Starbucks Corporation (SBUX) stock soared to an all-time high of $72.43 on Thursday as the company said it will redesign its loyalty program, modernize its stores, and test greener alternatives to its paper cup. The company has dominated in beverage, store setting, service and culture over the competitors, who was unable to succeed in developing a business model for beating the coffee giant. Despite this positivity, Starbucks will likely face four headwinds that might hinder its growth and dominance in the coffee market.
On Tuesday, Starbucks announced enhancements to its Rewards loyalty program, which currently has over 16 million members. The company has planned to modernize its stores and is testing greener alternatives to its paper cup in five locations, New York, San Francisco, Seattle, Vancouver, and London. In the compostable cup, a biodegradable liner, which replaces the plastic liner, will make sure the liquid doesn’t leak out.
In a note to AlphaStreet, Tigress Financial Partners analyst Ivan Feinseth said that the company could achieve additional sales growth and create additional market opportunities through the expanded rewards program. This will increase return visits and build a loyal and addressable customer base.
Feinseth also expects that the Starbucks partnership with Nestle SA will also add incremental growth as well. He believes further upside exists from current levels and continue to recommend the purchase of the stock.
Despite the positivity, Starbucks needed to keep a check at these four headwinds as it could hinder its growth and dominance in the market. Those include self-brewing, shift to ready-to-drink coffee, competition from quick-service restaurants and other gourmet coffee shops, and market saturation.
Self-brewing – According to a January 2019 report published in the journal Joule, thanks to the advancement of technology, Americans have started spending more time at their home. The researchers believed that the customers remained glued to watching videos and computer use as well as opt for work-from-home options instead of traveling outside. This report has matched the market research firm NPD Group’s expectations of consumers spending more time at home.
It is expected that the consumers will start brewing their own artisanal craft coffee rather than visiting a Starbucks store if they are spending more time at home. And, the demand for products such as coffee or espresso makers could rise for in-home craft brewing.
Shift to ready-to-drink – There has been an increase in ready-to-drink beverages as more Americans started changing themselves to the on-the-go lifestyle. According to a Mintel study, the growth rate in the coffee shop is slowing despite sales projecting to rise from an estimated $23.4 billion in 2017 to $28.7 billion by 2021. This was due to the ready-to-drink coffee segment replacing the store visit. The segment is likely to expand by 67% between 2017 and 2022.
In addition, the supermarkets have been experiencing an increase in the demand for liquid coffee, which is joining liquid tea and other new age beverages. The sales value of liquid coffee in the US was about $2.66 billion in 2017, up from $1.65 billion in 2013, according to the Statista. It is expected that the sales value could rise to $4 billion by 2020.
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Competition – The competition has been rising from quick-service restaurants and other gourmet coffee shops. Starbucks has acknowledged the same in its annual report. In recent years, in order to outpace the competitors, Starbucks has invested heavily in its locations by expanding its food options, modernizing its restaurants and updating its rewards program.
Market saturation – Starbucks has nearly four brick-and-mortar store in almost every neighborhood across the US and the company is facing market saturation. The competition has been brewing among the Starbucks cafes and this is hurting each other’s sales. During mid-2018, Starbucks has planned to close 150 US stores in 2019.
In the recent first-quarter, Starbucks reported a 66.2% plunge in earnings due to higher operating expenses as well as streamline-driven activities and partner investments. The company has opened 541 net new stores in the first quarter with over two-thirds of them were outside the US. The company expects to add about 2,100 new Starbucks stores globally in fiscal 2019.
Starbucks is undoubtedly the undisputed champion of coffee at the moment. However, if these headwinds are not managed, then the optimism could travel beyond practical limits. Coffee is a customer-centric sector and satisfying their desires could remain beneficial for the company. Innovation and store setting and culture remained the key to Starbucks growth.
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