It's just another sign of the slowing economic times: Coffeehouse Starbucks Corp. is closing 600 locations, about 8% of the company's U.S. stores, and is cutting its work force by 12,000. The restructuring alarmed credit rating agency Standard & Poor's so much so on Wednesday that it placed its BBB+ credit ratings on its creditwatch with negative implications list, signaling that a downgrade would likely happen in the near future.
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Who could blame S&P for being so cautious about Starbucks credit stability? After all, U.S. consumers, who are stretched on escalating prices for essential items such as gas, energy and groceries, are looking to cut back somewhere, and $5 cappuccinos is top on their list.
Starbucks' softer bottom line was apparent in its fiscal second quarter when it announced profit fell 28% from the same period in 2007 to $108.7 million. Prospects for the gourmet coffee house seem even more dim as competitors such as McDonald's Corp., and Dunkin' Donuts eat into its sales by offering comparable products for a cheaper price.
S&P also took notice of Starbucks unexpected change in the number of store closures from 100 to 600 locations. While the closures may be a step in the right direction, it won't be cheap. The closures would cost the company $328 million to $348 million, including expenses for severance pay and terminating leases.
The company has grown organically and has ventured into selling music and other food items with lukewarm success. Although Starbucks traditionally has made few M&A deals (Torrefazione Italia is one deal that comes to mind), now might be the time to pull the trigger on a complementary business outside of coffee before it falls too much and becomes a target. - Gerald Magpily
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Comments
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Mr. Magpily,
Just to correct one of your comments, Starbucks did not acquire Diedrich Coffee. We are still alive and well. Starbucks only purchased the lease position in our company-operated coffeehouses and then converted them to Starbucks coffeehouses. Diedrich Coffee has moved from a retail concentric business model to a wholesale/manufacturing organization centered around the Keurig single serve technology (K-Cups). While we continue the organizattional transformation process, our future looks very bright.
Best Regards,
Sean McCarthy
CFO
Diedrich Coffee, Inc.
smccarthy@diedrich.com