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A closer look at the Starbucks 97% profit drop

November 25, 2008

By Alyssa Williams, Biz Reporter

With the recent announcement of Starbucks’ new evolution of card rewards that “takes the next step in putting money back in loyal customers’ wallets,” one may think Starbucks needs the money in its own back pocket after a 97 percent profit drop. However, Starbucks is one of many businesses to suffer severe reduced profits in the current economic crisis, and there is no evidence to conclude that these businesses cannot recover from the profit decrease.

Businesses from all sectors are beginning to feel the pinch of the poor economy.   For example, retail store J.C. Penny’s profits dropped 52 percent and the Cheesecake Factory Inc. dropped 36 percent in their third quarters.    More locally, the Oregon Shakespeare Festival announced they will cut back $1 million for its 2009 budget, one of the greatest financial crises in the history of the organization.

Starbucks rebound plan

Starbucks introduced new products and services in the last several months such as the Clover coffee brewing method, Mastrena Espresso Machines and healthy breakfast options to help offset sinking profits.

While the new direction of the organization could not significantly counter the profit drop in time, the large fall of stock during the current economic crisis, often compared to the Great Depression, should not come as a surprise. Nevertheless, it is too early to judge the fate of a business by one large profit decrease in an unstable and unpredictable market.

Howard Schultz, chairman, president and CEO of Starbucks, commented that the company appears to be more resilient than many other premium brands. “With a re-architected cost structure at the close of fiscal 2008, we began the new fiscal year with a healthier store portfolio that will allow for operating margin expansion,” he said. “Despite a global economic environment which shows no immediate signs of improvement, the steps we took in FY08 position us to deliver EPS growth in FY09.”

Starbucks’ fourth quarter fiscal 2008 summary reported that the coffee company’s profit dropped $154.1 million, from a net income of $158.5 million from the same period last year to $5.4 million today.

Starbucks claimed the drop in the fourth quarter was due to less customer consumption, as well as restructuring charges totaling $99.2 million.  This includes the closing of 600 company-operated stores in the U.S. and 61 company-operated stores in Australia and cutting approximately 1,000 open and filled positions.

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Discuss this article

Ben November 25, 2008

Starbucks has been re-organizing for a while. There were addressing the restructuring issues all year long before the big drop. By closing some 600 stores, your profit will drop but much of that profit would not be considered actual profit if it came from locations with poor revenue margins. Those locations had to be closed. I forsee better days ahead for this biz.

Max IV November 25, 2008

I am more amazed at the Shakespear Festival having to trim a million dollars. That must be a big share of their budget. Sounds like they waited to the end to make the big changes. Not good.

Alpha Dog November 25, 2008

Here is an interesting nugget. If people scale back their expensive coffee habits, will they learn to live with it when times get better.

That is bad news for the ol’ Star-buck$

Max IV November 25, 2008

Not likely

Newserman November 25, 2008

Look to low-cost luxury coffee in the future. It may sound like a contradiction, but the trend is just around the corner. It is is just waiting to happen.

– NM

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