One might find it beneficial to have a Starbucks on every block, but it’s actually the opposite. More and more Starbucks cafes are facing competition from other Starbucks locations, and according to one Wall Street firm, that’s going to have detrimental effects on the stock.
On Wednesday, BMO Capital Markets downgraded Starbucks (NASDAQ:$SBUX) shares to ‘market perform’ from ‘outperform’. Why? The firm’s research suggested that store overlap has grown so extreme that the branches are starting to hurt each other’s sales.
“Cannibalization likely has increased,” wrote Andrew Strelzik of BMO Capital Markets. “Strong new store performance appears to be coming – at least in part – at the expense of existing store traffic.”
Not only does Strelzik’s analysis suggest that there are problems in increasing sales growth, it also suggests that the pace of development in the United States should be slowed. In the research, BMO found that annual increase in store overlap across Starbucks’ U.S. footprint has increased by more than three times over the course of the last couple of years.
The firm looked at the store overlap and used the following metrics to measure the likelihood and trajectory of cannibalization: the percentage of U.S. locations that have another Starbucks cafe within a one-mile radius, and the average number of U.S. locations within that designated 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 wrote. “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.”
BMO Capital Markets lowered its 12-month price target from $64 to $56, which represents almost 3% upside from Tuesday’s close. On Wednesday, after the downgrade, Starbucks shares dropped 1.6%.
Featured Image: depositphotos/monticello
