Starbucks cafes are facing mounting competition from other Starbucks locations and that’s going to hurt the stock, one Wall Street firm said Wednesday.
BMO Capital Markets downgraded Starbucks shares to market perform from outperform after its researched indicated that store overlap has grown to such an extreme point that they are hurting each other’s sales.
“Cannibalization likely has increased,” wrote BMO analyst Andrew Strelzik in the note. “Strong new store performance appears to be coming – at least in part – at the expense of existing store traffic.”
Strelzik’s analysis not only suggests problems in boosting sales growth, but also that the pace of U.S. development should be slowed. The research showed that annual increase in store overlap across Starbucks’ U.S. footprint has accelerated by more than three times over the last few years.
BMO used two metrics to gauge the likelihood and trajectory of cannibalization: the percentage of U.S. locations that have another Starbucks store within a one-mile radius and the average number of U.S. locations within that one-mile radius.
“Seventy-five percent of Starbucks locations in California (Starbucks’ largest U.S. market representing approximately 20 percent of its U.S. footprint) now have a store within a one-mile radius,” Strelzik said. “There are now 3.6 Starbucks locations within a one-mile radius of the typical Starbucks in the U.S. relative to 3.3 and 3.2 stores in 2014 and 2012 respectively.”
Source: BMO Capital Markets Research
BMO research lowered its 12-month price target to $56 from $64, representing nearly 3 percent upside from Tuesday’s close. Starbucks shares fell 1.6 percent Wednesday on the downgrade.
Multiple Wall Street firms recently lowered ratings on Starbucks shares in July after the company gave weaker-than-expected sales guidance and announced the closure of all its Teavana stores.
This self-inflicted competition comes as other coffee companies ramp up their own expansions.
“The competitors we analyzed have a store within one mile of 70 percent of Starbucks’ units in these markets most recently, up from 66 to 67 percent in 2012 and 2014,” added the analyst.
And as far as beverage innovation and the introduction of breakfast foods are concerned, BMO research isn’t optimistic.
“Specialty beverage growth may be nearing saturation among existing customers as the percentage of Starbucks U.S. orders that include specialty beverages declined from year-ago levels,” wrote Strelzik. “Beverage innovations may drive greater switching across products among existing customers, rather than incremental sales.”