Starbucks Stands Up to Heavy Competition

Withstanding pressure from the high and low ends

Author: Andria Cheng

October 4, 2017

Starbucks faces challenges from high-end artisanal brands to low-end mass market competitors, but its position in the market actually is relatively secure, according to a new study.

Growth at specialty coffee chains with 10 or more units is increasing, according to a Morgan Stanley study released Wednesday. Excluding Starbucks, store counts for this category increased 8% last year, the study found.

Even so, the total store count for such outlets is only about 3,000, the study found, an increase of just 400 stores over the past three years. 

In contrast, the study showed that Starbucks opened nearly two times that number of stores in the US in 2016 alone to a total of 14,000 units domestically.

Globally, Starbucks has increased its store count by more than 6% every year since 2012.

Starbucks’s domestic unit is more than 30 times the size of the next largest specialty coffee shop rival, Caribou Coffee, which had 405 stores as of 2016, according to the report.

When it comes to independent coffee houses and smaller chains with fewer than 10 store locations, which may number up to 15,000 in the US, total store count has edged down in the past two years, the study said. 

Focusing on 900 independent and micro chain roasters operating a total of about 1700 units, the study showed that the number of brands has actually “dropped significantly” since 2013.

“High-profile private investments in specialty coffee's 'Third Wave' are making headlines, but that may overstate their competitive relevance, at least for now,” said Morgan Stanley analyst John Glass in the report, adding his team’s informal tally suggests there are fewer than 20 of these high-profile “Third Wave” chains. He said the fact that many of them are located in New York and California make the threat to Starbucks seem bigger than it is.

(Nestle’s September purchase of a majority stake in high-end coffee label Blue Bottle was one notable recent example of investment interest in craft coffee brands.)

In fact, the artisanal coffee trend could actually benefit Starbucks, he said. Increased consumer interest in high-end coffee validates Starbucks' development of its upscale Reserve brand.

In response to a question at a UBS conference in May regarding competition from craft coffee purveyors, Starbucks CFO Scott Maw said, "We're still not seeing any one competitor or even a ... group of competitors being an influence on our business at any time."

He acknowledged that the company can't ignore the threat, but downplayed the severity. "If we don't have our service levels right and customers aren't engaged in the right way, they now have options. And so that's another part of the reason we have some urgency around the Reserve brand.”

What about competition from McDonald’s and Dunkin’ Donuts?

Those brands outnumber Starbucks nearly two to one in the US, the Morgan Stanley study showed. But it also found that overlap was less severe than might be expected. Some 68% of Starbucks outlets are within a one-mile radius of a McDonald's. With Dunkin' the overlap is just 30%. In Starbucks’ top 25 markets, the coffee house chain actually outnumbers McDonald’s stores by nearly two to one, the study showed.

“While we don’t have current customer overlap data, we'd note that McDonald's shares customers with just about every restaurant brand, but the last time they pushed into specialty coffee—the initial McCafe launch of '09—it had no discernible negative impact on Starbucks, and arguably even a positive one as category awareness rose,” Glass said in the report.