Why haven't Starbuck's competitors done more damage?

[CorpRaider]

The fact that schultz couldn't leave gives me a lot of heartache about their brand durability, moat or however you want to refer to any sustainable competitive advantage.

[Parsad]

Coffee is also habit forming.

 

There is a new breed of coffee shops coming out of the Bay Area that are kicking Starbucks butt here.

 

They've just raised money and are beginning to expand nationally.

 

I wouldn't be surprised to see Starbucks challenged in a few years.

 

Will not happen.  Even if Schulz passes away or something, it will take a decade to even make a dent, and over two decades to supplant them.  I would like to see the margins at those stores, and exactly how much cash they are generating. 

 

As well, Starbucks controls the amount of premium coffee being developed in the world through their huge orders to producers, and the moat is not about to be hurt by small retail shops that are sprouting up.  It's like saying that Walmart's buying power is going to be displaced by retailers in certain markets that are doing reasonably well.  Won't happen.

 

The only chains that could hurt Starbucks, are the ones that already have a huge footprint and excellent brand recognition...McDonalds, Subway, etc.  But two things will stop them:

 

- They cannot get enough premium coffee from farmers already producing for Starbucks, so they may be able to provide one or two blends of premium coffee, but nowhere near the variety of beans that Starbucks can, nor the same variety of mixed handmade drinks unless they change their operations.

- If they try to offer that same variety, they may end up being distracted and hurt existing moats in the food/sandwich category.

 

We have some very good chains and independent coffee stores, on par or better than any in Seattle and San Francisco.  They do ok competing head on, but none will displace Starbucks...ever...at least in my lifetime!  Coffee culture is huge here...in fact, the first Starbucks stores outside of Seattle opened in Vancouver some 25+ years ago.  I'm a hard-core coffee aficionado for over 15 years and watched the market grow here and in the Pacific Northwest, as I spend a lot of time in Seattle.  I drink daily, both the premium stuff and non-premium stuff, but I'll tell you...I go to Starbucks every time I want consistent, premium coffee or mixed drinks.  Too much inconsistency in the smaller artisian shops, and not enough variety in the other chains.     

 

Lastly, eventually when any competitors start doing well or start getting into trouble in any particular region, Starbucks will just buy them out like they have in the past.  Cheers! 

 

Cheers! 

 

And what about a Tim Hortons in Canada, who reach for different customers? They seem to resist well to Starbucks?

 

Starbucks brand is global.  Tim Horton's is regional.  Two very different clientele for the most part as we'll. 

 

You go to the prairies and TH's has 80% market share of coffee.  You go to Vancouver or Toronto, and that number drops to 30% or less.  You go outside of Canada and no one knows TH's other than expats. 

 

Finally, Tim's falls into that McDonald, Subway category.  Cannot compete with SBUX on variety, unless it detracts from what they do best...food!  Cheers!

[Liberty]

Great analysis Sanjeev, very clearly explained!

[Guest valueInv]

Coffee is also habit forming.

 

There is a new breed of coffee shops coming out of the Bay Area that are kicking Starbucks butt here.

 

They've just raised money and are beginning to expand nationally.

 

I wouldn't be surprised to see Starbucks challenged in a few years.

 

Will not happen.  Even if Schulz passes away or something, it will take a decade to even make a dent, and over two decades to supplant them.  I would like to see the margins at those stores, and exactly how much cash they are generating. 

 

As well, Starbucks controls the amount of premium coffee being developed in the world through their huge orders to producers, and the moat is not about to be hurt by small retail shops that are sprouting up.  It's like saying that Walmart's buying power is going to be displaced by retailers in certain markets that are doing reasonably well.  Won't happen.

 

The only chains that could hurt Starbucks, are the ones that already have a huge footprint and excellent brand recognition...McDonalds, Subway, etc.  But two things will stop them:

 

- They cannot get enough premium coffee from farmers already producing for Starbucks, so they may be able to provide one or two blends of premium coffee, but nowhere near the variety of beans that Starbucks can, nor the same variety of mixed handmade drinks unless they change their operations.

