Three reasons the Starbucks story hasn’t finished in the U.S.
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Three reasons the Starbucks story hasn’t finished in the U.S.

If you listen to some commentators, global coffeehouse kingpin Starbucks is now seeing growth peter out in its domestic market, the U.S. There are some compelling factors for agreeing with them – the company now has 13,000 stores in the country, and the average Starbucks location has 3.6 other Starbucks cafes within a mile radius.

According to BMO, this could lead to a cannibalization of the brand: stores are stealing sales away, not from competitors, but from other Starbucks cafes nearby. It is certainly true that the company may be reaching saturation point – but that does not necessarily mean that it can’t continue growing at home.

Starbucks has three strategies to keep its domestic market growing which could offset the effects of this saturation: premiumization, driving deeper into lower-income neighbourhoods, and the continued development of its mobile pickup and delivery service.

Starbucks’ premiumisation strategy will see it open a handful of Reserve Roasteries, like the one in Seattle, as well as roughly 1,000 Reserve cafes. By pursuing this higher end of the market, Starbucks is competing against new rivals: forget big coffee chains, this is the area of independent, upmarket, coffee houses, and there’s no reason the company can’t dominate it as impressively as it has the mass-market coffee industry.

At the end of last year, chairman Howard Schultz described the strategy and how it was working out: “With the Roastery, we introduced into the coffee category a previously unattained level of premiumization. Its success is unparalleled, last year achieving a comp sales increase of 24 percent and delivering a ticket that is four times the ticket of a typical Starbucks store.”

At the other end of the strategic scale is diversifying its brand in the opposite direction, and appealing to less-affluent consumers. This could be achieved simply through a targeted geographic expansion. Because Starbucks is best described as an “affordable luxury” brand, it is not surprising that the saturation previously described has happened almost exclusively in higher-income neighbourhoods and downtown areas.

Recently, Starbucks has committed itself to opening 15 stores in lower-income regions, like Ferguson, Missouri. According to the company, this store (and others like it) was amongst the best performing new stores of last year. Could they expand this initiative, and conquer the lower-end of the market too?

The last opportunity is almost certainly Starbucks’ biggest: mobile pay and delivery. Starbucks was the first coffee brand to reach out to the power of ecommerce by developing an app that lets people pre-pay for drinks and pick them up on their morning commutes. This has been so successful that the company has struggled to keep up with demand. But, if they took a leaf out of pizzeria Domino’s book, they could open express stores dedicated to pick up and delivery. These would need less real estate, come with less costs, and cater to the same market that Starbucks’ existing stores do.

Starbucks still lags behind McDonalds and Subway when it comes to number of U.S. stores. And, because they sell a higher frequency product (generally, Starbucks’ customers will drink more coffee than they have meals), they should be able to support more stores than both those brands. This, when considered alongside the three obvious strategies for further growth outlined above, has some investors wondering whether the “common wisdom” on the coffeehouse kingpin is significantly more “common” than it is wise.

Disclosure

Dominion holds Starbucks in its Global Trends Managed Fund.


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