Starbucks Leaves Stores Unfixed as McDonald’s Perks Up

Bloomberg

Less is more at Starbucks Corp.

The Seattle-based coffee chain is betting it can increase sales by spending the same amount of money as usual, about $250 million a year, to renovate only about half the approximately 1,900 shops due for a facelift in 2011.

Emphasizing stores in precincts like Manhattan’s Soho district, and employing such eco-friendly touches as reclaimed furniture, will lift the whole brand, Arthur Rubinfeld, Starbucks’ global development chief, said in an interview.

Starbucks is trying to caffeinate sales growth, which may have topped 10 percent in the most recent quarter for the first time since March 2008, while paying investors dividends. The strategy risks alienating customers at the unimproved stores as McDonald’s Corp., now pushing its own coffee drinks, plans to pump $1.2 billion into restaurant renovations this year.

“I have concern over Starbucks setting expectations that don’t get fulfilled by a visit to a typical store,” Julius Dorsey, the president of the Cleveland-based management consultant Dorsey & Co., said in a telephone interview.

Starbucks, led by Chief Executive Officer Howard Schultz, is scheduled to announce its fourth quarter and full-year earnings today. Quarterly sales are projected to rise 14 percent, with adjusted earnings per share increasing 33 percent according to an average of analyst estimates compiled by Bloomberg. The company is also expected to announce a dividend of 13 cents a share, according to a Bloomberg forecast, the third in the company’s history.

Shares Doubled

Starbucks rose 57 cents to $29.67 at 9:30 a.m. New York time on the Nasdaq Stock Market. Before today the shares had advanced 26 percent this year. While that about matches the return for McDonald’s, shares of the world’s largest hamburger chain have more than doubled in five years while Starbucks declined 1.1 percent.

Starbucks refurbishes its stores after five years and then again after 10. Since 2008, the number of stores turning 5 and 10 has doubled and as many as 1,900, or about a quarter of the company’s 8,800 stores, are due for upgrades in 2011. The company has closed about 900 stores since 2008. It declined to say how many 5- or 10-year-old shops were among the closures.

Many of the coffee shops feature the same earth tones and blond wood Starbucks has used since the 1990s.

Rehabbing all of them would cost as much as $475 million. Like other restaurant chains, Starbucks has cut capital spending since the recession. In the past 12 months Starbucks spent about $450 million and used about half for renovations, according to company filings. It will renovate the same number of stores, about 1,000, again in the next year, Chief Financial Officer Troy Alstead said in a July conference call.

Reclaimed Materials

Starbucks hired architect Kambiz Hemati from BCBG Max Azria Group Inc., the Vernon, California-based fashion retailer, to design the new stores. They feature reclaimed materials, low- flow faucets and energy-efficient air conditioning. As the company gradually remodels the rest of its coffee makers, it will borrow from the flagship stores, Hemati said.

Every time Starbucks opens a new location, the company makes sure the media hears about it -- part of a campaign to burnish the overall brand. After a new store opened in Seattle three weeks ago, it was mentioned 357 times in traditional media outlets, according the news tracking firm Vocus. USA Today wrote a story, which began: “The Starbucks of the future arrived today.”

Starbucks Reins in Baristas

The Wall Street Journal

Starbucks Corp. is telling its harried baristas to slow down—which may result in longer lines.

 

 

 

Amid customer complaints that the Seattle-based coffee chain has reduced the fine art of coffee making to a mechanized process with all the romance of an assembly line, Starbucks baristas are being told to stop making multiple drinks at the same time and focus instead on no more than two drinks at a time—starting a second one while finishing the first, according to company documents reviewed recently by The Wall Street Journal.

Baristas are also supposed to steam milk for each drink rather than steaming an entire pitcher to be used for several beverages. Other instructions include rinsing pitchers after each use; staying at the espresso bar instead of moving around; and using only one espresso machine instead of two, according to the documents.

