The president of Starbucks Canada has a grande challenge on his hands as he battles to match the financial performance of his bosses in Seattle.
Colin Moore grapples with lower profit margins in this country than at the café chain's U.S. home market. In Canada, he faces steeper costs in just about every part of his business, ranging from purchasing dairy products – milk for the latte – to shipping coffee across vast distances between cities and paying more to his employees as a result of elevated minimum wages and benefits.
His struggle is reflective of the pressures facing local leaders of global companies, who risk standing out as a weak link if they are unable to keep up with their stronger regional counterparts. Indeed, Seattle-based parent Starbucks Corp. now acknowledges the discrepancies among its different markets:
On Thursday, when it releases its quarterly results, it will underline those differences by starting to break out results of more of its regions so that they will feel the competitive heat to improve.
As global firms wrestle with varying levels of performance at its different divisions, their Canadian outposts often struggle to match their U.S. parent's margins amid higher costs from fewer economies of scale. In the food service sector, dairy prices that can be 75 per cent higher than in the U.S. because of Canada's regulated market add another roadblock to operators here trying to bolster their bottom line.
"There is quite a difference in margins in different parts of the geographies for us around the world," Mr. Moore said on Wednesday as he sipped his favourite Americano brew in a grande cup at one of his cafés. "Specific to Canada, there are differences in the cost structure, not the least of which is the cost of dairy in Canada versus the cost of dairy in the U.S. Canadians pay one of the highest prices in the world for milk and cheese ... Doing a direct margin comparison gives us that much more of a challenge."
While other retailers, such as fashion chain J. Crew, get a lift by raising prices here above those in the U.S., Starbucks is keeping prices relatively at parity, excluding differences between big cities and small towns, which occur on both sides of the border. Even so, the disparities leave Canadian executives with an urgent need to find more efficiencies in running their operations and pump up merchandise sales.
At Starbucks, Mr. Moore is racing to move more customers through the checkout faster and launch more products in the café, on store shelves and hotel rooms, including a milder Blonde brew and single-brew K-cups.
"It's a tough one for them, I don't think there's an easy solution," said Richard Talbot, president of Talbot Consultants International in Victoria. "McDonald's has the same problem. They don't want their burgers to be significantly higher [priced]in Canada than in the States."
With operations in more than 55 countries, Starbucks chalks up operating profit margins in Canada of an estimated 18 per cent, compared with 20 per cent or more at its U.S. division, which is by far the largest in the company. At a Starbucks investor conference about a year ago, Canada was called out for its target to raise its margins to more than 20 per cent within three to five years.
As a way to push its divisions to perform better, Starbucks will start this year – beginning with its first quarter results on Thursday – to report results separately for the Americas region (the United States and Canada); the fast-growing China and Asia Pacific (CAP) region; and the underperforming Europe, Middle East, Russia and Africa (EMEA) region. Previously, the company was organized in just two regions: Starbucks U.S. and Starbucks Coffee International.
The new structure "will enable us to accelerate our global growth strategy," chief financial officer Troy Alstead said late last week. Separating the weaker EMEA region will put more focus on that area, which also is burdened with higher costs and a wide geographic and cultural span. Its operating margins are "in the mid-single-digits," Mr. Alstead told a conference call last November.
In Canada, Mr. Moore is counting on new product launches this year, including the Blonde brew and K-Cup single-brew systems, to help shore up sales and improve profits. At the same time, he's focusing on cost savings.
In all, costs in Canada are roughly 15 to 20 per cent higher than in the U.S., Mr. Moore estimated. "Some of the challenges we have in commodity inflation and wages require us to be more innovative, more efficient, more productive to offset those business challenges."
Mr. Moore even faces the possibility that in Canada, where the coffee war is fierce among rivals Tim Hortons, McDonald's new McCafes and Second Cup, U.S.-based discount giant Target Corp. won't necessarily pick Starbucks to run cafés in its stores here. In its U.S. home base, Target operates Starbucks shops within its outlets.
"We welcome active discussions with Target," Mr. Moore said. "We're trying to get our product everywhere we can for the Canadian consumers."