Starbucks will close 500 more locations in the U.S. and cut 7% of its work force.
The pullback is a sign that the Seattle-based coffee giant is continuing to see weak sales as high gas prices and other pressures on consumer spending prompt Americans to cut back on extras.
It also shows how badly the specialty-coffee business is struggling just as mainstream companies, such as fast-food giant McDonald’s Corp., are beginning to invest heavily in it.
Starbucks said the 500 stores just slated for closure, as well as 100 others it announced plans to close earlier this year, will shut down in 2008 or early next year.
The company said it will eliminate as many as 12,000 full-time and part-time retail positions in connection with the closures; some baristas will get jobs at other stores. Starbucks said it had 172,000 employees as of last year, the latest count available.
Starbucks didn’t disclose which of its about 11,000 U.S. stores it will shut, but said the affected stores are spread across all major U.S. markets. About 70% of them have opened since the fall of 2005, it said.
Workers will find out whether their store is closing by the middle of this month.
The closings are bad news for commercial real-estate developers who have relied on the cachet of Starbucks to attract other tenants. Starbucks said the sites earmarked for closure include those that aren’t profitable at the moment or aren’t expected to provide the company with acceptable returns on its investment.
During the last fiscal year, Starbucks opened about 2,500 new cafes across the globe, or about seven outlets per day. The purpose of its rapid expansion was to boost sales growth and siphon traffic away from some of its stores where long lines were driving away customers.
Also fueling the push was company research that showed people sometimes weren’t willing to cross the street to buy a cup of coffee. But the density of Starbucks stores in places like New York and other large cities turned the chain into a symbol of ubiquity, spawning countless jokes.
Last year, as Starbucks’s sales began to soften, it became clear that the company’s expansion was cannibalizing its sales in a way that was threatening the chain’s success, as well as causing the quality at its existing locations to slip. Analysts have said that Starbucks lowered the bar for choosing new locations in recent years.
The closures will “take pressure off some of the stores” located in the same immediate area, said Pete Bocian, Starbucks’s chief financial officer.
Starbucks has been struggling to attract customers amid the slowdown in consumer spending and increasing competition from other coffee and restaurant chains.
Longtime Chairman Howard Schultz took over as chief executive in January to revive the company, whose stock had lost about half its value in the previous year. But the company’s shares have yet to rebound.
In May, activist investor Nelson Peltz’s Trian Fund Management disclosed it had taken a stake in the chain, putting pressure on Mr. Schultz to improve results.
Mr. Schultz has been pushing through changes, including the introduction in April of a new, milder daily brewed coffee that the company says has helped boost Starbucks’s drip-coffee sales. But, in doing so, he has alienated a small group of loyal Starbucks customers who prefer the strong coffees on which the chain built its reputation.
The store closures are likely to please Wall Street, which has called for more shutdowns and swifter spending cuts at the company. During the next fiscal year, which starts in September, the company plans to open fewer than 200 company-owned locations in the U.S., down from its earlier forecast of 250.
Starbucks has said that it is shifting some of its expansion abroad, where markets are more promising. We hope one of promising markets will be Slovakia.