Starbucks says the changes—which it expects to roll out nationwide and across Canada by next month—are part of its ongoing effort to make stores operate more efficiently. But some baristas worry it will create longer lines.

The new methods have "doubled the amount of time it takes to make drinks in some cases," according to Erik Forman, a Starbucks barista in Bloomington, Minn., who says his store began making drinks under the new guidelines last week. Longer lines have resulted, says Mr. Forman, who is a member of the IWW Starbucks Workers Union.

Tyler Swain, a barista in Omaha, Neb., who is also a member of the union, worries how he will keep up with volume if he can only complete one drink at a time. "While I'm blending a frappuccino, it doesn't make sense to stand there and wait for the blender to finish running, because I could be making an iced tea at the same time," he says. His store has yet to adopt the changes.

"As with any new behavior, it will take time for baristas to become comfortable with the new method," said Starbucks spokeswoman Trina Smith.

Starbucks insists the new procedures will eventually hasten the way drinks are made and lead to fresher, hotter drinks. Steaming milk for individual drinks, for example, "ensures the quality of the beverage in taste, temperature and appearance," the company documents state, while focusing on just two drinks at a time "reduces possibility for errors."

When asked whether changes have created longer lines in the test markets, Starbucks spokeswoman Ms. Smith said she didn't have "that level of detail."

The documents acknowledge that customers ordering no-foam lattes may have to wait longer for their drinks, and instructs employees to "let the customer know their beverage will take a little longer and may be out of order due to the time it takes the milk to settle and the foam to rise to the top (approximately 60 seconds)."

Customers have indicated that the quality of espresso drinks at Starbucks is "average" and that the beverages are inconsistently prepared from barista to barista and from store to store, the documents say.

Over the last few years, Starbucks has been applying to the coffee counter the kind of "lean" manufacturing techniques car makers have long used as a way to streamline production, eliminate wasteful activity and speed up service. The company has deployed a "lean team" to study every move its baristas make in order to shave seconds off each order.

That team discovered that many stores kept beans below the counter, leading baristas to waste time bending over to scoop beans, so those stores ended up storing the beans in bins on the top of the counter. To boost the freshness of the coffee and to bring back some of the "theater" that had been lost, the baristas also started grinding beans for each batch of coffee, instead of grinding the day's beans in the morning.

Baristas say it can take anywhere from 30 seconds to a minute to make an espresso-based drink, depending on the complexity of the drink and the barista's skill. In the documents, Starbucks says one of the goals of the new drink-making method is to produce beverages "at a more consistent pace."

The company has made numerous changes to its business amid the economic downturn, including closing underperforming stores, trimming its number of bakery suppliers, boosting the perks of its loyalty-card program and introducing new varieties of its Via instant coffee. The cost-cutting and customer-improvement paid off in the company's last quarter.

Earnings at Starbucks rose 37% while revenue for the quarter ended June 27 increased to $2.61 billion from $2.4 billion in the year-earlier period. Sales at U.S. stores open at least a year rose 9% in the quarter thanks to more customer visits and higher average spending.

At the same time that Starbucks has been on the upswing, it has been grappling with rising costs for raw coffee beans. The coffee and espresso makers recently said it would raise prices on more complex drinks in response.

Drive-Through Menu Change Causes Stir for Starbucks

USA Today

What a difference a new sign makes.

At Starbucks drive-throughs — one-third of the chain's 11,000 U.S. stores have one — newly redesigned outdoor menu boards advise customers that they can buy Grande (16 oz.) and Venti (20 oz.) sized beverages. Curiously, the signs no longer mention the smaller, cheaper cup size that's still for sale: Tall (12 oz.).

This has set the blogosphere abuzz. Some believe Starbucks is being sneaky — nudging hurried, drive-through customers to spend a tad more than they might have intended.

While Starbucks' same-store sales have grown nicely the past year — following very difficult years in fiscal 2008 and 2009 — the brouhaha comes as the restaurant industry is desperately searching for ways to boost traffic and sales. Some 44% of restaurant operators reported a same-store sales decline in July, the National Restaurant Association says.

