Howard Schultz, the founder of Starbucks (SBUX) defended his company’s growth plans in an interview with The New York Times. His two points for investors in the company are that Starbucks has less than 10% shares in the coffee market in the US and less than 1% overseas. And, the coffee chain can reach its long-term goal of 40,000 stores because it has low penetration in countries like China.
The logic is a bit faulty. Starbucks may have only 10% of the North American market. But, it coffee is a luxury item compared to buying Maxwell House and brewing it at home. It is very hard to make the case that most consumers would even consider buying expensive coffee when they can make it themselves or get it for less at outlets like McDonald’s (MCD).
The argument is probably even stronger when looking at overseas markets. While places like the UK and Japan may offer more growth for SBUX, there is no concrete evidence that a country like China could support 2,000 or 3,000 stores. The Chinese appetite for expensive coffee is, as yet, untested. There is no guarantee that Chinese companies will not copy the Starbucks model and create local competition.
Wall St. does not believe Schultz. That is why SBUX is down well over 20% this year, and is not likely to move back up.
Douglas A. McIntyre
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