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Starbucks Is Under-Stored in the U.S. -- Wait, What?

A Starbucks location in Portland International Airport. Source: Starbucks.

Re-listening to conference calls often allows you to pick up on things you didn't hear the first time around. With Starbucks (NASDAQ: SBUX  ) set to report its third-quarter earnings later this month, I decided it was worth brushing up on how Starbucks fared last quarter. Therefore, I got out Starbuck's second-quarter conference call and settled in for the hour marathon ahead. About five minutes in, I bolted up in my seat when I heard CEO Howard Schultz say this:

Despite currently operating over 20,000 Starbucks stores in 64 countries, our research clearly demonstrates that Starbucks still accounts for very small share of total global coffee occasions and that we are significantly under-stored in many markets, including North America, China, Brazil and India, today our fastest growing international markets.

Wait, Starbucks is under-stored in North America? Is that the same North America that includes the United States? Sure, Starbucks has a lot of room to grow in China, Brazil, and India, but the United States? Come on, Howard. In Manhattan alone, there are 201 Starbucks, one for nearly every street corner. To be exact, as of Sept. 29, 2013, there was a combined 11,457 company-owned and licensed Starbucks locations in the U.S. 

Why Schultz may actually not be crazy
I wasn't the only one shocked by that comment, as the first question of the Q&A session dealt with the U.S. being "under-stored." Schultz's response was actually quite convincing and offered an angle I had not considered:

We believe in the incrementality of creating new dayparts, fulfilling the needs that customers have other than the peak morning period and as a result of that, we can put Starbuck stores in areas that previously we probably thought would not be kind of stores that we would have gone after because they were morning day-part driven.

Starbucks in fact is currently making a huge push into lunch and evening hours. Starbucks has already successfully rolled out several La Boulange bakery items just this year, and it has expressed intentions of carrying that success later into the day with new offerings. Most of Starbucks' new beverages have also been more lunch/dinner-oriented, as offerings like Teavana iced tea and Fizzio soda are traditionally consumed later in the day. Additionally, Starbucks already has been testing the evening market with wine and beer for years.

All day dynamic and premium quality provides potential for more stores
To believe that Starbucks is under-stored in the U.S., you have to believe that Starbucks will successfully become an all-day destination.

McDonald's (NYSE: MCD  )  expansion into breakfast, beginning with the introduction of the Egg McMuffin in 1972, has partially, but not completely, enabled the company to increase its U.S. presence. Offering food for all parts of the day simply increases your potential market.

All-day offerings also have the potential to drastically increase each location's annual sales. In 2012, McDonald's average unit volume (AUV) was $2.5 million in sales, which is nearly three times more than Starbucks' 2012 AUV of $875 million. 

Further potential for expansion is made possible by Starbucks' hallmark premium nature, which could allow the company to ride the recent shift in consumer behavior toward healthy, premium brands (think Whole Foods, Panera, and Chipotle). 

Consider this: if Starbucks maintains only half of the 8.22% CAGR (compound annual growth rate) it has sported over the past decade, it would only take 14 years to hit 20,000 U.S. locations.

The Foolish takeaway
Maybe Howard Schultz isn't as crazy as I originally thought. While Starbucks is unlikely to sustain the remarkable CAGR it has achieved over the past decade, the United States should still continue to be a robust growth market for Starbucks, making the future an exciting time for Starbucks investors. 

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Ryan Guenette

I have been writing for The Motley Fool since 2012. More than anything else, I love digging through entire industries in search of the best place to put my money. Primarily, I focus on companies in the food and beverage industries.

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8/31/2015 11:29 AM
MCD $95.34 Down -0.91 -0.95%
McDonald's CAPS Rating: ***
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Starbucks CAPS Rating: ****