- If they try to offer that same variety, they may end up being distracted and hurt existing moats in the food/sandwich category.

 

We have some very good chains and independent coffee stores, on par or better than any in Seattle and San Francisco.  They do ok competing head on, but none will displace Starbucks...ever...at least in my lifetime!  Coffee culture is huge here...in fact, the first Starbucks stores outside of Seattle opened in Vancouver some 25+ years ago.  I'm a hard-core coffee aficionado for over 15 years and watched the market grow here and in the Pacific Northwest, as I spend a lot of time in Seattle.  I drink daily, both the premium stuff and non-premium stuff, but I'll tell you...I go to Starbucks every time I want consistent, premium coffee or mixed drinks.  Too much inconsistency in the smaller artisian shops, and not enough variety in the other chains.     

 

Lastly, eventually when any competitors start doing well or start getting into trouble in any particular region, Starbucks will just buy them out like they have in the past.  Cheers! 

 

Cheers! 

 

Well, visit the Bay Area and see what is happening.

[txlaw]

In addition to the arguments about SBUX consistency, which I agree with, SBUX also offers up a "third place" experience, which helps keep their mass market brand more premium and leisure-oriented.

 

When you go into SBUX or any coffee shop, you're not just paying for a cup of coffee.  You're also paying for rent, music, the "vibe," etc.  If you park yourself at SBUX for a couple of hours, drinking one cup of coffee (or some espresso drink), reading the WSJ for free, using their bathroom and air conditioning, and working, that's really what you're paying for in addition to the cost of preparing the coffee. 

 

As for those who pop in for a daily dosage of coffee, I wouldn't underestimate the convenience factor and the "communal daily ritual" aspect of it.  I remember going to SBUX in DC (and Peet's in SF) when I was working in those cities, and I did it despite knowing that I could wake up a bit earlier, make a french press, and have better coffee.  It was a ritual stop before getting into the office that I enjoyed.

 

Howard Schulz and Co are very good at what they do, even if their coffee is only sub-par. 

[Parsad]

Coffee is also habit forming.

 

There is a new breed of coffee shops coming out of the Bay Area that are kicking Starbucks butt here.

 

They've just raised money and are beginning to expand nationally.

 

I wouldn't be surprised to see Starbucks challenged in a few years.

 

Will not happen.  Even if Schulz passes away or something, it will take a decade to even make a dent, and over two decades to supplant them.  I would like to see the margins at those stores, and exactly how much cash they are generating. 

 

As well, Starbucks controls the amount of premium coffee being developed in the world through their huge orders to producers, and the moat is not about to be hurt by small retail shops that are sprouting up.  It's like saying that Walmart's buying power is going to be displaced by retailers in certain markets that are doing reasonably well.  Won't happen.

 

The only chains that could hurt Starbucks, are the ones that already have a huge footprint and excellent brand recognition...McDonalds, Subway, etc.  But two things will stop them:

 

- They cannot get enough premium coffee from farmers already producing for Starbucks, so they may be able to provide one or two blends of premium coffee, but nowhere near the variety of beans that Starbucks can, nor the same variety of mixed handmade drinks unless they change their operations.

- If they try to offer that same variety, they may end up being distracted and hurt existing moats in the food/sandwich category.

 

We have some very good chains and independent coffee stores, on par or better than any in Seattle and San Francisco.  They do ok competing head on, but none will displace Starbucks...ever...at least in my lifetime!  Coffee culture is huge here...in fact, the first Starbucks stores outside of Seattle opened in Vancouver some 25+ years ago.  I'm a hard-core coffee aficionado for over 15 years and watched the market grow here and in the Pacific Northwest, as I spend a lot of time in Seattle.  I drink daily, both the premium stuff and non-premium stuff, but I'll tell you...I go to Starbucks every time I want consistent, premium coffee or mixed drinks.  Too much inconsistency in the smaller artisian shops, and not enough variety in the other chains.     

 

Lastly, eventually when any competitors start doing well or start getting into trouble in any particular region, Starbucks will just buy them out like they have in the past.  Cheers! 

