Starbucks Corp. is looking to cut how much it spends upgrading stores, which could help address investor anxiety over the price tag of turning the chain around.
Starbucks had been spending $800,000 to $1 million for each store remodel, Chief Executive Officer Brian Niccol told staff in a companywide meeting, according to a recording viewed by Bloomberg News. The coffee chain is looking at ways to bring down costs for these renovations, which might involve major changes such as electrical or plumbing upgrades.
Separately, the company came up with a new strategy to refresh stores for about $150,000 each or less, Niccol said. Such a “coffeehouse uplift” might include less drastic changes for stores already in good shape, such as new furniture and fresh paint.
“We started building really expensive stores that didn’t look very great, so it couldn’t have been any worse,” Niccol said. “The seats are crap and it’s really expensive.”
“It’s impossible to make sense of that financially,” he added.
Starbucks confirmed that cost-cutting related to the renovations doesn’t change ongoing plans to add more outlets, comfier chairs, or other details designed to make stores more inviting — a key part of Niccol’s turnaround plan.
He’s also leading projects to speed up service with more staff and technology, including an algorithm to prioritize which orders to prepare first, a move he has said is already cutting wait times in test locations.
The company posted its fifth consecutive quarterly decline in comparable sales on April 29. Earnings per share took a hit because of expenses associated with the turnaround, and the company signaled profitability will remain under pressure as the coffee chain invests in stores and operations. Those warnings contributed to investor jitters, with shares falling 5.7% on Wednesday. The stock rose about 1% on Thursday at 9:37 a.m. in New York.
Moody’s Ratings on Wednesday changed its outlook for Starbucks to negative from stable, reflecting “weakening profitability and credit metrics” in part due to “increased labor investments made as part of its ‘Back to Starbucks’ reinvention plan.”
Starbucks is trying to build a “better business” in part by carefully managing costs, Niccol told analysts earlier this week during the company’s earnings call. At the meeting Wednesday, which is held at headquarters after each earnings report, Niccol urged workers across the company to look at spending in their own divisions.
“We just gotta ask ourselves like, is it helping us deliver on the ‘Back to Starbucks’ strategy and tactics?” he said, referring to his turnaround plan for the company. “Because if it’s not, I’d encourage you to say like, ‘Hmm, I’m not sure we need to spend the money this way.’”
Niccol, who joined in September, is seeking to reverse a sales slump prompted by price increases and lengthy wait times for orders. Boycotts after the outbreak of war in the Middle East also contributed to the slowdown.
While the sales decline persisted in the latest quarter, some signs of progress have emerged. Traffic among non-rewards members has stabilized, Chief Financial Officer Cathy Smith said, and the company’s market share is improving.
