2 coffee. They've got to make sure that special pot that they've got is absolutely phenomenal."
As of the end of March, there were 16,226 Starbucks stores around the world, including 7,257 company-operated stores in the U.S.
Starbucks estimates that its closure plan will cost up to $348 million, but after income tax benefits and other changes, it would pay $100 million.
The company will write off $200 million in assets for the third quarter of fiscal 2008 and also expects to spend up to $140 million to terminate its leases, which will be recognized in the fourth quarter of 2008 and the first half of 2009. And Starbucks will spend about $8 million on severance costs.
Shares of Seattle-based Starbucks jumped $1.02, or 6.5 percent, to $16.64 in after-hours trading Tuesday after losing 12 cents to close at $15.62. A year ago, shares traded above $28, and in fall 2006, they were trading close to $40.
TRANSFORMING STARBUCKS
Jan. 7: Chairman Howard Schultz returns as chief executice, replacing Jim Donald.
Feb. 21: Starbucks lays off 220 employees nationwide, including 73 in Seattle.
Feb. 26: Company closes doors at nearly 7,100 U.S. shops to retrain baristas.
March 19: Starbucks acquires Seattle-based The Coffee Equipment Co., which makes the Clover brewing system. It also announces its Card Rewards program, which gives perks such as free refills of brewed coffee, upgrades to espresso drinks and complimentary Wi-Fi. And it launches mystarbucksidea.com.
April 23: Starbucks warns that the national economy is hurting its business.
April 24: It announces restructuring of its entertainment strategy, turning over day-to-day management of the Hear Music Record label to Concord Music Group. Ken Lombard, senior vice president and president of Starbucks Entertainment, leaves.
April 30: Starbucks reports 28 percent decline in quarterly profit. It also announces three new product lines: Energy drinks, smoothies and an unnamed Italian drink.
June 5: Company lays off 100 global store-development employees, including 25 at headquarters.
Tuesday: Starbucks says it will close 600 underperforming stores.
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