 

Cheers! 

 

Well, visit the Bay Area and see what is happening.

 

Don't need to.  What is happening in San Francisco happened here already 15 years ago.  You know where the coffee/latte arts originated...you know the designs in coffee that artisianal baristas compete on globally?  Here in Vancouver.  Well, it actually was started by a barista in Seattle in 1988, but then Sammy Piccolo of Vancouver's Caffé Artigiano took it to another level where he won numerous competitions internationally. 

 

Artigiano made premium coffee...some of the best in the world...and Vancouver's coffee culture was willing to pay a lot for some of his real specialty blends.  They still make the best mochas in North America in my opinion!  Artigiano at its peak under Piccolo had about 9 locations, with almost all of them in and around downtown Vancouver.  They thrived and survived, but by no means was it easy.  Eventually about six years ago, Artigiano was bought out by a local wealthy restauranteur's family and they are attempting to grow the brand.  Sammy kept the roasting facility and provides the coffee to the chain, but is no longer in the business other than one store he kept outside of the downtown core that is in his family's neighbourhood.

 

Now this was one of the best coffee company's in the world!  Making coffee on par or better than Starbucks, and had a thriving business.  He did not even make a tiny dent in Starbuck's business in Vancouver, and was not making anywhere near what Starbucks makes on a per store or per square footage basis.  And his brand was very well known in Vancouver and lots of people wanted to partner with him to expand...he decided to sell and just focus on selling the beans, because as he said...that's where the money is!  Six years later, Artigiano has about 15 stores in Western Canada...only a tiny fraction of Starbucks stores in just BC alone.  Sammy's very happy selling the beans to those Artigiano stores, because at least his margins are now somewhat profitable!  Cheers! 

[mranski]

i think the seats (leather) make a difference in the experience versus the hard plastic.

 

p.s. there was a post on another board speaking of a flight attendant who bought the original starbucks 1992 IPO, 20,000 shares and never sold. With splits, wow, do the math.  The message was basically to just ride a good thing. Hard to know how someone had the foresight to hold for so long, or just luck maybe. The punchcard theory at work. Questionable to buy ipos as a strategy though, as the results are often not great.

 

 

 

 

[Parsad]

i think the seats (leather) make a difference in the experience versus the hard plastic.

 

p.s. there was a post on another board speaking of a flight attendant who bought the original starbucks 1992 IPO, 20,000 shares and never sold. With splits, wow, do the math.  The message was basically to just ride a good thing. Hard to know how someone had the foresight to hold for so long, or just luck maybe. The punchcard theory at work. Questionable to buy ipos as a strategy though, as the results are often not great.

 

Really, it was Schulz's execution.  The Ray Kroc of coffee.  He is really solely responsible for the way the company executed over the last 25 years.  Amazing guy, great leader and a visionary.  It's the one food business that probably still makes no sense to Buffett, as coffee consumption on a per capita basis has fallen for 40 years, yet somehow this company grows and dominates its industry.  Amazing story!  Cheers!

[ItsAValueTrap]

It's like saying that Walmart's buying power is going to be displaced by retailers in certain markets that are doing reasonably well.  Won't happen.

 

Tractor Supply (TSCO) is succeeding in ex-Walmart locations.  Tractor Supply stores have a smaller footprint than Walmart stores though.

 

Historically, size doesn't seem to be a moat in retail.  Size is both a blessing and a curse.  There are retailers with thousands of stores that have slowly gone out of business.

[Parsad]

It's like saying that Walmart's buying power is going to be displaced by retailers in certain markets that are doing reasonably well.  Won't happen.

 

Tractor Supply (TSCO) is succeeding in ex-Walmart locations.  Tractor Supply stores have a smaller footprint than Walmart stores though.

 

Historically, size doesn't seem to be a moat in retail.  Size is both a blessing and a curse.  There are retailers with thousands of stores that have slowly gone out of business.