But Starbucks officials strongly insist this isn't about nudging sales. They say the change is actually something that drive-through customers have requested — a simplified menu board. Starbucks shrank the number of items on drive-through menus from 70 to about 25. The change was made at all drive-throughs on Aug. 31.

"We are not being sneaky," Starbucks spokeswoman Deb Trevino says. "We did it because our customers were frustrated with the difficulty of reading our drive-through menus."

What's more, she notes, drive-through customers can still order Tall beverages. For that matter, they can even order Short (8 oz.) drinks, which aren't posted on menus inside or out.

But Robert Passikoff doesn't buy it for a minute. The founder of Brand Keys, a brand consulting and research consultancy, says Starbucks is playing fast and loose with its customers.

"It's disingenuous to suggest that how they simplified the menu was to benefit the customer," he says. "I don't know why you'd suddenly drop your cheaper item off the menu."

Well, responds Trevino, that's because the Talls don't sell as well as the Grandes and Ventis. "We have to make choices about what we put on our menus so that customers can get through as quickly as possible."

Also, she notes, Starbucks is making more room on its menus for the calorie postings that will be required next year under the recent health care reform. Chains with 20 units or more will have to post calories on menu boards for standard menu items.

For the moment, Trevino says, America's most popular coffee and espresso maker hasn't received "a significant number" of complaints from customers about the menu board change. "That said, if customers don't like a change we've made, we listen and will make changes, again."

Dennis Lombardi, executive vice president of food service strategies at consultancy WD Partners, says Starbucks is getting a raw deal on conspiracy theories. "Starbucks is a well-managed company that knows exactly what it's doing. This hoopla will eventually quiet down — until something else replaces it."

Starbucks 3Q Profit Rises 37 Percent

Associated Press

Starbucks Corp.'s effort to rebuild itself is taking hold: The world's largest coffee chain said Wednesday that its third-quarter profit rose 37 percent as more customers visited its stores and spent more when they did.

The company sharply increased its dividend but offered a 2011 profit forecast in line with forecasts. And investors, hoping for a rosier outlook, sent shares down in electronic trading after hours.

But Wednesday's results were solid, including a 9 percent increase in the key performance measure of revenue in locations open at least a year.

For the three months that ended in late June, Starbucks earned $207.9 million, or 27 cents per share. That's compared with $151.5 million, or 20 cents per share, a year earlier, when it was stumbling under the weight of over-expansion.

Excluding one-time items, Starbucks earned 29 cents per share, meeting the average forecast of analysts surveyed by Thomson Reuters. Its revenue climbed nearly 9 percent to $2.61 billion, topping analysts' estimate of $2.55 billion.

CFO Troy Alstead said the company was both gaining new customers and getting more frequent visits from coffee lovers during the day as customers bought more of Starbucks' newly customizable Frappuccinos and its instant coffee, called Via.

"A lot of what we've done is bringing in new (customers) and people buying when they weren't before," he said. "It's really driving people back through the doors."

To reinvigorate its business, Starbucks closed hundreds of stores, cut scores of jobs and brought back founder Howard Schultz as CEO in its effort to rebound.

Now, it plans more measured growth and is working to relax its corporatized image by returning to its image as a place where people want to linger for hours sipping coffee. It plans to offer free, unlimited Wi-Fi in all company-run stores; it's letting customers tailor drinks even more, and it's opening stores with more community flavor. It's also focusing on expanding overseas and boosting sales of Starbucks-branded food that is sold in grocery stores.

During the third quarter, U.S. revenue climbed 7 percent, but operating income rose 55 percent to $290.8 million. Overseas revenue rose 15 percent while operation income for that business unit soared 65 percent to $56.8 million.

R.W. Baird analyst David Tarantino called the report "healthy" but said it might disappoint investors who hoped Starbucks would beat Wall Street forecasts.

