Starbucks Expands Our Lives

During an investor conference held on December 5, 2012, Starbucks executives announced company plans to open at least 1,500 new units stateside over the next five years.   

The reason the seemingly ubiquitous chain feels the need to grow likely has to do with maintaining market share—downscale rival McDonald’s has been investing a lot of time and money into promoting its coffee line, according to Jeff Green, president of Jeff Green Partners, a Phoenix-based retail real estate consulting firm. The good news for Starbucks is that it continues to experience strong sales in spite of McDonald’s’ lower price point, notes Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based retail consulting and investment banking firm. Increasing its food offerings and investing in better customer service has served the chain well, he says.

Many retail real estate consultants wonder whether this is ultimately the right move. Sarbucks will have to ensure that it’s not opening locations haphazardly, across the street from each other, the way it was done in the early and mid 2000s.

“When they collapsed before, it wasn’t just [because of the] bad economy,” Davidowitz says. “There were a lot of strategic real estate mistakes.”

RJ Hottovy, an analyst who covers Starbucks for Chicago-based research firm Morningstar, expresses a similar view. “I think [the new expansion plan] is a little aggressive, but what gives me confidence in that goal is the unit economic numbers we’ve seen in the past two years, which have been some of the strongest in the history of the chain,” he says. “The way they characterized their last expansion phase was ‘undisciplined’ and now they are really prioritizing the customer experience. I do think there is substantial opportunity, especially in an environment where we have excess real estate capacity.”

Where to go?

Finding the right formula to take advantage of that opportunity will be no easy feat, however. While Starbucks was all but made for urban markets in Davidowitz’ view, Jeff Green points out that the chain has long ago saturated most of the major urban and suburban areas in the United States. What’s more, Starbucks risks losing its brand appeal if it can be found anywhere and everywhere, according to Doug Stephens, president of Retail Prophet, a consulting firm.  “As it is now, I think Starbucks is really walking a fine line between healthy growth and losing their brand magic,” he says. “The thinner they spread the brand the more ‘average’ and ‘ordinary’ they become.”

Are They Selling a Product, or a Service?

Yes, they do sell snacks and coffee refills. But there is something else going on in the Starbucks locations.  In my opinion, Starbucks is really a service provider. The coffee may be gratis. What they are selling is a place to relax; to chat with coworkers, or just sit and stare at your computer or iPhone screen. But being clever marketers, they have turned the formula completely around so that we think we are buying the coffee. What other beverages do we purchase this way? The only ones I can think of are beer and wine. Oh, and the strawberry margarita you had last weekend.

This is why having stores located much closer to one another than traditional merchandisers, is not as much of a problem for Starbucks. Plus, the fact that many of the new stores will come as a result of licensed partnerships with retailers like Safeway and Target—inside their stores, shows unique market understanding.