 

Sure, but there is no overlap really between Walmart and TSCO.  That's very different than someone competing head on with Walmart.  About the only two that are doing it competitively are Amazon and Costco, and both of them have limitations compared to Walmart...be it food/grocery sales or diversity of inventory.  It's hard to do it all.  Cheers!

[Kraven]

I think people have it right about the whole convenience factor, the vibe, etc.  That being said, I think Starbucks coffee is very average and if I have any other choice I will take it.  I used to walk each day to get coffee and there was a Starbucks and a Burger King right next to each other.  The Burger King had better coffee (I think they used Seattle's Best) and it was about half the price.

[Uccmal]

I think people have it right about the whole convenience factor, the vibe, etc.  That being said, I think Starbucks coffee is very average and if I have any other choice I will take it.  I used to walk each day to get coffee and there was a Starbucks and a Burger King right next to each other.  The Burger King had better coffee (I think they used Seattle's Best) and it was about half the price.

 

Of course Kraven, you know who owns Seattle's best?

[Guest valueInv]

I think people have it right about the whole convenience factor, the vibe, etc.  That being said, I think Starbucks coffee is very average and if I have any other choice I will take it.  I used to walk each day to get coffee and there was a Starbucks and a Burger King right next to each other.  The Burger King had better coffee (I think they used Seattle's Best) and it was about half the price.

 

And therein lies the opening for competitors.

[Guest valueInv]

Coffee is also habit forming.

 

There is a new breed of coffee shops coming out of the Bay Area that are kicking Starbucks butt here.

 

They've just raised money and are beginning to expand nationally.

 

I wouldn't be surprised to see Starbucks challenged in a few years.

 

Will not happen.  Even if Schulz passes away or something, it will take a decade to even make a dent, and over two decades to supplant them.  I would like to see the margins at those stores, and exactly how much cash they are generating. 

 

As well, Starbucks controls the amount of premium coffee being developed in the world through their huge orders to producers, and the moat is not about to be hurt by small retail shops that are sprouting up.  It's like saying that Walmart's buying power is going to be displaced by retailers in certain markets that are doing reasonably well.  Won't happen.

 

The only chains that could hurt Starbucks, are the ones that already have a huge footprint and excellent brand recognition...McDonalds, Subway, etc.  But two things will stop them:

 

- They cannot get enough premium coffee from farmers already producing for Starbucks, so they may be able to provide one or two blends of premium coffee, but nowhere near the variety of beans that Starbucks can, nor the same variety of mixed handmade drinks unless they change their operations.

- If they try to offer that same variety, they may end up being distracted and hurt existing moats in the food/sandwich category.

 

We have some very good chains and independent coffee stores, on par or better than any in Seattle and San Francisco.  They do ok competing head on, but none will displace Starbucks...ever...at least in my lifetime!  Coffee culture is huge here...in fact, the first Starbucks stores outside of Seattle opened in Vancouver some 25+ years ago.  I'm a hard-core coffee aficionado for over 15 years and watched the market grow here and in the Pacific Northwest, as I spend a lot of time in Seattle.  I drink daily, both the premium stuff and non-premium stuff, but I'll tell you...I go to Starbucks every time I want consistent, premium coffee or mixed drinks.  Too much inconsistency in the smaller artisian shops, and not enough variety in the other chains.     

 

Lastly, eventually when any competitors start doing well or start getting into trouble in any particular region, Starbucks will just buy them out like they have in the past.  Cheers! 

 

Cheers! 

 

Well, visit the Bay Area and see what is happening.

 

Don't need to.  What is happening in San Francisco happened here already 15 years ago.  You know where the coffee/latte arts originated...you know the designs in coffee that artisianal baristas compete on globally?  Here in Vancouver.  Well, it actually was started by a barista in Seattle in 1988, but then Sammy Piccolo of Vancouver's Caffé Artigiano took it to another level where he won numerous competitions internationally. 

