Higher Daily Customer Visits at Starbucks Expected

The average number of daily customers who visit a Starbucks (NASDAQ:SBUX) store decreased from an estimated 463 in 2005 to 408 in 2007, [1] driven by the launch of lower priced beverages by players like McDonald’s (NYSE:MCD), as well as due to self-cannibalization of Starbucks stores.  Starbucks faces competition from other specialty coffee manufacturers such as Caribou Coffee (NGM:CBOU) and Peet’s Coffee (NASDAQ:PEET).  We believe that long-term economic improvement will help Starbucks limit the impact of price competition and that the company will be able to increase its average daily customer visits as it continues to limit store count by shutting down under-performing stores.

Cheaper priced beverages from competitors

Fast food chains such as McDonald’s have been cutting into Starbucks’ customer segment by offering lower priced beverages. This had the impact of attracting price conscious customers particularly during recessionary times. In the long run, we believe that the market will make space for both types of business models: one for price conscious customers and the other for those who prefer premium quality at a higher price. Customers seeking the latter are likely to continue visiting Starbucks’ stores.

Self-cannibalization impacting customer base

By the end of fiscal year (FY) 1999, Starbucks had nearly 2,500 stores, but by FY 2007 this figure jumped to more than 8,500.  The firm had added 612 net stores at an average of about 1.7 per day in FY 1999. This number nearly doubled in FY 2007 when the firm added 1,342 net stores at an average rate of 3.7 per day.  The larger store count has lead to some self-cannibalization and Starbucks is addressing the problem by shutting certain stores.

Starbucks underwent a business restructuring in 2008-09, closing down more than 890 under-performing stores [2].  As the firm rethinks its strategy, we believe this could help increase the average customer base per store going forward.

The average of Trefis member forecasts for Number of Daily Customers per Store indicate an increase from around 468 in 2010 to 575 by 2016, compared to the baseline Trefis estimate of an increase from 434 in 2010 to 531 by the end of the Trefis forecast period. If the member estimates are indeed true, it would imply an upside of 6% to the Trefis price estimate for Starbuck’s stock.

You can drag the forecast trend-line above to express your own view, and see the sensitivity of Starbucks’s stock to the Number of Daily Customers per Store.

Our complete analysis for Starbucks’s stock is here.

Notes:

1. Starbucks provides number of weekly customers in its annual report. We have calculated Average Customers per Starbucks Store per day as: (Weekly customer traffic x 1000000)/ (total no. of company owned stores and licensed stores x 7).

2. Reported by the company