Starbucks to Close 600 U.S. Stores

Seattle Starbucks Corp. announced Tuesday it will close 600 company-operated stores in the next year as the faltering U.S. economy hastened the pain caused by the company's own rapid expansion.

Starbucks said its decision was the result of a rigorous evaluation of its U.S. company-operated store portfolio and includes the 100 stores targeted for closure in the company’s previously announced plans. The majority of the store closures are scheduled to occur during the remainder of fiscal 2008 and the first half of fiscal 2009.

The stores scheduled for closure are spread across all major U.S. markets. Approximately 70% of them opened since the beginning of fiscal 2006, which means that Starbucks is closing 19% of all U.S. company-operated stores that opened in the last two years.

About 12,000 workers, or 7% of Starbucks' global work force, will be affected by the closings. Starbucks spokeswoman Valerie O'Neil said most employees will be moved to nearby stores, but she did not know exactly how many jobs will be lost, according to an Associated Press report.

Starbucks estimated $8 million in severance costs. In total, the company forecasts up to $348 million in charges related to the closures, $200 million to be booked in the fiscal third quarter ended June 30.

The company had previously planned to shut 100 stores. The 500 more that will be closed had been on an internal watch list for some time, according to the Associated Press report. The locations were not profitable or were not expected to be profitable in the foreseeable future, and the majority had been opened near an existing company-operated Starbucks.

In recent years, many analysts have complained that the company had overbuilt in the United States—particularly in major urban areas.

During a conference call with investors, CFO Pete Bocian said that between 25% and 30% of a Starbucks shop's revenue is cannibalized when a new store opens nearby, and that the closures should help return some of that revenue to the remaining stores.

Bocian said there aren't a material number of stores left on the watch list, but that the company will hold remaining stores to the same standards.

Starbucks still plans to open new stores in fiscal 2009, but on Tuesday it cut that number in half to fewer than 200. The company did not adjust its plan to open fewer than 400 stores in 2010 and 2011.

"We believe we still have opportunities to open new locations with strong returns on capital," Bocian said.

During the conference call, the CFO echoed concerns about the economy expressed by CEO Howard Schultz in May, when the company attributed a 28% drop in profit to less traffic from U.S. consumers who were feeling the pinch of higher food and gas prices.

At the end of March, there were 7,257 Starbucks stores in the United States.

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