Starbucks to Close Stores Amid Competition, Controversy
Starbucks continues to be in the news for all the wrong reasons. After public controversies and new competition rising to meet the coffee giant, Starbucks is looking to streamline 150 stores, mostly in urban areas.
The Seattle-based company announced Tuesday that it will close 150 underperforming stores in heavily penetrated markets, up from the usual rate of 50 closings a year.
Starbucks now operates about 13,900 locations in the U.S., putting it within sipping distance of the 14,400 restaurants operated by McDonald’s. In the past year, Starbucks has opened almost 1,000 new stores in the Americas, which includes the U.S., Canada and Latin America. One analyst estimates that new stores may be cannibalizing traffic from existing stores, potentially diverting 1 out of 7 transactions.
Competition from rivals like McDonald’s and Dunkin’ Donuts is heating up, said Bernstein analyst Sara Senatore in a research note.
“Intensified competition in the slushy coffee category is exacerbating the shift towards health and wellness weighing on Frappuccino demand,” she wrote. “Starbucks will focus on Teavana drinks and other more healthful options in its core offering, which it views as ‘more differentiated.'”
The old joke of “a Starbucks on every corner” might be slowing down, but the issues of growing too fast are not new for the coffee giant. CEO Howard Schultz returned to the company during the last period of adjustment, and his current retirement from the company has a familiar feel to it.
For the ubiquitous chain, moving slower and shutting unprofitable stores may trigger some deja vu. In 2008, longtime leader Howard Schultz returned to the company that was struggling after expanding too quickly across the U.S., giving competitors like McDonald’s Corp. a chance to elbow back into breakfast. Investors cheered as Schultz retook the helm and closed some underperforming stores, and share prices at the chain have been up eight of the last 10 years. So far this year through Tuesday’s close, shares have been essentially flat.
But now, with Schultz stepping back from his beloved company, the task of the righting the ship will fall to Johnson, who took over as a CEO just over a year ago. Schultz, who had already transitioned away from running the coffee chain’s day-to-day operations, announced earlier this month he’d be leaving the company, fueling speculation he could be gearing up for a political career. Veteran retailing executive Myron Ullman is taking over as the new head of the board as Schultz departs.
While Schultz had been trying to expand the Seattle company’s premium business, dubbed Reserve, along with Italian bakery Princi, analysts have speculated that these may be put on the back burner under the new leadership. The company is also facing a resurgent McDonald’s, which has been advertising $2 cold-brew coffees, along with other steep discounts from fast-food rivals.
“The competitive environment has really become a lot stronger in the U.S. and a lot of that is the fast-food chains really improving the quality and breadth of their offerings in terms of hot beverages and breakfast,” said Bloomberg Intelligence analyst Jennifer Bartashus. Americans can “get that same flavor profile at a much lower price somewhere else. That becomes an area of concern for Starbucks.”
Starbucks has also faced backlash this spring after two black men were arrested at one of its stores in Philadelphia while waiting for a meeting to begin. The company and Johnson apologized, calling the arrests “reprehensible.” Last month, Starbucks closed about 8,000 cafes so its employees could undergo racial-bias training, which did hurt sales in the quarter, Johnson said. After stores reopened following the May 29 training, sales have started to rebound at U.S. locations, with the chain expecting domestic same-store sales growth of around 3 percent in June, according to the company.
Regardless of where folks fall on the controversy it’s clear the issues and publicity have Starbucks reacting, both in policy and in its bottom line.
The company also said it expects 1 percent growth in global sales for the third quarter, a period that encompassed an uproar over the arrest of two black men at a Philadelphia Starbucks. Starbucks closed its U.S. stores on May 29 to conduct racial-bias training for its employees.
CEO Kevin Johnson told investors the company halted its marketing campaign for cold beverages while it addressed with controversy, which may have affected sales.
Starbucks shares slipped nearly 2 percent in after-hours trading.