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The Honolulu Advertiser
Posted on: Wednesday, July 2, 2008

FEWER STARBUCKS
Starbucks closing 600 U.S. stores

By Jessica Mintz
Associated Press

Hawaii news photo - The Honolulu Advertiser

Starbucks says it also will cut back the number of new stores it had planned to open in fiscal 2009. About 12,000 workers will be affected by closings announced yesterday.

ELISE AMENDOLA | Associated Press

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SEATTLE — For a decade it appeared there was no such thing as too many Starbucks for U.S. coffee drinkers, whose willingness to buy its $4 lattes and dark drip brews justified a second green-and-white mermaid awning just down the street — and sometimes even a third.

But in a sign that those days are over, Starbucks Corp. announced yesterday 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 did not say which stores will be closed, only that they are spread throughout the country. But it did say 70 percent of those slated for closure had opened after the start of 2006.

To put it another way, Starbucks is closing 19 percent of all U.S. company-operated stores that opened in the last two years, Chief Financial Officer Pete Bocian said during a conference call.

Starbucks owns a total of 84 stores in Hawai'i, according to the company's Web site, the bulk of which were opened before 2006.

Starbucks first entered the Hawai'i market in 1997 under a licensing agreement with a local company affiliated with the MacNaughton Group development firm that opened 54 stores before Seattle-based Starbucks bought back its stores in 2006.

About 12,000 workers, or 7 percent of Starbucks' global workforce, will be affected by the closings, which are expected to take place between late July and the middle of 2009, spokeswoman Valerie O'Neil said.

O'Neil said most employees will be moved to nearby stores, but she did not know exactly how many jobs will be lost. Starbucks estimated $8 million in severance costs.

In total, the company forecast up to $348 million in charges related to the closures, $200 million to be booked in the fiscal third quarter ended June 30. Starbucks reports third-quarter results at the end of July.

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. They were not profitable, not expected to be profitable in the foreseeable future, and the "vast majority" had been opened near an existing company-operated Starbucks, Bocian said.

Some analysts had wondered whether Starbucks' explosive growth in the U.S. would come back to haunt it as the market became saturated.

But before yesterday, the company avoided acknowledging that saturation was an issue and pinned weak financial results and adjustments to new store openings on the economy.

During the call, Bocian said that between 25 percent and 30 percent 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 yesterday 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 Chief Executive Howard Schultz in May, when the company attributed a 28 percent 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 16,226 Starbucks stores around the world.

The company operates 7,257 of those stores in the U.S. and 1,867 abroad; the remaining 7,102 locations are run by partners who license the Starbucks brand.

Shares of Seattle-based Starbucks jumped 72 cents, or 4.6 percent, to $16.34 in after-hours trading after losing 12 cents to close at $15.62.

Advertiser staff writer Andrew Gomes contributed to this story.