The oil price-driven restructuring of American business continues unabated. Having forced the struggling airline and car industries in the US to hack and slash to stay alive, soaring petrol and energy costs plus the rising threat of unemployment and inflation have snared a new victim: the world’s biggest coffee chain, Starbucks.
In a move which shows US consumers are cutting back on non-essential spending of all types, Starbucks will close 600 poorly performing US outlets, sack 12,000 employees (full and part time) and take a $A400 million charge against profits as it struggles to accommodate itself to the changes in consumer behaviour. Starbucks’ cuts amount to about 7% of its global workforce, but the company says it still plans to open 200 stores over the next 15 months. The stores to be shut will be around 8.5% of its 7,100 outlets in the US and represents a 600% increase on the previously announced plans in April to shut just 100 stores.
It won’t be the last such announcement from big US service companies, especially in retailing. Other fast food chains may make similar moves as they are hammered by the high cost of transport in the US.
US analysts say the news means the company’s performance has worsened in recent weeks, as it has for much of corporate America. The $US120 billion tax rebate which has helped boost retail sales, industrial production (overnight figures were better than forecast) and consumer spending hasn’t been spent on cars, air travel, or coffee. It’s being spent in the likes of Wal-Mart and Costco, cheapie retailers.
The latest survey of manufacturing showed a small rise in activity, which cheered US markets, but part of the survey disclosed that manufacturers are facing cost increases at a 29 year high as energy prices soar. So businesses are being hit by falling demand and surging costs: and even the restructuring plans of the big car companies and airlines might not be enough to guarantee survival if oil prices continue at current levels.
That’s why an overnight forecast by the International Energy Agency that oil production will expand more slowly over the next five years than previously thought will send a chill through governments, companies and consumers. This means we face five years of tight oil supplies with volatile price rises and falls as demand drops. The question now to be asked: does the IEA forecast mean five more years of oil prices at or above the current price of around $US140 a barrel?
The IEA said spare capacity would fall to “minimal levels” in 2013 amid rising demand from developing countries and supply problems. As a result the IEA cut its supply forecast by 2.7 million barrels per day (bpd) to 95.33 million bpd. If the IEA’s forecast eventuates, it could mean the world economy slumps into recession because oil prices have crushed the growth out of even the faster growing emerging economies like China.
The IEA said that while consumption would rise by an average of 1.6% a year – or 1.5 million barrels per day on average – until 2013, supply growth would drop to 1 million bpd from 2010. If you are in a big car company (and not just Ford, GM and Chrysler) and you look at those figures and forecast, you’d be entitled to wonder if the company and industry will survive in their current forms.
General Motors sales fell 18%, Ford was down 28% while Toyota’s 21% drop was the largest in six years as it suffered plunging sales of its Tundra pickup line and a severe shortage of the Prius. Chrysler sales were off more than 35%. It announced the close of a minivan plant on Monday and the idling of another for some time to try and cut stocks. Minivans consume petrol like SUVs and pick ups and US buyers are deserting them in their thousands.
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General Motors reported that all its US vehicle sales fell 18% in June compared with June 2007. Sales of GM’s light trucks, which include pickups, SUVs and so-called crossovers, dropped 16%, but worryingly for the stuttering giant, its car sales fell a steep 21%. Its fuel guzzling Hummer division saw sales plunge 59%: soon they won’t be able to give them away.