Starbucks has been foolish [in spite of McKinsey's endorsement!]

Kim Warren has a wonderful expose of the current state of Starbucks and how they have ended up where they are now. The summary is that having focused very successfully on building a highly engaged and productive workforce which served to drive spectacular results, they've moved away from this formula with a reasonably predictable outcome.

I'll let Kim take up the reigns;

I’ve blogged on Starbucks before, but just seen their results for y/e Sep08, with sales up $9.4>10.4bn but profits down $1.1>0.5bn. A pity, but what are they doing about it?

To see the 6-year path that brought them to this point , see their 07 Annual Report. Store numbers and revenues multiplied by ~2.5 - operating profits and earnings more than tripled ! How do you do that? - by squeezing more margin out, so operating margins up from 9.5>11.2% [but hit 12.3% in 05] .. and how do you do that by pushing prices or squeezing costs.

From the start, generous benefits and stock options even for new employees – called as ‘partners’ – pushed satisfaction levels to over 80%. Starbucks hit 2nd place amongst large US companies in the Fortune 2005 ranking of best places to work. Result - turnover rates way below industry averages at 70%-80% per year. And it’s not just direct staff benefits – the company spends more on employee training and development than on marketing.

It’s when these advantages impact on customers, though, that the real benefits show up. Staff get to know their customers, so visits to the company’s stores become a regular part of their lives. Some simple numbers show just what all this is worth. The company captured $10.4bn in revenue in 2008, so if the most loyal customer used a store only 10 times a month rather than the 18 times it often hits, then revenue would only have been $5.7bn. But then, with lower customer usage, many of the stores that have been opened over the years would never have been viable. So instead of the 15,000 outlets operating at the end of 2007, it would have been operating many fewer, and revenue would have been way less than that $5bn.

So how has Starbucks responded to the difficulties this year?

  • “A re-architected cost structure to allow for long-term operating margin expansion
  • A healthier store portfolio achieved through closure of underperforming stores
  • A stronger value and rewards platform - consistent with Starbucks premium brand“

The killer is on the staffing issue - “… in the 4th quarter, general and administrative expenses … improved to 3.8 percent, from 5.1 percent for 2007. The favorability was primarily due to lower payroll-related expenses.” [emphasis added]

Now... ask what this will likely do to the very special staff culture in the stores, and what that might then do to customers’ experience, and what that might then do to sales in FY 2009? I don’t have time to do the numbers in detail, but those savings would be worth about +$130m in operating profits for a full year. You can do a heck of a lot of training and staff development with that kind of money, even with Starbucks’ staff numbers.

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