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In Venti Retreat, 600 Starbucks to Close

By Michael S. Rosenwald
Washington Post Staff Writer
Wednesday, July 2, 2008

Starbucks Coffee, once the fast-growing darling of the retail world, said yesterday that it was closing 600 U.S. stores and cutting as many as 12,000 jobs as it tries to right-size itself in the face of stiffer competition, a bleak economy and growth that appears to have outpaced demand.

The Seattle company said 70 percent of the stores it was closing had opened after 2006 and most were near other Starbucks stores -- a sign that the company had oversaturated its markets. The stores planned for closure are unprofitable and show no signs of turning around soon, Starbucks officials said.

"They didn't ramp up like the business case expected," Pete Bocian, the company's chief financial officer, told analysts in an evening conference call.

A noticeable absence on the call was Howard Schultz, the man who turned the tiny specialty store into a global powerhouse. As recently as 2006 -- when many of the to-be closed stores were opened -- he was still promising big-time growth.

"We're going to open up at least 30,000 stores . . . and I'm quite sure that number is going to be light," Schultz told a restaurant conference in March 2006. The company had 16,226 stores at the end of this March.

Schultz's success in creating a so-called third place, where people could gather when not at work or home, had a decidedly unwanted side effect: In helping to create a larger retail market for coffee, Starbucks found its throne besieged by competitors. Dunkin' Donuts jumped in. So did McDonald's, even beating Starbucks in a Consumer Reports taste test.

By late last year, a Deutsche Bank analyst wrote to clients: "Starbucks is not imagining the bad guys are coming to get them. They really are."

Throw in the cash-strapped consumer, stung by high gas prices and soaring food costs, and Starbucks has found itself with a venti frappuproblem. In January, Schultz, who was then chairman of the board, announced that he was taking over again as chief executive, hoping he could recaffeinate the company.

In February, Starbucks took the risky step of denying coffee addicts their fix for several hours, closing its stores so the company could retrain its baristas in the art of coffeemaking the Starbucks way.

But investors know that the way the milk is steamed is not going to solve the company's problems. Many had been clamoring for the company to slow its growth. Yesterday, news of the store closures sent Starbucks stock up nearly 5 percent, to $16.34, in after-hours trading. Some Starbucks customers want skim milk in their lattes. Others went store closures. Such is life for a publicly traded coffee seller.

"I think the market has wanted the company to analyze their store portfolio very stringently," said Sharon Zackfia, an analyst with William Blair & Co. (She owns Starbucks shares.) "Part of the reason we see the stock reaction is that it's another indication that management doesn't have their head in the sand."

But Zackfia said the company still has tough times ahead. It cannot escape larger economic forces. "Every retailer is challenged, with few exceptions," she said. "Starbucks has proven not to be immune to what's happening in the broader environment."

The company is forging ahead with new products, including smoothies and a new Italian beverage, both of which are aimed at winning back more afternoon sales, according to Zackfia. "Their afternoon has been the weakest part of the day," she said. "It hasn't been the morning core coffee hours."

The store closings, 100 of which were previously announced, will stretch into 2009. The company did not pinpoint precisely which stores would close. Starbucks said it hopes to place affected employees at nearby stores.

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