Sluggish Economy Leads to Profit Losses for Starbucks


Written by Jon Mercer in Economy
Viewed by 123 readers since 11-16-2008

In times of recession, conventional wisdom holds that consumers will still spend money on anything that helps them forget their problems. That’s why many economists consider bars and nightclubs to be practically recession proof. But retail giant Starbucks is finding out that the same rule may not hold true for coffee houses.

Starbucks is reporting a 2.9% decrease in their quarterly earnings, significantly lower than analysts had estimated. Figures for the first two quarters of 2008 haven’t been much better for the coffee giant, and the company has announced it intends to cut more than 13,000 full time jobs.

Like other big retailers, Starbucks is blaming the stock market crash and the generally conservative spending habits Americans appear to be adopting at this time of financial stress for their shrinking profit margin. Fourth quarter income for the company dropped to $5.4 million, down from over $158 million for the same quarter in 2007.

But despite having to close some of its retail outlets, most Starbucks stores continue to be profitable, especially those in the larger urban areas. The company admits, however, that even its most profitable locations are showing a decline in profit.

Many pundits have pointed out that Starbucks has become over exposed in many cities. In places like Dallas and Atlanta, the company often had three or more locations within a radius of two city blocks.

But if Starbucks was overzealous in expanding their brand, they are certainly paying the price for it now: shares of Starbucks stock have fallen significantly over the last year, and chief executive officer Howard Schultz has admitted that the company can only do so much in the way of cost-cutting and improving efficiency — the economy will have to take an upward swing in order for Starbucks shares to increase in value.

Because expensive café lattes are often an impulse buy, it would seem that consumers have chosen to tighten their financial belts by cutting back on trips to Starbucks and other high-end coffee houses. But it’s not just coffee bars that are hurting. High-end retailers in general are reporting disappointing fourth-quarter profits, even as discount and bargain retailers like Wal-Mart show a slight upturn in sales.

But there could be light at the end of the tunnel for high-end retailers and “lifestyle vendors” such as Starbucks: Howard Schultz predicts that individual Starbucks stores have now bottomed out in sales. The good news? There’s nowhere at left for them to go but up.


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