Thursday, July 31, 2008

Starbuck's New Zealand cup doesn't runneth over

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News from the USA that around 600 "unprofitable" company owned Starbucks stores are to be closed and that similar things are happening in Australia, with 61 of 84 stores closing, is bad news for investors in the franchisee operator of Starbucks in New Zealand, Restaurant Brands [RBD.NZ].

Bad news because it is an indication of how many of RBD's franchised stores are losing money.

"Any announcements internationally won't have any effect on the way we do business in New Zealand...the New Zealand operation continued to trade strongly", said Paul Wood, GM of Starbucks in New Zealand, in reaction to Howard Schultz', Starbuck's global CEO, announcement of the closures.

Regular readers of mine will know that I don't agree with Paul Wood's contention. I would argue that the Schultz announcement confirms my suspicions that Kiwi Starbucks are losing money.

Paul Wood maybe right when he says the local Starbucks is "trading strongly", although that is up for argument- small sales increases have come from price increases which haven't kept pace with inflation and rising business costs- but what he didn't say was if they were trading profitably.

RBD's Starbucks are suffering from excessive cost structures. Their leases, especially in their high profile stores, are prohibitively high. That has been the case since the brands arrival here in 1998.

Of late, other running costs have impacted on the size of the loss. Rising coffee, electricity and labour costs are among just a few attacks on the expensively priced coffee makers ability to make money.

The increasing amount of competition for the coffee buck in New Zealand has also made things look bleak for any promise of a profit anytime soon.

McDonalds especially has taken custom off Starbucks. Their lower cost and sometimes better quality offerings has had a severe impact. The fact that the Big Mac has a drive through service while Starbucks is devoid of both that and fast in-store service means revenue increases will not come until something has changed.

There is also a myriad of other competition like Robert Harris, Gloria Jeans, Dunkin Donuts and a whole host of smaller chains, "coffee-to-go" installations and independent operators. Most of which were not around when Starbucks opened here 10 years ago.

After years of losses, the promise of profit for Restaurant Brands Kiwi Starbucks looks even further away than it did at its introduction to this country. Its only hope for real increased sales is to dramatically increase store numbers but that is the very reason the brand got into trouble here in the first place-too much overhead not enough custom.

As RBD are contemplating selling their loss making Pizza Hut chain, the only hope for pegging back theirs and their shareholders losses from the Starbucks brand is for it to be sold as well.

The alternative will be a similar announcement to that of Howard Schultz.

Starbucks[SBUX] shares were up 76 cents at US$14.99 on the New York Stock Exchange and at near year lows look good for a recovery under the eye of the founder once again.


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Related Amazon reading

Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time

Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time by Howard Schultz
Buy new: $10.85 / Used from: $0.92
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c Share Investor 2008