Starbucks steams into new areas
The world's largest coffee chain expands its market to heartland, inner cities.
March 14, 2004
SEATTLE - When Howard Schultz looks at the United States, the Starbucks Corp. chairman sees nothing but potential locations - from the main streets of middle America to the barrio of East Los Angeles. The world's largest coffee chain has found that busy professionals and soccer moms are hardly the only folks who love its lattes. So the Seattle company also is targeting rural and ethnically diverse neighborhoods outside the upscale business districts and trendy shopping spots that were the springboard of its early success. "As we have been opening stores in places where Starbucks has not traditionally been before, we are finding the size of our market opportunity is much, much larger than we had thought," Schultz said in a recent interview. With more than 300 highway drive-through stores building a growing presence in black and Latino neighborhoods and smaller Midwestern cities, the 33-year-old company is challenging assumptions about its maximum growth potential, analysts said. "Several years ago, we were looking for highly concentrated populations," said Mark Wesley, Starbucks' senior vice president for store development. "Now, in some markets we really weren't thinking about, like North and South Dakota and parts of Montana, are some of our highest-performing stores." Household income may be lower outside the big cities on the East and West Coasts, but second-tier cities have literally clamored for Starbucks. Key factors are the company's marketing, which has made Starbucks' outlets hot with a young clientele, and pricing strategy. Overall, company sales - now at more than $4 billion annually - have increased every year for the last 10 years, and profits rose in all but one of those years. In February alone, sales rose a stunning 32 percent from February 2003. Those are just the kind of business basics that diligent investors look for - and investors have noticed. They pushed Starbucks' share price higher, even during much of the 2000-02 collapse in the stock market. In yesterday's Nasdaq trading, the shares fell 56 cents to close at $37.46, up 67 percent from a year earlier. Since the end of 1999, just before the market entered its three-year swoon, Starbucks' shares are up 209 percent. Getting less-affluent Americans to fork over $4 for a large, foamy latte or even $1.50 for a single-serve cup of coffee would seem like a tall order. But the demand for an affordable luxury, along with prices that have not risen since August 2000, has kept cash registers humming, analysts said. "Who would've thought teenagers would be spending $4 on a Frappuccino?" asked WR Hambrecht + Co. analyst Kristine Koerber. "But they are." Younger customers also are drawn to Starbucks' wireless Internet "hot spots," which provide Web access for owners of laptop computers who often come in after the morning traffic peak or during the evening. A partnership with former basketball star Earvin "Magic" Johnson has now grown to 58 stores, many in inner-city, predominantly black neighborhoods, and Starbucks has begun advertising in Spanish to lure Latinos in Southern California. Company executives have suggested that the chain could grow beyond its current targets of 10,000 stores in the United States and 15,000 elsewhere. A realistic U.S. goal is 15,000, said Legg Mason analyst Glenn Guard, who said he saw less demand for hot coffee in warm-weather states such as Florida. "Obviously there is still a significant amount of growth left," Guard said. Starbucks has 5,472 U.S. and 2,199 foreign locations. But as it continues to grow, the company will face new rivals. For instance, Dunkin' Donuts, which has a loyal following at its more than 4,000 U.S. stores, has begun selling lattes and other espresso drinks - at prices 20 percent below Starbucks'. Starbucks officials are undaunted. The company is in all 50 states and neighborhoods of all stripes, as well as in airports, grocery stores, and various other retail sites. Starbucks has yet to identify a location that it would rule out.