The coffee maker boosted its forecast for fiscal 2010, saying it expects to earn $1.22 to $1.23 per share, excluding one-time items. It previously forecast adjusted net income of $1.19 to $1.22 per share. Analysts expect adjusted profit of $1.23 per share.

Morningstar analyst R.J. Hottovy said investors were likely hoping for a more robust forecast for fiscal 2011, when Starbucks estimates its adjusted profit will be $1.36 to $1.41 per share. Analysts expect $1.40 per share.

"A lot of people were fixated on fiscal year 2011, and that came in a little lighter than a lot of people were looking for," he said.

Starbucks Targets Regular Joes with Second Coffee Brand

The Wall Street Journal

Firm to Offer Second Coffee Brand—Its Seattle's Best—in Fast-Food Outlets, Supermarkets, Machines

SEATTLE—In a counterattack against its lower-priced fast-food rivals, Starbucks Corp. plans to roll out a second coffee brand.

By autumn, Seattle's Best Coffee—a former competitor Starbucks acquired seven years ago—will be sold in about 30,000 fast-food outlets, supermarkets and coffee houses, the company said. Currently, Seattle's Best coffee and coffee beans are sold in the chain's own shops inside nearly 500 Borders bookstores, as well as in about 2,500 supermarkets.

Eventually, Starbucks said, the brand will also be sold in convenience stores, drive-through kiosks, coffee carts, vending machines and mobile trucks. The company has already reached deals to sell Seattle's Best at Burger King and Subway restaurants and at AMC Entertainment Inc. movie theaters.

The new push by Starbucks is a response to the invasion of the specialty-coffee market by McDonald's Corp., Dunkin' Donuts and other fast-food chains, which offer espresso-based drinks at lower prices than Starbucks.

Especially during the recession, the incursion appeared to hurt Starbucks, which suffered a decline in same-store sales and closed hundreds of stores. In recent years, as McDonald's produced big sales gains inside existing stores, Starbucks has struggled to expand beyond a limited menu and a largely morning clientele.

In a presentation last week to the Starbucks board, executives unveiled a new logo for Seattle's Best, along with a new motto: "Great Coffee Everywhere." The motto reflects the Starbucks theory that the success of McDonald's and others in selling coffee has created a fresh opportunity to sell a mass-market brand.

In the past three years, the percentage of Americans drinking premium coffee has jumped to 35% from 29%, says Tom Ehlers, a veteran Starbucks executive who is now vice president of retail for the Seattle's Best unit. "Regular people have found their way to great coffee."

Mr. Ehlers likened the Seattle's Best venture to Old Navy, the Gap Inc. discount chain that now rivals the Gap chain in size.

The new strategy carries risks. Starbucks owns and operates its coffee shops. But despite the challenge of maintaining quality control, it will seek to expand the Seattle's Best coffee-house chain through franchisees operating stores as large as 1,400 square feet and as small as 200 square feet.

Associating Starbucks with a product sold from vending machines could also damage the brand's upscale image. And it could cannibalize Starbucks customers. "I've always preferred Seattle's Best to Starbucks, which tastes burnt to me," says John Joyce, a Chicago construction contractor.

But Seattle's Best is intended to appeal to just this sort of Starbucks critic. For those who find Starbucks coffee too strong-tasting, Seattle's Best is promoting the "smoothness" of its blend in ads and promotions. For those turned off by the prices and ambiance at Starbucks stores, Seattle's Best is touted as "unpretentious."

And Starbucks says its risks are small because it has barely 4% of the U.S. market for brewed coffee, and Seattle's Best's potential rests with consumers of mass-market brands. "The people who always drank a cup of Joe still want just a cup of Joe," Mr. Ehlers says. "But nowadays they want it to be good."

David Palmer, an analyst who follows Starbucks for UBS Securities, believes the strategy makes sense. He notes that no national coffee brand can be found across the U.S. convenience-store industry, which operates more than 100,000 outlets. By contrast, McDonald's has about 30,000 restaurants in the U.S.

