Fool.com: Rating Starbucks' Competition [Special] February 5, 2004

David and Tom Gardner recently interviewed Starbucks(Nasdaq: SBUX) CEO Orin Smith onThe Motley Fool Radio Show on NPR. Starbucks' stock has risen 60% over the last three years, a period in which the S&P 500 dropped 15%. This is the fourth of five parts. All previous parts are linked to the right.

TMF: Orin, how do the economics of the drive-through stores compare to the economics of your other stores? And how many Starbucks drive-throughs are there these days?

Smith: I suspect right now we must have close to 400 in the U.S. The company owns stores that will open this year, which approaches probably about 550. We will be opening about a third of those as drive-throughs.

TMF: Wow.

Smith: The reason for that is that they are right now the most attractive return on investment we have. Better than our traditional stores. Higher volumes. There is a higher capital cost, but it is made up by the incremental volume for those units.

TMF: Are you at all worried about over-saturating the market here? How many locations do you have in New York City, for example, at this point, and how many more would you see there over the next five years?

Smith: I would imagine we have close to 200 units in Manhattan right now. I don't have that exact number. We can get that for you, but I was just told it was 168.

TMF: OK.

Smith: Relatively speaking, that is a small number for the population in Manhattan. If you go to the Upper East Side, the Upper West Side, and some parts of Midtown, you see quite a concentration of stores. But if you were to look more closely at the neighborhoods -- and there are neighborhoods throughout New York City, which comes as a surprise sometimes to people who don't live there -- but we are actually not present in the vast majority of neighborhoods in Manhattan. I don't have a target for you for Manhattan. I haven't talked to our people about what those plans are, so I can't answer your second question.

What I can tell you is we are experiencing, as we continue to evolve, that in the oldest markets where we have the largest number of stores, we are continuing to have extraordinary growth. So we are not at a saturation point, even in the state of Washington, where we ended this year with 380 units within a population of 5 million.

TMF: Let's talk about the competition here. I am going to throw out a few competitive threats, at least we think of them as potential competitive threats to Starbucks. I would like for you to rank them if you would. I have four of them for you.

Smith: OK.

TMF:Krispy Kreme(NYSE: KKD), Dunkin Donuts, McDonald's(NYSE: MCD), and local coffee houses. How would you rank those four as competitive threats?

Smith: In the immediate present, the top of that list would be the local competition. Then I would put Dunkin Donuts, even though the competition is primarily in the Northeast.

Then it is hard with Krispy Kreme right now to tell what kind of a threat they would be because the fact is our stores that are in or adjacent to the areas where they locate Krispy Kreme stores benefit from that. I think a lot of people who are waiting in those long lines for Krispy Kremes get a Starbucks coffee before they head over there. So we benefit. So that is the way it stacks up.

McDonald's, right now... well, they have made forays into our segment of the business. We can't regard them as an immediate competitive threat. Now, all of that could change down stream. I think the competition from the locals will continue to be important. I think many of them will continue to thrive. In fact, I expect that there will be increasing numbers of small competitors. I do believe that Dunkin Donuts is improving its coffee offering. They are becoming more of a competitive issue for us in the Northeast. Krispy Kreme is making some efforts to improve their product as well.

Tomorrow: Smith's smartest and dumbest decisions.


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