Starbucks' Dream of 40,000 Stores

By Douglas McIntyre | March 21, 2007 AAA

Jim Donald, the chief executive officer at Starbucks Corp. (Nasdaq: SBUX), recently said that the coffee store company's long term goal is to have 40,000 stores worldwide. It has about 13,000 now, and, by way of comparison, fast food chain McDonald's Corp. (NYSE: MCD) has 36,000.

Starbucks shares are up almost 700% over the last 10 years, so investors who got into the stock when the company was fairly small have done very well. But, 40,000 stores is a lot.

Competing With Yourself?
Some large companies with multiple locations have found that their same-store sales growth year-over-previous-year begins to flatten. This has happened to Wal-Mart (NYSE: WMT) over the last year. When stores get close enough together, they end up taking customers from one another, instead of from the competition. Since Starbucks would argue that it has no direct competitors, it may not be able to grow be "stealing" from other food retail outlets. That means that almost all of its additional revenue has to come from adding customers who may migrate from buying inexpensive coffee to Starbucks fare, or from increased traffic from existing patrons.

The idea that traffic to current stores could grow rapidly, even as locations increase, is not out of the question. McDonald's same store-sales are still moving up 5% to 6% a month as it expands its menu and its hours.

Is Coffee, Recession Proof?
Starbuck's revenue has grown over 20% each of the last two fiscal years. In the year that ended on October 1, 2006, the top line hit $7.8 billion. The growth has continued. In the December 2006 quarter, quarterly revenue moved up to $2.36 billion.

Starbucks sells expensive coffee. Many of its drinks are over $3. A cup of coffee at most cafes or small coffee shops is often less than half of that. Starbucks has not been through a major recession since it hit the $5 billion revenue mark, and whether people will continue to buy premium coffee and breakfast food in an economic downturn is still an open question. Starbucks' same-store sales have been moving up in the 4% to 6% range over the last year. Wall Street has come to expect that level of growth, and with the ambition of hitting 40,000 outlets, the "believability" of the Starbuck's plans would be undermined by any significant economic slowdown.

The Starbucks Experience
Starbucks founder Howard Schultz recently sent his senior management a memo. In it he expressed concern about the loss of the "Starbucks experience". In his mind, this was based on the company's shops being viewed as local meeting places where the coffee was ground fresh for each drink and that atmosphere was congenial. Schultz bemoaned the fact that the stores now had little identity and that each one looked and operated like the rest of the outlets in the chain. His note to the troops reflects a problem in the company's thinking. To quickly grow its number of stores, Starbucks needs to be able to standardize much of the way it does business. In the founder's view, this undercuts the appeal of the company to consumers. It is a tension that is almost impossible to solve, but the uniformity of stores could turn off customers, at least according to Schultz.

One Competitor
Starbucks probably does have one competitor. McDonald's. The big burger chain says that its recent spurt of growth has been due in large part to sales of breakfast foods and premium coffees. It has also been helped by staying open 24 hours a day at many locations, something that Starbucks does not do.

If Starbucks' ambitions are likely to be thwarted by any single company, it would be one that already has more outlets and can create products similar to those that the coffee chain offers. So, hitting 40,000 stores may not be as easy with McDonald's hanging around.

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