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Throughout my 4 years in college, and the beginning of my career in the "real world", I have come to realize that coffee is essential to start almost everyone's day. Never having drank a cup of coffee a day in my life, this was an eye opener for me. Now that my attention has been drawn to this, I started noticing where people get there coffee. Of course there are the Dunkin' Donuts, McDonald's, and Wawa/Sheetz/7-Eleven lovers of the world. The biggest by far, however, is Starbucks with over $21 Billion in worldwide revenue.
This is no accident. Starbucks have strategically placed their locations on not only the highly trafficked roads, but the correct side of the road and intersections to ensure that it is convenient for you to access their locations on your way to work. All you have to do is drive by them to see that they are the busiest in the mornings.
After rapid expansion, what happens when expansion opportunities are scarce? BMO Capital Markets recently performed a study which determined that an average Starbucks store has about 3.6 other Starbucks cafes within a 1 mile radius. As mentioned in the article, adding more stores won't increase their sales, but instead, it will cannibalize customers from existing stores. Starbucks has determined that the newest model of increasing sales is to offer a new coffee experience, with higher-end and higher priced products.
This new model is leaning closer to a Roastery experience, where the barista will be able
to understand your likes and dislikes, and would be able to brew a coffee to satisfy your specific tastes. With this new experience and a higher-priced product, Starbucks is looking to get customers to come in and spend some time, as opposed to a quick pit stop on the way to work.
As Caribou Coffee, Saxby's, Peet's, Seattle's Best, and other smaller chains start to emerge and grow, Starbucks needs to find a way to differentiate themselves from the competition.
David Laiter | Investment Sales Specialist
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