TOPICS > Economy

Starbucks Plans to Close 600 Stores as Sales Slide

July 2, 2008 at 6:30 PM EDT
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Starbucks announced Wednesday the closure of 600 stores and plans for staff cutbacks after a drop in sales. Lee Hochberg reports on the economic shifts behind the company's losses and how the coffee giant plans to recover.

LEE HOCHBERG, NewsHour Correspondent: The jokes about Starbucks’ wild success are legion, like Starbucks building a Starbucks inside another Starbucks. With 15,000 stores worldwide, almost 50 million customers buy something from Starbucks every week.

But the company suddenly is taking as many shots as it’s pouring. CEO Howard Schultz was downright contrite as he addressed 6,000 stockholders at the company’s recent annual meeting in Seattle.

HOWARD SCHULTZ, Starbucks: I humbly recognize and share both your concern and your disappointment in how the company has performed and how that has affected your investment in Starbucks.

LEE HOCHBERG: The company’s stock has lost almost half its value in a year. And in the last two quarters, customer traffic has declined for the first time ever. Starbucks, the CEO said, has lost its way.

HOWARD SCHULTZ: We somehow evolved from a culture of entrepreneurship, creativity and innovation to a culture of, in a way, mediocrity and bureaucracy.

LEE HOCHBERG: Schultz, who left the CEO position in 2000, was considered the architect of Starbucks’ phenomenal rise, but he was brought back this January to try to give a double-shot pick-me-up to his sagging $9 billion company. A stockholder offered an opinion.

RUTH KYLE, Starbucks Shareholder: I told my husband a long time ago, I don’t think they should expand so quickly. I think they ought to concentrate on what they have now rather than keep going elsewhere.

Economy, coffee wars at fault?

LEE HOCHBERG: Starbucks has its own view of the problems. In February, it seemed to suggest that the quality of its coffee drinks has diminished.

The company locked doors at 7,000 stores for three prime-time hours to retrain 135,000 baristas. It said it wasn't a P.R. stunt, but the media covered it breathlessly. To the company's delight, satirists, like Comedy Central's Stephen Colbert, drew attention to the shutdown, too.

But the problem with Starbucks goes deeper than its baristas. Downturns in the California and Florida housing markets have hurt sales. Those two states account for a third of Starbucks' U.S. retail revenue. And the general U.S. economy has not helped.

HOWARD SCHULTZ: Perhaps for the first time in our history, the downturn in the economic cycle and the pressure that the consumer is under has affected the frequency of visits of how often people have been coming into Starbucks.

LEE HOCHBERG: There could be another problem. Competitors have started to drain away some of the $25 billion specialty coffee market. McDonald's offers lattes, mochas, and cappuccinos, as well as drip and iced coffee. Dunkin' Donuts and Burger King also have espresso drinks.

HOWARD SCHULTZ: We've done quite a bit of research, more so than perhaps we've done in our history, over the last few months. And what we've learned from the research is that the people who are not coming to Starbucks are either not coming as often or cutting out the occasion all together, but they're not going elsewhere for their coffee.

It's not about the competition. Don't believe all the media hype about that. There's no coffee wars going on. This is about us; this is about Starbucks.

Too many chains, too little charm

LEE HOCHBERG: Many analysts agree Starbucks has caused its own problems by getting too big, too mechanized. For example, out here on the sidewalk, I can't smell the coffee, but neither can Starbucks' customers inside.

That's because Starbucks stopped grinding beans for brewed coffee in-store, instead using pre-packaged, pre-ground beans to cut lines and speed sales. And they bought espresso makers that pull shots automatically, but are so tall customers can't see their drinks being made. Schultz says that stripped some of the theater from his stores.

But Seattle-area marketing analyst Harvey Hartman says the mechanization is worse than that.

HARVEY HARTMAN, Food Industry Consultant: The smell has basically been lost, that coffee smell. Those sensory cues of what consumers are looking for are almost like more corporate rather than personal.

What consumers are starting to sense is that Starbucks is losing this authentic, local, unique kind of real experience and has really become more bureaucratic, more mediocre, not as exploratory and as fun as it once was.

LEE HOCHBERG: Starbucks also concedes its uniform store design suggests a chain of stores rather than the so-called third place, besides home and work, it once sought to become.

Part of the stores' lack of individual identity is that most play and sell the same music, like that of K.D. Lang, who performed for stockholders. The company also promotes books, CDs and films that some say distract from its core mission of selling coffee.

HOWARD SCHULTZ: Who would've thought that we'd have three consecutive books the number one on the New York Times best-seller list or the fact that we won 10 Grammies over the last couple of years for the music business?

But please make no mistake about it: We're a coffee company. Anything else that we do is complementary to the experience.

Small shops stay intimate

LEE HOCHBERG: It may be that, in its drive to expand, Starbucks -- which defined the coffee experience for many Americans -- inadvertently ceded that experience to other, smaller coffee shops. Nationally, the number of coffee houses has nearly doubled to 24,000 in the past six years.

The owner of Zoka's Coffee Roasters in Seattle, Jeffery Babcock, credits Starbucks for creating a high-quality coffee culture, but he says maintaining that while getting so big is nearly impossible.

JEFF BABCOCK, Zoka Coffee Roaster and Tea: For us, it's an art. So we use manual machines, and we teach the employees to really perfect the espresso and the coffee. And we do hundreds and hundreds and hundreds of hours of training to get to that point. It's so hard to do on a bigger scale. Porsche doesn't sell millions of Porsches; they sell a few.

LEE HOCHBERG: He says the "coffee experience," in quotes, almost by definition needs to be local and intimate.

JEFF BABCOCK: We created something that was specific for the neighborhood, a place for people to come and hang out, because I think that's what a coffee house is all about. I think we've provided that third place that they kind of talk about.

Going back to basics

LEE HOCHBERG: Starbucks says it's doing its best to get back to that. The company is going back to begin grinding beans in-store again for brewed coffee, and customers will be able to see the baristas again over new, lower espresso machines.

And the product line is changing. In a nostalgic attempt to recapture the company's early success, it announced a new coffee blend named after Seattle's Pike Place Market, the site of Starbucks' first store.

But the money-saving change is the 600 closures, mostly of stores opened since 2006. Starbucks will also open fewer than 200 new stores in the U.S., compared with 1,800 last year. In fact, 2009 will be the first time Starbucks will open more international stores than domestic ones.

HOWARD SCHULTZ: We have a deep level of responsibility to the farmers who grow our coffee, to the almost 200,000 people who work for our company. I take that very seriously. And at the end of the day, we are all committed to making sure that the shareholders of the company are rewarded for their support of Starbucks.

LEE HOCHBERG: Some stockholders, though, wonder whether the company has grown too big to be able to fix its problems, even if it's woken up and smelled the coffee.