3 Glaring Problems With Starbucks' U.S. Strategy

Starbucks continues its impressive expansion in the United States. Here are three things that could derail growth in the years ahead.

Jun 24, 2014 at 2:20PM

Investors have come to expect Starbucks (NASDAQ:SBUX) to grow quickly, and it has delivered. The company consistently grows comparable-store sales by mid-single digits each year -- phenomenal results for such a large company. Even in the U.S., stores older than one year continue to grow sales by a solid 6% per year.

The growth is making the stock price soar, and Starbucks is doing everything it can to keep it going. The company's primary strategy is to revise and expand its food and beverage menus to draw in customers during lunch and early evening. Although the plan has enabled U.S. stores to keep growing, it has three major flaws that could have a negative impact on growth and profitability going forward.

Menu

Coffee is getting edged out by Starbucks' new menu items. Image source: Starbucks.

Problem 1: Dilutes coffee brand
No company can be all things to all people. Starbucks is no exception. Over the last year and a half, Starbucks added new gourmet sandwiches, renewed its push to sell alcoholic beverages, and is stocking Teavana tea and craft soda in its coffee shops. Today, people think of Starbucks when they think of coffee... and vice versa. However, another 10 years of "menu innovation" could make it difficult to label Starbucks as a coffee shop.

Every successful global restaurant chain has succeeded by centering its menu on a handful of core offerings. No other global restaurant chain has abandoned its core product and continued to prosper. There is nothing wrong with trailblazing, but it vastly increases the uncertainty for investors. Starbucks has a long track record of profitable growth as the world's preeminent coffee shop; investors can look back at its history to see how its customers react during recessions, periods of growth, and periods of stagnation. No such track record exists for a Starbucks with an image as a quick-service restaurant that serves premium food and beverages. The company may prosper, but it will do so in unknown territory.

Problem 2: Choice overload
One of the byproducts of Starbucks' expanded food and beverage menus is an abundance of choice. That sounds like a good outcome for consumers, but it turns out that most consumers prefer fewer choices to more choices. A Columbia University study found that people were more likely to make a purchase when offered six choices rather than 30 choices. Participants in the study were also more satisfied with their purchases when they selected from fewer options. By giving customers more choices, Starbucks is making decisions more difficult and lowering purchase satisfaction.

Plus, customers who can't make up their minds slow down the line. This leads to slower service and lower satisfaction.

Starbucks may grow as it adds new menu items, but it will eventually need to pare down its menu to reduce the number of options and focus on what consumers enjoy most.

Problem 3: Complicates supply chain and employee training
It's easy for investors to overlook the nuts and bolts of carrying out a business strategy, but execution is the most important part of a strategy's success. Starbucks is adding several layers of complication to its supply chain and employee training just by introducing La Boulange to its stores.

Starbucks COO Troy Alstead told investors that La Boulange "is a very complex rollout." He said the effort required adjustments to "labor deployment strategies, product assortment choices, and marketing and display optimization." Employees have to be trained, inventory must be stocked, and customers must know their options.

Last December, Business Insider ran an article illustrating just how difficult it is to deliver an order that includes both food and beverages when your store is designed to sell coffee. The journalist discovered that miscommunication between employees preparing food and those preparing beverages led to incorrect orders or orders not being filled at all. When you add in the logistical complexities that come with expanding store inventory and the new routines required to prepare gourmet food, Starbucks' ever-expanding menu could easily lead to problems in execution.

Foolish takeaway
Starbucks' menu expansion is the core element of its domestic growth strategy. The new items are drawing in more customers at times that Starbucks stores have traditionally experienced a lull in traffic. This has resulted in impressive growth in the maturing U.S. market. However, if Starbucks continues to add new menu items, it risks diluting its coffee brand, confusing customers with choice overload, and complicating basic execution at the store level. By all accounts, Starbucks is poised to continue growing for many more years, but investors should be concerned if the menu continues to expand.

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Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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