 

Artigiano made premium coffee...some of the best in the world...and Vancouver's coffee culture was willing to pay a lot for some of his real specialty blends.  They still make the best mochas in North America in my opinion!  Artigiano at its peak under Piccolo had about 9 locations, with almost all of them in and around downtown Vancouver.  They thrived and survived, but by no means was it easy.  Eventually about six years ago, Artigiano was bought out by a local wealthy restauranteur's family and they are attempting to grow the brand.  Sammy kept the roasting facility and provides the coffee to the chain, but is no longer in the business other than one store he kept outside of the downtown core that is in his family's neighbourhood.

 

Now this was one of the best coffee company's in the world!  Making coffee on par or better than Starbucks, and had a thriving business.  He did not even make a tiny dent in Starbuck's business in Vancouver, and was not making anywhere near what Starbucks makes on a per store or per square footage basis.  And his brand was very well known in Vancouver and lots of people wanted to partner with him to expand...he decided to sell and just focus on selling the beans, because as he said...that's where the money is!  Six years later, Artigiano has about 15 stores in Western Canada...only a tiny fraction of Starbucks stores in just BC alone.  Sammy's very happy selling the beans to those Artigiano stores, because at least his margins are now somewhat profitable!  Cheers!

 

So Sammy decided that he wanted to cash out instead of compete. And what if the Bay Area stores have other plans?

[Kraven]

I think people have it right about the whole convenience factor, the vibe, etc.  That being said, I think Starbucks coffee is very average and if I have any other choice I will take it.  I used to walk each day to get coffee and there was a Starbucks and a Burger King right next to each other.  The Burger King had better coffee (I think they used Seattle's Best) and it was about half the price.

 

Of course Kraven, you know who owns Seattle's best?

 

No idea.  I will take a wild guess.  Starbucks?  Ha ha, just looked it up.  Starbucks it is.  Well, I still say their coffee was much better!  And on top of that who wants to go to some nice, hip place with music playing and good looking baristas when they can stand in line with the great unwashed masses?  For better coffee, I will choose the latter!

[Guest valueInv]

Were there other chains other than Sammy's?

[Uccmal]

The greater question is what makes a brand.  Tim Hortons, or Starbucks, as examples:

 

TH started as a single coffee shop in Hamilton Ontario around 45, maybe closer to 50'years ago.  They built slowly at first.  They provided a place to sit, as per Kravens comment, a place to have a smoke, (those were the days), a take out option.  From the very beginning they developed a franchise system that had ingrained quality control.  These days franchisees must pony up with 100% cash to buy an outlet, and go through extensive training, so no outlets are left wanting.  As they started to expand the advertising was nothing short of brilliant.  All Canadians are familiar with Roll up the Rim to Win.

 

THs big expansion period was in the mid to late 90s and has continued at a controlled pace since then.  Somewhere along the way they added food, soup, etc, making their outlets all day events. 

 

So what made them different and better:

1) First to do take out coffee

2) first to drive through coffee

3) First to refine soup and sandwich combos. 

And on and on and on. 

 

The expansion is continuing into Toronto, having only started 12 or so years ago.  Along the way they tried other things but quickly abandoned them if they didn't work.

 

So what makes it work:

1) Consistency and quality

2) First mover, over and over again.  Constant reinvention. 

3) At a certain point ubiquity kicks in. 

4) Customer comfort, speed of service, general competence of staff.

5) Total buy- in by fanchisees.

 

An interesting other effect is that THI closes unsuccessful outlets and immediately disappears them.  When Burger King was in trouble places with the signs partly blanked out appeared all over because the chain had cut franchisees loose, and the quality of these places deteriorated. 

 

I have watched first hand for 35 years as TH has grown, and would not want to be Dunkin Donuts in a border state.  THI is shooting down the interstates that Canadians travel, and bringing in Americans with it. 

 

Sbux story seems very similar.  You have the constant reinvention, great service, decent product, comfortable locations, and ubiquity.  The products are different from THI but the key aspects are identical.  The only operational difference is that Sbux stores are wholly owned. 

 

Another thing about both chains is their ability to raise prices when needed.  They inform their customers in advance and uniformly raise the prices.  And what happens:  The competition, rather than trying to price war them, sees an opportunity and raises prices in lock step. 

 

I dont know how to sum this up except to say perfect execution with a bit of luck, and first mover advantage.

