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Starbucks Costs Analysis

Essay by   •  February 18, 2011  •  Case Study  •  1,355 Words (6 Pages)  •  3,449 Views

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In order to overturn the decline of its earnings, Starbucks set up in 2008, an aggressive Cost Reduction Plan to improve its operational efficiency and its earnings Results.

This Cost Reduction Plan directly impacted the Earnings of the Company in the fiscal year 2009.

In our attempt to estimate the earnings of the company in the 4q 2009 we will analyze and measure the impact of the cost reduction plan during the lasts quarters. But first, we will present a snapshot of the cost reduction plan of Starbucks as displayed by the direction at the end of 2008.

I/ Action Plan Set up by the company to improve its cost effectiveness

The company Projected to make 25% of costs savings with a target of 500 millions dollars by the end of the year 2009.

This plan includes the closing of 600 stores and laying off 6000 workers by the end of the fiscal year 2009. The following actions were outlined in its annual Report 2008.

* As a result of the ongoing, rigorous evaluation of its global store portfolio, the company plans to close approximately 300 additional underperforming company-operated stores, approximately 200 in the U.S. and the remainder in international markets. These stores are in addition to the approximately 600 U.S. and 61 Australian market store closures announced in July 2008. The majority of the new store closures are expected to occur during the remainder of fiscal 2009.

* Starbucks has further reduced its fiscal 2009 new company-operated store openings target in the U.S. to 140 new stores from its previous target of 200 new stores. Internationally, the company now plans to open 170 new stores in fiscal 2009, down from the company's previous expectation to open 270 new stores. Accordingly, capital expenditures for fiscal 2009 are now expected to be approximately $600 million, a $100 million reduction from the company's previous estimate. The company has also lowered its net new licensed store opening target, and is now expecting to open approximately 125 net new licensed stores in the U.S. and approximately 360 net new licensed stores internationally.

* The company anticipates that the store closures, combined with reduced store openings for fiscal 2009 and other labor efficiency initiatives, could result in a reduction of as many as 6,000 store positions over the course of fiscal 2009. Wherever possible, Starbucks plans to place affected store employees (partners) elsewhere in its store organization.

* As part of the effort to align the company's non-retail support organization with the current operating environment, Starbucks plans a global workforce reduction that will result in approximately 700 non-store partners being separated from the company in the U.S. and internationally, with about half at the company's support center in Seattle.

The cost reduction initiatives announced today, combined with $400 million in targeted cost savings announced in early December, increase Starbucks fiscal 2009 cost reduction target to $500 million. This target consists of anticipated savings resulting from store closures, reduction of support staff and infrastructure, supply chain efficiencies, store operations improvements and various other initiatives across the business. The company's cost reduction initiatives delivered approximately $75 million of benefit in the first fiscal quarter, and are expected to deliver approximately $100 million in the second quarter, approximately $150 million in the third, and approximately $175 million in the fourth quarter of fiscal 2009.

The aggregate pre-tax charges associated with the additional store closures and headcount reductions are estimated to be up to approximately $230 million. Pre-tax charges related to today's announced store closures include approximately $60 million of asset write-offs to be recognized in the second quarter of fiscal 2009. In addition, up to $140 million for lease termination costs and future lease obligations are currently expected, the majority of which are estimated to be recognized over the balance of fiscal 2009. Costs associated with severance related to the reductions in workforce are currently estimated to be up to $30 million, and Starbucks anticipates that the majority of these charges will be recorded in the second fiscal quarter of 2009. Upon the



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