Starbucks
Starbucks closed stores across the United States on Tuesday.
- Starbucks closed 8,000 locations across the US on Tuesday afternoon for racial-bias training.
- Rough calculations indicate the closures could result in $12.4 million in lost sales.
- But for a chain whose reputation is vital, $12 million is a worthwhile investment.
Starbucks' decision to shut down all its stores in the US for anti-bias training has sparked debate.
Since the coffee giant announced plans to close 8,000 company-owned stores for the afternoon of Tuesday, May 29, people have been split on the wisdom of the decision.
The decision to temporarily close stores came after two black men were arrested in a Philadelphia Starbucks after they tried to use the bathroom without ordering anything. Footage of the arrests went viral, sparking boycott threats.
Rough calculations from Business Insider estimate that the closures could mean $12.4 million in lost sales. And that's purely from a couple of hours of shuttered stores - not considering wider repercussions.
Despite the backlash and the lost sales, Starbucks' decision to close stores is built on a solid business plan. Here are three reasons why Starbucks is making the right choice with the closures.
Starbucks' reputation is vital
AP Photo/Seth Wenig
Starbucks is eager to boost its reputation.
Much of the plan to close stores for training has centered on the idea of the "third place."
"In 1983 I took my first trip to Italy," Starbucks executive chairman Howard Schultz wrote in an open letter on Tuesday. "As I walked the streets of Milan, I saw cafés and espresso bars on every street. When I ventured inside I experienced something powerful: a sense of community and human connection."
Schultz continued: "I returned home determined to create a similar experience in America - a new 'third place' between home and work - and build a different kind of company."
Starbucks depends on its reputation as a "third place" - or at least its reputation as a comfortable, welcoming environment - to attract customers.
The coffee chain is able to charge more for drinks not just due to their quality, but because Starbucks is a place that more customers actively enjoy compared to the average fast-food chain. Starbucks isn't the status symbol it once was, but it still has a more upscale environment than McDonald's.
If customers are associating Starbucks with actively unwelcoming and racist footage, that ruins Starbucks' reputation in a way it wouldn't impact other brands. So, it is clear major action needed to be taken.
Closures have worked before
AP Photo/Paul Sakuma
A sign from Starbucks' closures in 2008.
Starbucks closed all of its US locations for an afternoon once before, at another point in time when the chain's "third-place" reputation was under fire.
In February 2008, Starbucks closed all 7,100 of its stores for three and a half hours to train employees. Schultz had recently returned as CEO to turn the company around as it struggled to repair its reputation and grow sales after a period of overexpansion.
The closures cost the company an estimated $6 million, according to Schultz's 2011 book "Onward: How Starbucks Fought for Its Life without Losing Its Soul." However, Schultz maintained that it was worth the financial cost and the mockery the company endured to put Starbucks back on the road to recovery.
"Ultimately, closing our stores was most powerful in its symbolism," Schultz wrote in "Onward." "It was a galvanizing event for Starbucks' partners - the term we use for our employees - a stake in the ground that helped reestablish some of the emotional attachment and trust we had squandered during our years of focusing on hypergrowth."
The gamble worked. While Starbucks was struggling to survive in 2008, the company reported net revenues of $22.4 billion in 2017.
With this track record, it makes sense Schultz would try to shut down locations again when it needed to make a dramatic change.
$12 million isn't that much
Kim Hong-Ji/Reuters
$12 million is a relatively small sum for Starbucks.
Starbucks' reputation is worth way more than $12 million.
In November, Starbucks reported $22.4 billion in revenue in 2017, a 5% increase over the prior year. Compared to $22 billion, $12 million is basically a rounding error.
However, the stain on Starbucks' reputation that would continue if the chain lost its sheen of respectability would not be something the company could ignore.
It remains to be seen whether the actual material of Starbucks' training will cut through rhetoric and result in an actual change. This isn't the first time that Starbucks has tried to revamp its employee training. In 2017, the chain rolled out a controversial new training program to improve employees' interactions with customers.
Closing - as opposed to behind-the-scenes training - sends a major message to customers that Starbucks is serious about creating a certain environment. If the company uses the Tuesday afternoon training wisely, $12 million in sunk costs could be a very worthwhile investment.
Read more about Starbucks' closures:
- Starbucks is closing all of its US locations early Tuesday. Here's what you need to know.
- Starbucks is closing all locations in response to the arrest of 2 black men who tried to use a store's bathroom - and it's sparking a culture war on all sides
- Internet trolls are spreading fake Starbucks coupons exclusively for black customers after the chain announced it would close all stores for 'racial-bias education'
- Starbucks is doing something it has only done once before - and last time it cost the company $6 million
- Video shows a black man confronting a Starbucks barista about why he was apparently denied access to bathroom while a white man was not