Company and its business
The company selected for review in this paper is Starbucks Coffee Company. It is one of the leading international coffeehouse chains based in Seattle, Washington, the U.S.A that was established in 1971 by three partners to sell high-quality coffee beans and machinery. Over the years the company shifted to selling brewed coffees and other items in its coffeehouses. In 1987 Starbucks chain was sold to Schultz’s Il Giornale and after that, the company experienced commendable growth and expansion both in the US and internationally. The company serves millions of customers throughout its global chain of more than 16,000 coffeehouses in 49 countries with a major concentration of stores in the USA, Japan and Canada. The company’s product line includes drip-brewed coffee, espresso-based hot drinks, other hot and cold drinks, snacks and items such as mugs and coffee beans. Also, through its Entertainment Division, the company sells markets books, music and film.
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Company Business Decision
Over the years Starbucks Coffee Company has successfully expanded geographically and heightened sales. However, in the wake of the recent global financial crisis the company has run into liquidity problems which have forced the company to rethink its strategic decision of expansion. Instead, the company has decided in 2008 to close down 900 stores in the US (Adamy, 2009) and 61 stores in Australia (CNN, 2008) as an attempt to manage its plummeting profits down by 69% from US$208.1mn to US$64.3mn reported in December 2008 (Adamy, 2009). The company is planning to close these stores in 2009. Therefore, the time period of this business decision is from 2008 to 2009.
Relevant Cost Implications
The two relevant costs could be as follows:
- The company will have to incur out-of-pocket expenses to cancel the lease arrangements it had for the stores planned to be closed. These costs can further reduce company profits and the global economic situation is not showing any signs of stabilizing. Typically, companies tend to disclose these costs under extraordinary activities which are separately identified in the income statement.
- The company will have to compensate a large number of employees who will be forced to leave the company. These compensations could include golden handshakes, early repayment of gratuity and perpetual funds, or other payments which are part of the employer-employee contract. These compensation costs can reduce the company’s profits and decline of funds maintained by the company.
Non-relevant Cost Implications
The two non-relevant costs could be as follows:
- Due to the company’s closure of its coffeehouses thousands of employees. Almost 12,000 workers will be affected by this business decision. Most of them will be out of work which will have indirect cost implications on society. This would extra burden on the government which will be aiming to accommodate non-working staff.
- As the company’s financial position is hit badly by worsening market conditions. The company will not be able to enjoy the high pricing for its coffees and other products. This will have implications on the gross margin as the company will have to reduce its products’ prices to get its footing back into the ground which at present seems a rather weak proposition.
On the whole, the company estimates that its closure will cost the company US$348million but after income tax benefits and other changes, it will pay US$100million (James, 2008). This will have a devastating impact on the company’s profits and its ability to continue with its existing business plans. The company has developed over the years based on the sales experiences and has been considered as a strategic success before the recession but now the company’s directors will have to think of a strategy of shrinking its operations causing a large number of staff and stores to be out of work. The company is estimated to save US$500 million next year by this business decision (Rooney, 2009). But for the time being, the company’s future remains vague and in trouble.
- Adamy, J. (2009). At Starbucks, A Tall Order For New Cuts,Store Closures. Web.
- CNN. (2008). Starbucks Closing 61 Stores in Australia. Web.
- James, A. (2008). Starbucks Plans to Close 600 Stores Across U.S.
- Rooney, B. (2009). Starbucks to Close 300 Stores as Profit Tumbles. Web.