Instant Alert: Starbucks is set to lose an estimated $12 million by closing stores for racial-bias training, but it's still a brilliant business idea

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Starbucks is set to lose an estimated $12 million by closing stores for racial-bias training, but it's still a brilliant business idea

by Kate Taylor on May 29, 2018, 5:33 PM

Starbucks closed 8,000 locations across the United States on Tuesday afternoon for racial-bias training.
Rough calculations indicate that the closures could result in $12.4 million in lost sales.
However, for a chain where reputation is vital, $12 million is a worthwhile investment.

Starbucks' decision to shut down all of its stores in the United States 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 comes after two black men were arrested in a Philadelphia Starbucks when 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 hours of shuttered stores — not considering wider repercussions.

Despite the backlash and the lost sales, Starbucks' decision to close down 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

starbucks barista

Much of the plan to close stores for training has centered around 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

Starbucks closure

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

starbucks barista

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.