Pricing will vary widely. Like Coca-Cola, which can cost $5 a serving at a swanky resort restaurant or a dollar in a vending machine, the price of Seattle's Best will depend on where it's sold. In grocery stores, Seattle's Best beans will cost consumers less than Starbucks-brand beans but more than conventional brands, Starbucks executives say.

Seattle's Best helped pioneer the specialty coffee-house concept when it opened its first store in Seattle 40 years ago. But like other coffee-house chains, Seattle's Best failed to keep pace with Starbucks, which quickly grew into the industry's largest player. When Starbucks acquired it in 2003, Seattle's Best had about 50 stores and a sizable supermarket presence, particularly in flavored beans, a lucrative category that Starbucks never entered.

Perhaps the most radical feature of the Starbucks strategy calls for selling Seattle's Best from vending machines. Vending-machine coffee has long been regarded as a last resort, often found in factory cafeterias miles from the nearest fresh brew. But Seattle's Best engineers have developed a coffee-making machine that Starbucks predicts will improve that image.

Critics predicted trouble when Starbucks entered the maligned instant-coffee market last year, executives note. "In the early days of Via, there were many disbelievers," says Michelle Gass, who worked on the Via launch. She is now president of Seattle's Best.

Fast-Food Coffee Gaining Ground During Recession
AP Story Posted at Forbes

A Stifel Nicolaus & Co. analyst said Friday fast-food and other quick-service operators will likely continue to take customers away from specialty coffee retailers as consumers search for more affordable options.

Analyst Steve West said in a note to investors that Peet's Coffee & Tea Inc., Dunkin' Donuts and McDonald's Corp. could be big winners in the "coffee wars" through 2009.

"Just as Starbucks is trying to turn around its U.S. business ... McDonald's is rolling out McCafe, arguably one its largest national initiatives in company history," he said.

McDonald's has now added new espresso-based drinks to more than half of its U.S. restaurants. The drinks are slightly cheaper than those at Starbucks Corp., which has struggled lately with slow U.S. same-store sales, or sales at stores open at least a year.

To boost sales and profits, Starbucks has been cutting jobs, closing under-performing stores and offering customers more deals.

West also said he expects more consumers will brew their coffee at home using espresso coffee makers and other inexpensive home appliances - a trend that could help Peet's and the privately owned Dunkin' chain.

West noted that in February, both Dunkin' and Peet's saw sales grow in their grocery business while Starbucks Corp. reported a "significant decline" in year-over-year sales for the month.

Whole Foods, Starbucks, Costco Propose Compromise Over Congressional Union Bill

Originally Posted to Triangle Business Journal

Whole Foods Market Inc., Starbucks Corp. and Costco Wholesale Corp. introduced a proposed compromise over the weekend to a bill before Congress that would make it easier to create unions.

Austin, Texas-based Whole Foods was joined by Seattle-based Starbucks and Issaquah, Wash.-based Costco in the proposal, which they say is an alternative to the controversial Employee Free Choice Act.

The EFCA – pushed by labor officials and many Democrats and heavily opposed by business leaders – would allow a majority of employees at a company to form a union by signing cards. Currently, if a majority of employees sign the cards, a process known as "card check," then employees vote in a secret-ballot election on forming a union.

The proposal from the companies, calling themselves the Committee for A Level Playing Field, would reject unionization via card check. It also would strip from the EFCA a controversial provision requiring unions and employees to go to federal arbitration if they cannot reach a deal within 120 days of a union's formation.

But the compromise legislation would allow unions access to employees during nonworking hours at a neutral location – a first – and mandate a fixed time for elections so companies wouldn’t be able to delay a vote. Delays in union votes are common complaints among labor organizers.

Speaking to reporters in a conference call, attorney Lanny Davis, who is representing the companies in the proposal, said the goal is to “trigger a conversation” between the two sides in the debate.

North Carolina business leaders are among those opposed to the card check bill, which they say would put a major dent in many of the state's economic development advantages.

