Why Starbucks Decide To Close 600 Outlets In US?

Why Starbucks may decide to close up to 600 stores in US?

1. Diseconomies of scale. DEOS is defined as an increase in costs of production due to overexpansion by firms. It has the total number 15011 outlets worldwide as at November 2007 (Wikipedia). In the 1990s, it opened up a new outlet every workday & this pace continue until 2000s. When the US economy slowed down around that time, they expanded outside US with an average of 7 new outlets a day. Its aggressive expansion locally & internationally has led to various management inefficiencies. Problems such as difficulty to monitor such a huge number of outlets & workers, coordinating the marketing effort & communication failure are responsible for its increase in costs of production

2. Rise in other costs. Rising costs of milk has been cited as one of the primary reason for deteriorating profits. Furthermore at such a time where consumers demand is low, it is not wise to pass on the costs. Other factors are like increasing operational costs due to increase in rental rate & workers are demanding for higher pay rise

3. Sharp fall in consumer demand. Increase in the cost of living stemmed from fuel price hike recently has inevitably forced people to adopt different lifestyle. People are substituting Starbucks coffee to other form of drinks like tea or even ‘non-branded’ coffee. This is due to falling purchasing power which makes Starbucks coffee relatively more expensive compared to any other form of drinks

4. Emergence of strong substitute. Starbucks is not the only outlet that sells coffee. There are others like Coffee Bean, McDonald, Burger King, Dunkin’ Donuts etc. In the earlier survey, US consumers claimed that McDonald’s coffee tastes better & yet cheaper compared to Starbucks.

5. Discovery of other potential market outside US. Starbucks management is ‘relocating’ those underperforming outlets in US to Europe countries such as UK, German & France. It’s CEO, Howard Schultz plans to launch another 150 outlets in these countries with 120 itself in German (The China Post)