A recent study from BMO Capital Markets pointed out that the chain's average store has 3.6 other Starbucks cafes within a one-mile radius. That means adding new locations in most of its markets won't add sales. Instead, it will cannibalize customers from existing stores.
To keep growing, at least in its home market, the coffee chain won't succeed by adding thousands of new locations. Instead, Starbucks' U.S. growth will be fueled by getting more money out of its existing customers by offering higher-end, higher-priced experiences.
What's next for Starbucks?
When former CEO Howard Schultz stepped down in April, he did not move into retirement or a hands-off role. Instead, he went back to his entrepreneurial roots. The man who made his idea of creating a "third place" after home and work took over efforts to grow Starbucks' Roastery and Reserve brands.
The coffee chain has one Roastery location in Seattle that serves as sort of a coffee theme park for visitors and a test lab for the company. The original Roastery offers a higher-end, more-barista-led coffee experience for visitors and its serving as a model for premium expansion for the company.
Starbucks has plans to eventually open 20-30 Roastery locations around the world with New York on track for 2018 and Chicago following in 2019. In addition, the new group being led by Schultz plans to open several hundred Reserve stores all around the world, while adding Reserve bars to up to 20% of its global locations by 2021.
If Starbucks has become a place to work or casually meet with friends over a drink, the Reserve and Roastery experiences will be much more about the coffee. The Seattle Roastery offers limited-edition coffee beans, and drinks that can't be sampled anywhere else. It also operates somewhat like a wine bar where the barista will, if you want, learn about your preferences before crafting a personalized coffee for you.
Obviously, these locations will drive higher check prices and adding Reserve Bars to existing stores may expand the hours a location remains busy. So far, the sample size is small, but in 2016 sales at the original Roastery grew by 24% over the previous year. During the chain's Q4 2016 earnings call, Schultz credited that to an average ticket that comes in at four times what a typical customer spends in a regular store.
A bright path forward
In addition to Starbucks' opportunity to grow its premium brand, the company also has a huge opportunity in China. In August, the company said it would spend $1.3 billion to buy the half of its East China joint venture it did not previously own. That gives the coffee giant full control of 1,300 stores in three Chinese provinces. In addition, Starbucks plans to open 5,000 stores in Mainland China by 2021.
Big things ahead
Starbucks has a growth plan that may take decades to realize. It will take years to build out its premium strategy in the U.S. and abroad, while its global expansion plans will also drive growth for years.
The company clearly has found a model that works across the world with its traditional cafes. As it grows its footprint with those, it can pick and choose which markets will support Roastery locations, as well as Reserve stores or bars.