Starbucks Seeks More Frugal Image
As Originally Posted to The Wall Street Journal

SEATTLE -- Starbucks Corp. Chief Executive Howard Schultz said the coffee chain would combat the notion that its drinks are expensive, as he outlined plans to weather an economic downturn.

At the company's annual investors meeting Wednesday in Seattle, Mr. Schultz railed against the notion that Starbucks -- where the menu includes beverages that can cost upwards of $4 -- is "the poster child for excess," pointing out that half of the beverages Starbucks sells cost less than $3.

"Starbucks has got to demonstrate to our customers and the marketplace that we can still be a premium brand and create a premium experience and at the same time create a platform for value," said Mr. Schultz.

He also said new efforts such as the company's Via instant coffee and its $3.95 pairings of breakfast sandwiches with drinks have received a good response.

Mr. Schultz spoke to a nearly packed auditorium in an event markedly more subdued than those in previous years that often included a big musical act and baristas on stage. Most of the efforts Mr. Schultz discussed had been previously announced, compared with past years when he used the meeting to introduce big new ideas.

After years of rapid growth, Starbucks is now focused on cutting costs, making its operations more efficient and introducing new products that might help increase sales at its existing outlets. Mr. Schultz said the company needs to adapt to a shift in behavior that has customers coming to its stores less frequently and brewing coffee at home.

He indicated the company will use more television advertising after years of using very little. He didn't address whether Starbucks's planned campaign is in response to plans by McDonald's Corp. to start advertising its new line of espresso drinks this year, but he said "it is not true that customers are going to fast-food restaurants" instead of buying their coffee at Starbucks.

The company also plans to reintroduce a promotion from last summer that offers some drinks for $2 to patrons who had made a purchase at a store that morning.

During questions from investors, one Starbucks executive said the company is working on a single-cup solution to be able to quickly brew decaffeinated coffee after recently taking decaf out of the regular afternoon brewing rotation at many outlets.

Starbucks Is Extending Shifts for Baristas

Starbucks Corp. is changing its scheduling system so that fewer employees will work more hours at its coffee shops.

The program aims to reduce the company's labor costs and improve sales by fostering familiarity between customers and employees.

Many baristas have complained that under the old scheduling system it was too difficult to secure enough hours on the clock each week. Above, baristas at a Starbucks in Manhattan.

Starbucks, based in Seattle, introduced its program about a week ago as part of a broader effort to revive the company. A sales slowdown has prompted the chain to shut stores.

"The customer's favorite experience is when the people behind the counter know them," said Craig Russell, Starbucks vice president for U.S. store services. Baristas, the employees who make individual coffee drinks, will "be able to get you going faster by knowing what you already want."

The new program also is intended to address the longtime complaint among some baristas, who are paid hourly, that it is too difficult to secure enough hours on the clock each week. Starbucks, which hasn't guaranteed full-time hours for nonmanagement store workers, is creating a full-time description that aims to give those employees at least 32 hours of work a week.

But the Industrial Workers of the World, a union that is trying to organize Starbucks workers, says the new system doesn't adequately address workers' scheduling complaints because it offers no guarantee that workers will be scheduled to work 32 hours. The program requires that full-time employees are available to work 70% of the hours during which their store is open, which the union deems too high, said Daniel Gross, an IWW organizer.

"Since they're not guaranteeing anything for us," said Liberte Locke, a Starbucks barista in New York, "I feel like it's unfair for them to demand so much availability."

Mr. Russell said that in test markets workers liked the program because eventually it gave them more-regular schedules. He said the labor-cost improvements will come from a lower turnover rate and lower training costs.

Part-time workers must be able to work three shifts, or 16 hours, a week. If they are unable to do that without a compelling reason, workers may be "separated" from the company, according to a memo on the program obtained by the IWW.

Starbucks declined to verify the memo but confirmed that workers who couldn't meet a minimum-availability standard in six months would be directed toward leaving the company.

By: Janet Adamy
Wall Street Journal; October 6, 2008