Starbucks growth strategy backfires – too many outlets

In the US, if you have one Starbucks outlet where you live, you most likely have another - or more than one. That oversaturation is a reason why one analyst is cutting his outlook for the coffee chain – and while this analysis is specific to the US, it might hold lessons for other markets as well.

Analyst Andrew Stelzik of BMO Capital Markets downgraded Starbucks shares to 'market perform' from 'outperform' after its researched indicated that store overlap has grown to such an extreme point that they are hurting each other's sales, CNBC and other media reported.

BMO's research showed there are 3.6 Starbucks stores within a one mile radius of a typical Starbucks in the United States.

That is up from 3.3 stores in 2014, and 3.2 in 2012, BMO says. While that means choice and convenience for customers, it also dilutes the number of people that each store can attract.

"Cannibalization likely has increased," Strelzik said in a research note. "Strong new store performance appears to be coming at least in part at the expense of existing store traffic."

Strelzik's analysis not only suggests problems in boosting sales growth, but also that the pace of US development should be slowed. The research showed that annual increase in store overlap across Starbucks' US footprint has accelerated by more than three times over the last few years.

BMO used two metrics to gauge the likelihood and trajectory of cannibalisation: the percentage of US locations that have another Starbucks store within a one-mile radius and the average number of US locations within that one-mile radius.

"Seventy-five percent of Starbucks locations in California (Starbucks' largest US market representing approximately 20 per cent of its US footprint) now have a store within a one-mile radius," Strelzik said.

BMO research lowered its 12-month price target to $56 from $64, and its shares fell 1.6 per cent Wednesday following the downgrade.

Multiple Wall Street firms lowered ratings on Starbucks shares in July after the company gave weaker-than-expected sales guidance and announced the closure of all its Teavana stores.

This self-inflicted competition comes as other coffee companies ramp up their own expansions.

"The competitors we analysed have a store within one mile of 70 per cent of Starbucks' units in these markets most recently, up from 66 to 67 percent in 2012 and 2014," added the analyst.

And as far as beverage innovation and the introduction of breakfast foods are concerned, BMO research isn't optimistic.

"Specialty beverage growth may be nearing saturation among existing customers as the percentage of Starbucks US orders that include specialty beverages declined from year-ago levels," wrote Strelzik. "Beverage innovations may drive greater switching across products among existing customers, rather than incremental sales."

To be sure, growth has been a consistent Starbucks strategy. In 2013, it had 20,184 franchised and company owned stores. At the end of 2016, it had 25,085 worldwide.

Beyond its own stores, Starbucks also is available in grocery stores, airports and university student unions, to name a few places. But this strategy now seems to be preying on its own success.