Recession forces Starbucks to think lean

By The Wall Street Journal

Starbucks (SBUX, news, msgs) built its business as the anti-fast-food joint. Now, the recession and growing competition are forcing the coffeehouse giant to see the virtues of behaving more like its streamlined competitors.

Under a new initiative being put into practice at its more than 11,000 U.S. stores, there will be no more bending over to scoop coffee from below the counter, no more idle moments waiting for expired coffee to drain and no more dillydallying at the pastry case.

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Starbucks says the efforts are already helping its bottom line, as shown by quarterly results last month that beat analysts' expectations. Still, some baristas fear the drive will turn them into coffee-making automatons and take away some of the things that made the chain different.

Pushing Starbucks' drive is Scott Heydon, the company's "vice president of lean thinking," and a student of the Toyota production system, where lean manufacturing got its start.

Heydon and a 10-person "lean team" have been going from region to region armed with a stopwatch and a Mr. Potato Head toy that they challenge managers to put together and re-box in less than 45 seconds.

Heydon says reducing waste will free up time for baristas -- or "partners," as the company calls them -- to interact with customers and improve the Starbucks experience. "Motion and work are two different things. Thirty percent of the partners' time is motion; the walking, reaching, bending," he says. He wants to lower that.

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If Starbucks can reduce the time each employee spends making a drink, he says, the company could make more drinks with the same number of workers or have fewer workers.

Some say lean techniques aren't a panacea. "Those efficiencies only help when people come in the door," says Jeffrey Bernstein, a restaurant-industry analyst at Barclays Capital. "Broader economic pressures need to ease, and traffic needs to increase before they can benefit from those efforts." Transactions at Starbucks stores fell 4% in the most recent quarter.

Starbucks' efficiency quest is an example of how even premium brands are re-engineering how they do business amid an economic crisis. Unlike in boom times, offering ever-fancier products and opening new stores is no longer a recipe for growth.

The recession has resulted in a new thrift among consumers. In an April poll of 1,500 people, research company WSL Strategic Retail found 28% said they were putting more money into savings, up from 19% six months earlier.

Retail sales in June, excluding gasoline and autos, declined for the fourth consecutive month, according to the Commerce Department. Upscale brands are reacting in a variety of ways. In June, Coach (COH, news, msgs) introduced "Poppy," a new line with handbags that sell for about 20% less than most Coach purses. J. Crew Group (JCG, news, msgs) recently opened its first boutique dedicated to accessories, which often bring in higher margins. Department stores including Saks (SKS, news, msgs) and Nordstrom (JWN, news, msgs) are culling inventory.

The economy has forced Starbucks to plan for the closure of 900 stores, renegotiate rents and trim its number of bakery suppliers it uses. The company recently cut the price on "grande" iced coffees, and began offering pairings of breakfast sandwiches and drinks for $3.95.

The Seattle company is facing heightened competition from McDonald's (MCD, news, msgs) and Dunkin' Brands trying to lure customers with new, cheaper specialty-coffee drinks.

All major fast-food chains use some kind of lean techniques, says Dennis Lombardi, executive vice president of food-service strategies at consulting company WD Partners. Dunkin' Donuts uses lean methods "everywhere from manufacturing to in-store organization and work flow," says Joe Scafido, chief creative and innovation officer for Dunkin' Brands. McDonald's declined to comment.

One of Starbucks' biggest expenses is store labor, which costs about $2.5 billion, or 24% of revenue, annually. When the economy was strong, Starbucks added workers to handle an expanding menu. The company employed 176,000 people worldwide as of Sept. 28, 2008.

"We continued to add things, but we'd never had a real pressure on us to look at an optimal way to do the work," says Cliff Burrows, president of Starbucks U.S. "Lean has helped us relook at what we do every day."

Starbucks declined to be specific about how much its moves could save.

Continued: Facing some resistance

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