Starbucks Coffee Loses Its Froth In Japan

EH&C Staff - Mumbai

The froth seems to have gone out of Starbucks Coffee’s business in Japan. The company, which was heralding Japan as its ‘best market’ a year ago, is now having to curb its expansion plans and strive to cut costs.

In a strategy that echoes McDonald’s Japan, Starbucks appears to have expanded at a rate that could not be justified by sales or profits. McDonald’s last year reported its first loss in Japan for 29 years and is now closing more stores than it is opening. Starbucks Japan also fell into the red in the year that ended in March.

Since opening its first store in Tokyo’s fashionable Ginza district in 1996 - the Seattle-based company’s first international venture - Starbucks has opened 467 stores in Japan. Last year, Howard Schultz, chairman of the Starbucks group, set out plans for aggressive growth in the country with a target of 1,000 stores by 2007.

Starbucks reported a net loss of Yen 454m (USD 3.9m) in the year that ended in March, compared with a net profit of Yen 735m the previous year.

Same-store sales have declined for 20 months amid intense competition in a crowded market. Starbucks posted a special loss of almost Yen 230m on the closure of some stores.

Although overall revenues rose 14.8 per cent to Yen 54.6bn, sales at stores open for more than a year fell 17 per cent, reflecting competition from its own newly opened outlets and from rivals.

The company seems to be suffering from the end of the Starbucks boom. Sho Kawano, analyst at Goldman Sachs, likens Starbucks’ experience to that of ‘fast retailing’, the company that operates Uniqlo casual clothing stores, which enjoyed rapid expansion on the back of a nationwide boom followed by declining sales and a struggle to curb costs.

“Even though Starbucks’ sales per store are down year on year, they are still 40 to 50 per cent higher than their competitors. The reason Starbucks cannot manage to create profit is because its cost-base was based on past sales levels,” Kawano said. “I do not think the problem is due to accelerated store openings. The real factor lies in the change in customer attitudes. Japan is a very specific market. There was a kind of coffee boom and Starbucks was one of the biggest players in the boom.”

With sales declining, Starbucks Japan’s shares have plunged nearly 70 per cent over the past year.

This year, Starbucks expects a net profit of Yen 50m on revenues of Yen 60m. To return to profit, the company is focusing on cutting costs by opening new stores at a slower pace than projected and curbing head-office costs.

It had planned to open 120 a year but now plans to open 80 new stores this year and to close between five and 10.
It hopes to slow down the decline in same-store sales to 10 per cent this year, from 17 per cent, helped by a long over due improvement in its food selection in all stores.

“To maintain profit levels, we believe the company needs to cut the head-office expense burden and drastically reduce outlet expenses, which are holding back the brand,” said Kawano.

In spite of its problems, Japan remains an important market for the Starbucks group. And, although the Starbucks’ Japanese star may have faded a little, the company continues to expand in a market that Peet’s Coffee and Tea, a rival US chain, has decided to exit after only one year.