Starbucks Slashes Its Way to Profits

Consumer giants have their machetes out these days. As sales fall, companies are slashing away at costs to retain profit margins. Though Starbucks (NASDAQ:SBUX) is a poster child for slicing its way toward increased profits, its investors should remember that the company's blade could ultimately cut both ways.

A samurai sword vs. an army of expenses
As The Wall Street Journal recently noted, Starbuck is rolling out Japanese-style "lean" efficiencies to boost its operations, including efforts to pare back the time and effort of baristas' daily chores. For example, one barista took 75 minutes to load baked goodies into the store's pastry case, making 40 trips back and forth en route. A rolling pastry rack shaved valuable time off that task.

Increasing efficiency isn't the only way retailers seek to cut costs. For example, J. Crew (NYSE:JCG), Williams-Sonoma, and American Eagle Outfitters (NYSE:AEO) are all experimenting with regular offerings of lower-priced merchandise, rather than a roller-coaster cycle of high initial prices and margin-busting clearance sales. Meanwhile, Coach (NYSE:COH) is repositioning itself to lure in customers doing some cost-cutting of their own; the luxury leather-goods maker recently introduced its less expensive Poppy line of merchandise.

Starbucks' efforts are clearly taking a page from fast-food rivals such as McDonald's (NYSE:MCD), which have "fast" built into their missions. But the java giant has also enlisted help from a very different model industry, recruiting a former Toyota (NYSE:TM) executive.

While some of Starbucks' plans are undeniably practical, others sound claustrophobically corporate. One barista interviewed in the WSJ article complained of the factory atmosphere management demanded, which makes conditions "robot-like" in an effort to "pinch every possible penny." That's bad for employees, and their ill will could radiate to customers. If so, that won't help Starbucks' desire to create a third place for patrons that's neither home nor the workplace.

Cutting to the bone
Ironically, Starbucks' own CEO Howard Schultz once opined on the dangers of Starbucks losing its soul: "Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI [return on investment] on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store."

Sounds eerily apropos, doesn't it?

Fortunately, Starbucks' "vice president of lean thinking" has said that frontline employees are encouraged to come up with their own solutions to increase efficiency, since the company's 10,000-plus stores don't share identical designs. But will the green-aproned multitudes be able to accomplish that goal while keeping Starbucks' atmosphere cheery?

Cutting costs today can create companies that are stronger, more efficient, and ready to operate more profitably in the long haul. But as a Starbucks shareholder, I simply hope its latest efforts stop at trimming the fat. I'd hate to see a great brand die the death of a thousand cuts.

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