Starbucks' Surprising Store Survivors

Starbucks (Nasdaq: SBUX  ) has been slashing its way to profit. In a sign that its turnaround is turning out well, the company took nearly 30 stores off its "death list" of slated closures.

The coffee giant's chief financial officer, Troy Alstead, shared the glad tidings at the Goldman Sachs Global Retail Conference. He said Starbucks has been able to improve the profitability at those stores, and that they even started contributing to the company's fortunes. Cost-saving strategies included wasting less coffee and milk, tinkering with employee scheduling so that it's more efficient, and renegotiating rent for some of the stores.

Granted, we're talking about a minuscule number of cafes compared to the nearly 1,000 locations Starbucks had planned to close, but the survivors represent a glimmer of hope. There is a solid argument that once Starbucks emerges from these difficult times, it will be a much leaner, meaner company operationally.

It'll need that edge, given the rivalry it faces not just from close cafe rivals such as Peet's (Nasdaq: PEET  ) , Caribou Coffee (Nasdaq: CBOU  ) , and mom-and-pop coffee shops, but also from fast-food giant McDonald's (NYSE: MCD  ) . It's even under siege from Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , which offers gourmet coffee and Keurig coffee makers for people who sip their java at home.

These may be glad tidings for Starbucks, but I remain cautiously optimistic. I still worry that some of its recent initiatives could cost Starbucks its soul, as company founder Howard Schultz has occasionally feared. Our poll revealed that a daunting 45% of Foolish respondents already think Starbucks is no different from any other corporation. And if the company gets too zealous about cost-cutting, the brand could die the death of a thousand cuts.

For now, though, a reduction in the store death list -- especially because of significantly improved profitability -- is a heartening sign of life for the coffee giant.

Starbucks is a Motley Fool Stock Advisor selection and an Inside Value pick. Green Mountain Coffee Roasters is a Rule Breakers recommendation. The Fool owns shares of Starbucks. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.


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  • Report this Comment On September 14, 2009, at 5:49 PM, bile1947 wrote:

    regarding your remark about starbucks making their stores leaner and meaner: I am an insider....the main way that starbucks has cut costs is by firing most all of the service techs that worked on the espresso machines. They replaced these techs with a central dispatch company which then contracted with local service companies. In order to work with this central dispatch company the local service company had to lower their hourly service rates, not charge for the normal trip charge and could only charge a 15% markup on parts. The parts markup is not even worth the cost of bookkeeping. The most egregious part is that the local service company has to give the central dispatch company 7.5% of each invoice total....starbucks is totally aware of this business practice. It is just a matter of time before this backfires. As the saying goes "it all comes back". I wonder if Mr. Schultz talks about this lean & mean and clever cost cutting move.

  • Report this Comment On September 19, 2009, at 12:08 AM, BSmeter wrote:

    Please...another disgruntled "insider". It seems highly unlikely (read impossible) that the moves to streamline and make operations more efficient all boils down to outsourcing machine service tech. By the way, many other companies use outsourced service/repair techs as a means of standardizing repair at a more affordable cost. I'm sure the "insider" might prefer to keep the old way but American businesses are forced to adapt. As best as I can tell in visiting Starbucks shops all over the country as I travel, the company has not "lost its soul" or cut service. In fact I have found that I actually get to see my favorite baristas more now because they are on staff more consistently when I'm visiting. The way the stock is moving it sounds like some people have sour grapes about changes to make the company leaner and more competitive. But I suppose we will see....

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