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Starbucks: Reinvention Plan Has Big Commercial Real Estate Implications

RJ Hottovy
Sep 16, 2022
Starbucks: Reinvention Plan Has Big Commercial Real Estate Implications

Key Starbucks Metrics

Building excess capacity and improving throughput were the central themes at Starbucks’ investor update this week. The company laid out an ambitious "reinvention" plan highlighted by plans to accelerate U.S. store growth, automate several restaurant tasks to improve store efficiency, and elevate the customer experience and drive engagement with its Starbucks Rewards membership base. There were several notable developments from a commercial real estate perspective, which we’ve analyzed using Placer.ai's visitation data.

  • Unlocking capacity at existing stores. Starbucks finds itself in an enviable position compared to most retail and restaurant chains as it continues to see strong consumer demand but needs to unlock capacity to improve its guest experience, reduce bottlenecks, and ultimately drive more frequent visits. We’ve previously discussed that the number of visitors to Starbucks U.S. stores in calendar 2022 has exceeded pre-pandemic levels, yet the number of unique visits (and by extension visits per location) hasn't kept pace (below), potentially confirming the operational efficiency issues that the company is looking to improve upon. As such, it’s not surprising to see Starbucks commit to reimagining its existing store environment and focus on reducing complexity, enabling stronger engagement, and "experiential convenience". This plan will be backed by a $450M investment in its existing U.S. store base during fiscal 2023 with continued investment in fiscal 2024 and 2025. Starbucks expects these investments will create efficiencies, unlock capacity for partners, and enable increased throughput to support increasing customer demand.

  • Evolving its store footprint with new formats. Touting new store economics that are expected to deliver 50% return on investment and 25% cash margin, Starbucks announced plans to accelerate U.S store growth to 3%-4% annually over the next several years, which will take the company’s U.S. store base (both company-owned and licensed locations) from 16,000 units to 18,000 units. More important from a capacity standpoint, the company plans to diversify the formats it uses for its store expansion plan, more heavily utilizing pickup, delivery-only and drive-thru only locations. By 2025, Starbucks expects that pickup, delivery-only, and drive-thru only locations will represent 3% of the total U.S. store base, with each of these formats seeing greater rollout in the coming years (below).

Starbucks has been using these new store formats for a limited amount of time–the first Starbucks pickup only store opened in New York City’s Penn Plaza in 2019–but the visitation trends are encouraging. We examined the trailing-twelve-month visitation trends for a handful of Starbucks Pickup locations and compared them to the chain’s legacy stores. Over the past twelve months, the Starbucks Pickup stores we examined averaged 30.6K visits relative to the chain-wide average of 133.5K. Assuming Starbucks Pickup locations average 400 square feet and legacy stores average 2,000 square feet, our data suggests that Starbucks Pickup locations see 15% greater visits per square foot than legacy locations. Assuming these trends continue as the company pursues its U.S. expansion plans, it should help Starbucks build more capacity and translate into healthy transaction growth.

  • Visitation data confirms Starbucks is underpenetrated in new growth markets. Where does Starbucks plan to open these new stores? Interestingly, the company highlighted that it is underpenetrated on a stores per population basis in several markets across the Midwest and Southeast, including Kansas City, Indianapolis, Cincinnati, St. Louis, Nashville, Louisville, Knoxville, Charlotte, Jacksonville, and Birmingham (below). (Coincidentally, these are also several markets we've identified as having high growth potential due to future EV investments, as we highlight below.)

Instead of looking at the population per Starbucks location as the company presented, we reviewed Starbucks visits as a percentage of total restaurant industry visits in several of these markers relative to its national average (below). We found that Starbucks lags its national average (7% of total industry visits) in most of these markets, confirming Starbucks growth opportunity in the region. Interestingly, many of the markets that Starbucks has identified are also markets that Dutch Bros. has also identified for expansion.

  • Starbucks in good hands with new leadership. Interim CEO Howard Schultz deserves credit for helping to develop such a comprehensive reinvention plan for the company, but we believe the company is in good hands with incoming CEO Laxman Narasimhan. Although Narasimhan may appear as an unconventional choice to lead Starbucks given his most recent position as CEO of Reckitt, he has led that company through a major strategic transformation and also has global brand building and digital strategy expertise during several leadership roles at Pepsi. Narasimhan strikes us as a strong candidate to continue Starbucks’ reinvention plan in the years to come.
  • Updated financial targets. As mentioned above, Starbucks is now planning for annual U.S. store growth of 3%-4% (compared to a prior goal of 3%), which will contribute to the company’s global revenue growth target of 10%-12% annually from fiscal 2023 to fiscal 2025 (up from a previous range of 8%-10%). Management forecasts "solid" margin expansion in fiscal 2023 with progressively more expansion in fiscal 2024 and fiscal 2025, which is expected to drive adjusted EPS growth between 15%-20% over the next three years (up from its previous range of 10%-12%).

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RJ Hottovy

Head of Analytical Research, Placer.ai

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for nearly 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank.

R.J. also brings a wealth of experience with early-stage investments as an investment committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he has advised over 50 foodservice and foodservice tech companies on more than $200 million in early-stage capital raises and M&A transactions.

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