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One of Starbucks’ former biggest advantages may be turning into a huge problem for the chain


Business Insider Article

53.60 -0.92 (-1.70 %)

  • An analyst downgraded Starbucks shares, saying the chain’s large number of US locations is cannibalizing sales.
  • A Starbucks location has on average more than three others within a mile, according to the analyst.
  • Starbucks has struggled to increase traffic in recent months — and oversaturation may be to blame.

The “Starbucks on every corner” stereotype is going from a joke to a serious problem for the chain, according to one analyst.

On Wednesday, BMO Capital Markets downgraded Starbucks shares to “market perform” partly because of concerns that there are simply too many locations in the US for the chain to continue to increase same-store sales.

“Cannibalization of existing store traffic appears to have accelerated over the last several years, which may create challenges in reaccelerating US comp momentum and could require a slowdown in the new store development pace,” the analyst, Andrew Strelzik, wrote in a note.

According to Strelzik, 62.5% of Starbucks locations in the US have another store within one mile, up from 58.6% in 2014, and a Starbucks location has on average 3.6 others within a one-mile radius, compared with 3.3 in 2014.

In certain areas, those figures are even higher. In California, for example, 75% of Starbucks have another location within a mile.

BMO StarbucksBMO Capital

BMO says many areas stuffed with Starbucks locations also have several other premium coffee options for customers to pick from, such as Blue Bottle, Stumptown, and trendy independent shops.

While Starbucks has said these independent coffee shops are the biggest threat to its business, it has maintained that its US expansion hasn’t cannibalized stores’ sales.

“We’re able to track quite accurately the cannibalization results that happened from those new stores, and what we’ve seen over many years is very, very little impact,” Scott Maw, Starbucks’ chief financial officer, said in a call with investors in July.

Starbucks storesMike Nudelman / Business Insider

However, Strelzik argues that the success of new stores — something Starbucks has offered as proof against cannibalization — comes at the expense of existing stores in the area. (Starbucks opened about 650 stores in the US in fiscal 2016.)

Starbucks has recently struggled to attract new customers. Even as same-store sales have increased — albeit at a slower pace than in years past — traffic has stayed roughly the same or dropped every quarter for the past year.

This isn’t the first time Starbucks has dealt with the threat of cannibalized business through overexpansion. In 2008, Starbucks closed 600 underperforming US stores — it had gone from 1,755 total US stores in 1998 to 11,567 that year.

Further, the large number of locations makes it more difficult for Starbucks to maintain its status as a premium brand. If Starbucks is everywhere, customers may no longer perceive it as an upscale, coffee-snob-approved experience that’s worth paying extra for.

“Ubiquity will create sort of a natural gravitation pull toward a commodity,” CEO Kevin Johnson told Business Insider earlier this year.