Starbucks recently announced they will be closing 600 US company-operated stores. The company said 70% of the cafes slated for closure had opened after the start of 2006. The chief financial officer, Pete Bocian, said that meant Starbucks would close 19% of all US company-operated stores that opened in the past two years.
A funny thing happened on the way to closing these 600 Starbucks locations. Now that the customers closest to the targeted locations (see map) have learned about the impending closure of their local store, many have rallied for the “Save our Starbucks” campaign. They are writing letters, making phone calls and signing petitions begging the company to reconsider the decision. People have even commented on some of my earlier Starbucks posts, asking the chain to not close their store.
Starbucks’ profits may not be so great right now, but they do have something that many companies can only dream of: Customers who are passionate about their brand. Yet with their latest cost cutting decision, Starbucks is turning them into passionately unhappy customers. You see, these folks who are willing to pay $4.00 for a latte on a regular basis, have become quite attached to “their” local Starbucks. Sure there is probably one a few miles away (on across the street, depending on where you are), but to frequent customers, these are not “Their” Starbucks. They have an attachment to the local store. They know the Baristas who make their drink just like they like it (and contrary to Howard Schultz’ direction, consistency isn’t that common).
It’s unfortunate that the necessary cost cutting is coming at the expense of customers, but what else is Starbucks to do? While I can’t claim to know the facts regarding the financial analysis behind the decision, I might suggest a few alternative cost cutting ideas.
Take a Closer Look at Existing Store Saturation.
When Starbucks announced the closing, the CFO said a Starbucks store’s revenue dropped 25 to 30 % when a new one opened nearby. There are no closings planned for my city, yet I am amazed by the saturation of Starbucks outlets in my area. Within three miles of my house, I have no less than ten Starbucks outlets to choose from (including Target, Kroger, & Barnes & Noble locations). There are two company owned stores and a Barnes & Noble outlet which are literally across the street from each other. In a move that seems to go against the CFO’s comments, Starbuck’s is building yet another cafe with a drive-thru on the same corner. This ain’t Manhattan folks. This is downtown Short Pump, VA; hardly a bustling metropolis, and four Starbucks within walking distance seems a bit unnecessary .
Starbuck’s Card Rewards
I think the incentives-based Starbucks prepaid card is a highly innovative idea to cut operating costs. Like most retail today, most Starbucks transactions have historically been tendered using a credit card or cash. Both have expenses (fees and operating overhead). By getting customers to use prepaid cards, Starbucks lowers their transaction costs and it get more cash into their hands sooner. That cash can be held in interest-bearing accounts generating income for the company. In return for customers Registering the cards, Starbucks is offering a number of perks including free WiFi access and free beverage upgrades (syrups, etc). I think this is where Starbucks may be giving up too much. My sugar-free vanilla, breve (half & half) latte in Richmond, VA is around $4.00, but when I pay with the Starbucks card, I get the syrup and breve upgrades for free saving me $.70. That’s more than 20% off. The way I see it, my profitability as a customer has gone down and my transaction volume has stayed about the same. Again, I don’t have the financial analysis behind this plan, but instinctively, it seems like they are leaving money on the table.
In retail (and food retail is no different), you normally want to get the customer to upgrade their purchase (“would you like fries and a drink with that?”. “Have you considered the extended warranty?”). That’s often where the biggest margin is and the Starbucks upgrades are no exception. By giving it away it’s like saying the fries and drink are on the house. It’s really not necessary because you already have me as a regular customer. and I’m going to order the same drink on a regular basis whether you give me the syrup or not.
What are your thoughts? What alternative cost cutting ideas would you explore if you were Starbucks?