Starbucks (NASDAQ:SBUX) has built a fairly unassailable business.
The company has a loyal customer base, a high-margin core product, and significant room to expand same-store sales. In addition, the coffee chain has long been a leader in technology, further tying customers to the brand by allowing them to pay and auto-replenish their account balance through its app.
Starbucks closed 2016 with over 20 million members in its reward program globally, and with over 17 million people using its app. The chain has become so much a part of the culture in its home country of the United States that during the most recent holiday season, one in six American adults received a Starbucks gift card.
That success has not slowed in 2017. In its most recent quarter, the cafe chain delivered record revenue of $5.3 billion. It also saw nearly 30% of its orders being paid for through mobile payment, with Mobile Order & Pay accounting for 8%.
In fact, in recent years, the worst that can be said about Starbucks may be that mobile ordering has caused congestion in the front of its stores. That's a problem along the lines of having too much money or being too good-looking.
All of this has made me strongly bullish on the company. I'm not, however, blind to other arguments, and I see how a case can be made that the company may be set for a fall.
The Reserve brand could fail
Starbucks Chairman Howard Schultz stepped away from being CEO of the chain to focus on growing its premium brand. This undertaking will include launching Roastery locations in New York, Chicago, Tokyo, Shanghai, and Milan over the next two years, joining the original Roastery in Seattle. The company will also open up to 1,000 Reserve stores around the world while adding Reserve bars to up to 20% of its existing locations. These sell the small-lot premium coffees produced by the Roasteries along with higher-end food.
It's possible the even though the Seattle Roastery has been a hit, with an average ticket that comes in at four times what a typical customer spends in a regular store, the model won't work on a broader level. It's possible that the unique nature of the Seattle Roastery makes it a sort of theme park, where customers are happy to spend whatever is asked. It's also possible that even if the other Roasteries copy that success, the Reserve stores and bars won't, leading to a costly misstep for the company.
Competition finally catches up
Rivals for Starbucks' throne, from Dunkin' Brands (NASDAQ:DNKN) to McDonald's (NYSE:MCD), have begun selling espresso-based drinks and other coffee concoctions. Doing so may have helped both of those chains add sales from their own customers, but it hasn't taken any business from Starbucks.
That's partly because Schultz's company offers an experience along with a beverage. McDonald's and Dunkin' Donuts may have machine-produced lattes and cappuccinos, but that doesn't make them coffeehouses.
It's the difference between a nice bottle of wine and a box of wine. Both are sort of the same thing while being completely different.
It's possible, though, that a rival -- perhaps the conglomerate of coffee brands being assembled by privately held JAB Holdings -- launches a large-scale Starbucks rival that gets both the coffee and the ambiance right. If that were to happen, Starbucks could lose market share, pricing power, or both.
The cup is half full
While those two scenarios could dent the Starbucks brand and hurt earnings, perhaps for a few quarters, the company has shown an ability to overcome missteps. It has failed with efforts to offer an evening menu in limited markets, and it has struggled with its Evolution Fresh Juice and Teavana brands, while it shuttered the Boulange Bakery chain it bought.
Mistakes will happen, but as a Starbucks bull, I believe they will be overcome. The Reserve business will require educating consumers to get them to pay still more for coffee, but that's something Schultz has shown he can do.
In addition, while competition may realize that the Starbucks audience is looking for more than coffee, building a real rival will take a very long time. It's much more likely that JAB, or even Dunkin', creates coffee experiences that borrow from Starbucks without stealing from its customer base.
Starbucks has room to grow, both with its Roastery and Reserve brands and by expanding sales in the afternoon and evening. Those opportunities are likely to help the company overcome any competitors or operational stumbles.