Starbucks Stores Are Finally Cannibalizing Each Other: BMO Downgrades

Seattle-based coffee and food chain Starbucks Inc. (SBUX) could be facing deep issues, as adding new locations no longer works to boost sales, say analysts at BMO Capital.

Instead, analysts warn in a research note Wednesday that stores are too close together and that the company not only needs to revamp its U.S. business but also slow down its store growth.

Too Many Starbucks?

BMO’s Andrew Strelzik warns investors on Starbucks’ saturation, now that each store has nearly four other locations within a one-mile radius. As a result of the increased density, the analyst downgraded SBUX to market perform from outperform, citing his research that indicates that store overlap has grown to such an extreme point that a booming number of locations are hurting each others sales. Strelzik also slashed his price target on Starbucks shares to $56 from $64, reflecting an approximate 4.5% upside from Thursday morning at $53.57.

In addition to concerns over cannibalization at the global coffee giant, BMO doubts whether food and fancy beverages, one major growth drivers at SBUX, will have the same positive effect in future quarters. “There are some signs that the share of Starbucks orders that include specialty beverages may have peaked and breakfast sandwich growth has slowed,” wrote Strelzik, also noting skepticism over whether new lunch offerings will make up for the breakfast slowdown. 

Further, the analyst suggests that beverage innovation may be working to drive more switching across products among exiting customers, rather than increasing incremental sales. The bearish note comes after Starbucks received a wave of downgrades last month on its weak quarterly earnings and an announcement that it would close all of its Teavana stores.