Starbucks Strategic Transformation, Status? Implications for Future Value.

The is final article in this week's series of 4 that  have taken a closer look  several of the key strategic initiatives being employed by Starbucks under the leadership of former CEO/Founder Howard Schultz,  who reassumed the CEO Position early last year.  In this article we will examine the implications of several issues relating to Starbucks' store closing program.

The is final article in this week's series of 4 that  have taken a closer look  several of the key strategic initiatives being employed by Starbucks under the leadership of former CEO/Founder Howard Schultz,  who reassumed the CEO Position early last year. 

 

The following issues will be discussed and analyzed separately in this article.

                1.            The impact on reported Comp. Store sales of a reduction of the
                                number of 2nd and 3rd year stores in Starbucks portfolio of existing                                 stores.

 

               2.            The Compounding effect of multiple consecutive years of negative
                               reported Comp. Store Sales

Finally, a summary of the key conclusions supported by the analysis presented in all 4 of the articles in this series will be provided; And, a brief overview of the associated implications on the significance of Starbucks improvement of .4% (from <10%> to <6%>) in Comp Store Sales between the 1st and 3rd quarters of 2009.

Please note that, consistent with the 3 previous articles in this series, the analysis presented focusses upon Starbucks US Retail Stores. the Company derives about 84% of its total revenue from its North American operations.

 

 

The estimated proportions of sales attributable New Stores and Comp stores, as a percentage of the Total North American Company Operated Retail Store segment, for the 4 year period including FYs 2005-2008, are presented below.

 

 Year   New Store Sales % of Total   Comp Store Sales   %of Total          Total    

 2005     287,000,000           6.3%           4,252,000,000          93.7%          $4,539,000,000

 2006     410,000,000           7.5%           5,085,000,000          92.5%          $5,495,000,000

 2007     537,500,000           8.2%           6,022,500,000          91.8%          $6,997,000,000

 2008     325,000,000           4.6%           6,672,000,000          95.6%          $6,997,000,000

 

Starbucks does not report sales for new and continuing stores separately. For the purposes of developing these estimates, it was assumed that new stores were open ½ year their first fiscal year, and generated revenues of $500,000. These estimates are accurate enough to demonstrate an important point. 

 

For almost any type of Limited Assortment Quick Service restaurant, there is a normal maturity process that results in above average sales growth in the second, and to a more limited degree the third years of operation. This of course assumes (i) That it’s a good location with sufficient potential to support the concept, (ii) that later stores are not being developed too close to existing stores, and (iii) that there are no other factors adversely affecting store sales in an unusual way.

 

Starbucks has not disclosed the original opening dates of the stores that are being closed. Regarding these three reservations, it is interesting to note that about half of the stores that were closed during FY 2008 had store numbers above 10,000.That indicates that most of these stores had opened within two years of their closure. The very unfavorable economic climate undoubtedly affected all stores, including these.

However, the fact that so many newer stores are being closed raises questions concerning the overall relative quality of their locations and the appropriateness of their proximity to other stores,

 

The obvious conclusion is that normally the more new stores developed in a given year; the more positive their Aggregate impact will be in the subsequent year of operation as a component of Comp Store Sales growth.  

 

The table above indicates that the first year sales of new stores a % of total sales increased consistently from 6.3% for FY 2005, to 8.2% for FY 2007. However, in 2008, it dropped substantially to only 4.6%. And, it is likely to be reported that in FY 09 it dropped even further.

 

The implications are that for the next several years, reported Comp Store sales at Starbucks will not enjoy to the same degree as in recent years, the positive impact of recently opened new stores that are still maturing, but are included in the Comp Store numbers.

 

 

Any consideration of Comp Store Sales numbers is complicated by the fact that for each reporting period, the base of comparison does not include the same group of stores. Last year’s new stores are included and this year’s closed store excluded from each calculation. Also, only the Comp Store growth over a single reporting period is reflected in the reported numbers.   When there are multiple sequential periods of negative growth, the current statistic does not in any way reflect the longer term trend and the compounding effect.

 

The table below provides a summary of the Comp Store growth numbers for Starbucks’ Company owned North American retail stores, for the last 5 years. For 2009, the 3rd Quarter Number was included. Q4 has not yet been reported.

 

       

 

 Q1        Total        11%           7%           6%            -1%        -10%

              Trans         6%           6%           3%            -3%          -6%

              Ticket         5%           1%          3%             2%           -5%

              Trans         4%            8%          0%           -5%           -5%

              Ticket        3%            2%          3%            1%            -3%

              Trans         3%            5%          0%            -4%           -4%

              Ticket        4%            1%          4%            -1%           -2%

 

              Trans         4%           4%         -1%             -5

              Ticket        5%           1%         5%              -3%

               

 

The rate of growth in Comp Store Sales has been consistently in decline since FY 05.  On a quarterly basis, the growth rate for customer traffic has been negative since Q4 of 07. The substantial but temporary improvement in Average Ticket in the second half of FY 07 was attributed in the Annual Report to price increases. It should be noted that this was also the period during which a large number of stores were rolling out the breakfast sandwich program. It will be interesting to note if customer traffic growth will remain negative in Q4 09, in which case it would be the third consecutive year of negative customer traffic growth in that quarter. It’s difficult to conclude from these numbers that a fundamental improvement and trend reversal in Comp Store sales occurred in the first 3 quarters of FY 09.

 
Over the last week, four articles has been published examining a number of important factors underlying the Comp Store Sales numbers that have been reported by Starbucks in the first 3 quarters of FY 2009. The following broad conclusions are supported:

 

            1.  The Closure of 509 of the worst performing stores during FYU 08-09

                 period should result in an incremental improvement in the Comp Store

                 growth rate estimated to be in the range of .6%.

 

            2. The closure of a significant number of stores   located in close

                 proximity to another store or stores that will continue to operate,

                 Should result in an incremental improvement in overall Comp Store Sales

                 estimated to be in the range of .4%. This results from the transfer of

                 some of the customers from the closing stores to those remaining open.

 

            3. The steady and precipitous decline in the reported growth rate in Comp

                 Store sales has been ongoing since 2005, and as of the beginning of FY

                 2009, the overall change from the +10% achieved in FY 2005, to the -10%

                 reported for Q1 09, was 20%. And, there is no obvious indication from the

                 most recently reported FY 09 quarterly data, of a reversal of that trend.

 

            4. The reduction in the relative number of new stores for FY’s 2008-09

                 may not be as negative as might normally be expected on subsequent year

                 Comp Store growth, to the degree that quality of these locations was

                 substandard, or their locations too close to other existing stores.

 

            5. The overall conclusion is that even without factoring in the positive impact of

                 number of operational improvements, Starbucks should be able to

                 accomplish an improvement in Comp Store sales of about 1% (points) as a
                direct result of the store closure program and its likely impact on the stores that
                are to remain open.

 

This author consults with leading institutions through GLG