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No More Lattes . . . ?

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In a move blamed on the economy rather than saturation, Starbucks announced it will close 600 underperforming company-operated stores.

U.S. coffee drinkers, whose willingness to buy $4 lattes and dark drip concoctions seemed to know no bounds is what helped to fuel Starbucks’ rapid growth.

However, all good things must come to an end, and in the case of Starbucks, the decision to put a store in close proximity to others, resulted in cannibalization and saturated the market.

Starbucks’ Chief Financial Officer Pete Bocain stated during a conference call that 19 percent of all U.S. company-operated stores opened in the last two years will be closed.

The closing will affect about 12, 000 workers or 7 percent of Starbucks’ global work force. According to spokeswoman Valerie O’Neil, the tentative time period for displacing workers will take place between late July and the middle of 2009.

Ms. O’Neil did not know exactly how many jobs will be lost. Starbucks estimated that severance payouts will cost the company $8 million.

The company had previously proposed to close 100 stores. The other 500 had been on the company’s internal watch list.

“They were not profitable, not expected to be profitable in the foreseeable future,” Bocian said, “and the vast majority had been opened near and existing company-operated Starbucks.

Starbucks’ inability to acknowledge what some analysts suspected, that the company’s explosive growth in the U.S. would come back to haunt it as the market saturated, may have led to its undoing.

Similar to an ostrich burying its head in the sand . . . Starbucks refused to acknowledge any theory of saturation and pinned the faltering new stores’ opening sales on the economy.

During the conference call however, Bocian stated that 25 to 30 percent of an existing store’s revenues is cannibalized when a new store opens nearby, and that the closures should return some of that revenue to the remaining stores.

Starbucks still plans to open new stores in fiscal 2009, but reduced the number to fewer than 200.

“We believe we still have opportunities to open new locations with strong return on capital,” Bocian said.

This may account for Starbucks decision not to alter the company’s forecast of opening 400 stores in 2010 and 2011.

Chief Executive Howard Schultz expressed concern in May, when the company attributed a 28 percent drop in sales to less traffic from U.S. consumers.

Starbucks has every right to be concerned . . . the closing of 600 stores may be a precursor of many more to come.

U.S. consumers’ grappling with the state of the economy, less discretionary income, and having to decide between $4 for gas and $4 for a latte . . .. Are finding it easier to fill the tank and bypass Starbucks for Dunkin Donuts.

It would seem that Starbucks miscalculated consumers’ desire to overspend . . . once all the hype has been removed, for what amounts to . . . a cup of coffee.

Bradley Booth/Freelance Commercial Writer/Author

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