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The following is a modified post from the Motley Fool Editors' Blog. You can see all the posts here.
A group of Fool employees recently had the opportunity to chat with Starbucks' (Nasdaq: SBUX ) CFO Troy Alstead. Troy's an 18-year veteran of the company and is helping steer the cost controls that have gotten Starbucks back on track this year.
Most anyone with a penchant for (legal) addictive consumables is familiar with Starbucks and the absurd growth rates the company saw in the late 90s and most of this decade. While great material for comedy acts lampooning the company's expansion (I will always be grateful to The Onion for its "New Starbucks Open in Rest Room of Existing Starbucks" headline), the growth began to take a toll on the company's operational efficiency.
Balancing a relentless focus on growth with squeezing maximum efficiencies out of stores is a tough balancing act, and it's apparently one that Starbucks never fully mastered. Despite the "premium pricing" some consumers grouch about, Starbucks is at heart still a retailer that operates in an industry with thin margins. Not being able to continually find new high-traffic locations and losing their operational thriftiness is a death spiral for any retailer, no matter how strong their brand and following is. Not to mention, aside from challenges with its own operations, the company has seen value-focused competition from the likes of Kraft's (NYSE: KFT ) Maxwell House brand, McDonald's (NYSE: MCD ) new coffee offerings, and Green Mountain Coffee Roasters' (Nasdaq: GMCR ) home brewers.
So it wasn't surprising to hear Troy open up with comments on these cost savings. There are a couple of components to Starbucks' savings plan:
1. Permanent Cost Savings -- Part of this was the layoffs and closure of underperforming stores that was so widely reported across the media.
2. Process Improvements -- Finding ways to more effectively conduct everyday tasks and improving Starbucks' out-of-store costs.
Troy spent most of his time focusing on the second point. As he explained it, Starbucks' rapid expansion meant that different stores began creating new methods for everyday tasks. These tasks include brewing schedules of coffee, when pastries are set out, and finding ways to reduce waste. It all sounds rather mundane, but the disparity of methods used in 15,000 locations meant some stores' systems were far more efficient than others'. By studying what stores were most successful and standardizing those processes across the company, Starbucks was able to realize a high level of savings. Also, Starbucks found success with out-of-store cost-saving initiatives. The company's supply chain was built for a rapidly expanding store count, but by tweaking the supply chain to better align with a slowdown in store growth -- reevaluating the company's strategies with procurement, manufacturing, etc. -- Starbucks realized its highest level of savings.
I know, studying how to streamline operations sounds like pretty standard stuff for a retailer, but it appears that Starbucks' growth-focus made this kind of standardization a secondary priority. In this regard, taking a breather is probably a long-term plus for the company. In 2009, Troy said that the company had initially hoped to cut $400 million in costs, but ended up realizing $580 million in cost savings. He admitted that, unfortunately, most of the "low hanging fruit" was gone, so growth going forward will require more sales as cost-cutting measures have less of an impact on the bottom line.
Troy also spent some time discussing Starbucks' international plans. The company wants to leverage its back office across several countries to make its international presence more cost-effective. For example, it is consolidating back office operations between France, the U.K., and Germany. Troy also put a strong emphasis on the opportunity in China, which isn't surprising seeing as how he used to be the COO of Starbucks' Greater China.
Going forward, Troy expects Starbucks' international mix to continue at roughly 70% licensed stores and 30% company owned. That rough figure isn't a huge departure from current international mix; the company last reported that 62% of its international stores were licensed. In contrast to its domestic licensed stores, which are frequently cited for their sub-standard quality, such as those seen at Safeway (NYSE: SWY ) and other grocers, Starbucks international licensees have maintained better quality. As a whole, Starbucks' international approach seemed pretty conservative: in-fill current markets, better align back office operations, continue focusing on licensing.
Also, since we're such hard hitting analysts, we had to ask whether their new instant coffee is pronounced VI-a or VEE-a. The answer is VEE-a, you're welcome for that.
Finally, Troy was also asked about the Starbucks 15th Ave and Roy Street store concepts. While the concepts have gotten a lot of press for their neighborhood appeal, he maintained that they're more of an isolated test case, and Starbucks isn't looking at rolling the concept out further.
Being a Seattle native who has seen a number of store layouts tested, I pried a bit further into the issue and asked about Seattle's University Village location. Yes, the company has 15,000 locations, and maybe I'm getting into the weeds here, but the location has a number of features that foreshadow how Starbucks is looking to approach its next remodeling cycle.
The location definitely has more of a neighborhood appeal. Rather than the typical circular illuminated mermaid logo on the outside, there's a more distinct metallic sign. The inside features an educational area that shows how different Starbucks beans are cultivated (emphasis on its premium quality), there's new finishes to the store, and it features a more wide-open layout that's reminiscent of neighborhood coffee shops. The store is a bit of a reimagination of the Starbucks experience; the continuing realization of founder and CEO Howard Schultz's emphasis on returning Starbucks coffee to a unique, premium experience.
So, while there's been a lot of media attention on the 15th Ave. and Roy Street stores, the University Village location appears to be an application of the lessons the company is learning from its "neighborhood concepts." The stores are quite a bit different than anything seen at your typical Peet's (Nasdaq: PEET ) or Caribou Coffee (Nasdaq: CBOU ) store.
I asked Troy whether the company was seeing enough additional traffic from unique stores like University Village to justify the remodeling costs, and he seemed fairly positive. In light of the company's cost focus, he said new store concepts had to meet specific goals (a 2:1 sales to investment ratio) to justify their costs, but they've been very successful thus far. In light of these comments, it wouldn't be surprising if high-traffic locations began getting some more distinct touches. Overall, though, store investment costs have gone down in the past year. If you hadn't gleaned from what Troy said already, thriftiness seems to be the word at Starbucks HQ these days.
That's it for my take on what Troy had to say. I'm sure there's a lot that wasn't covered, so feel free to ask any questions in the comments area below, and we could discuss any other coffee related questions!