 

Edit to add: Tim Hortons has a nation wide hockey league, soccer leagues etc.  Not just teams but leagues.  Perpetual free advertising and goodwill via tax writeoffs. 

 

 

 

[Mikenhe]

I prefer seattles best too!! sometimes we'd take a 20 minute drive and go to borders so I could drink seattles best and hang out at a bookstore (my kids love bookstores) rather than the 5 minutes to B&N - who serve Starbucks.

 

Prefer Timmies and DD as well to starbucks but its tough to be a patron of those in Florida (saying that I drive past a DD every day!!)

 

I'd rather hang out in a panera for coffee and free wifi than a starbucks.

 

Can't argue with their model though - its very sucessful..

[king888]

In my city, I prefer Coffee Bean & Tea Leaf both for coffee and for a 3rd place.Not sure how is the chain doing in US ?

[LongHaul]

Great posts - very helpful.  So basically consumers love Starbucks because they have clean bathrooms.  JK.

 

Howard Schultz is a very rare CEO who is really great and really cares.  SBUX is his baby.  It makes it hard to compete with them because they are doing so much so well. 

 

I am really not sure if anyone will challenge SBUX long term though.  I just don't know.  Speed, service, ambiance and even the quality can be replicated.  The management and brand might be tough though.  They may or may not be surmountable.  With hundreds and hundreds of competitors trying to take their share someone might crack the code in a big way.

[Parsad]

Were there other chains other than Sammy's?

 

Yes, very good ones, including one called JJ Beans.  Many argued they had/have the best coffee in town.  But again, they could not take away any market share.  They survived and continue to maintain many of their locations, but have not really expanded.  Whereas, almost every new development in every city centre around Vancouver has not only one new Starbucks, but usually multiple.  There is one small mall in Burnaby that has two...and no other coffee shops other than a McDonalds!  Metrotown, which is the largest mall outside of the Mall of America and Edmonton's Mall, has four Starbucks and one other coffee chain, as well as a McDonalds.  No competition. 

 

Starbucks actually entered the Toronto market en masse much later than Vancouver's.  Already they are the dominant chain, with several going out of business or acquired by Starbucks.  But they did elevate the coffee culture there.  I remember going to Toronto eight years ago, and going what is this shit?!  You couldn't get a decent mocha anywhere.  Today, you have some very good cafes in Toronto, albeit, they are mostly independents and stand alones, not chains.  Cheers!

[mranski]

i've also noticed in my city that starbucks controls downtown, where Tim Horton is strong outside of downtown. Also Tim's location selection seems really good, they have absolutely prime spots.

Tim's is experimenting with co branding with Cold Stone Ice Cream.  Apparently one of the rationales is that you get sales at times when the lunch and coffee traffic slow. Not sure I get this, it seems like a second rate brand (cold stone) dragging down a first rate brand to me.

I can't see Starbucks doing that with Baskin Robbins, but maybe they will or do.  Orange julius is co branding with DQ in my town, it looks awkward but maybe it works.

 

As an investor in Starbucks, having the founder involved is comforting versus Tim's where they seem to have had trouble with the CEO position. 

 

[txlaw]

Another thing about SBUX is that they embrace diversity of taste. 

 

You can get their traditional roast, which tastes over-roasted, or you can get Pike's Place roast.  You can get brewed pot coffee, or you can get french press coffee.  They have Clover machines.  You can order Barista made espresso-based drinks.  You can get frappucino's.  Or tea.  Or flavored sodas.

 

Basically, you can take a look at the Malcolm Gladwell video on spaghetti sauce and see that SBUX cares about being able to satisfy everyone (or most people) with their products. 

 

Why oh why didn't I hold onto my SBUX?

[Guest valueInv]

Were there other chains other than Sammy's?

 

Yes, very good ones, including one called JJ Beans.  Many argued they had/have the best coffee in town.  But again, they could not take away any market share.  They survived and continue to maintain many of their locations, but have not really expanded.  Whereas, almost every new development in every city centre around Vancouver has not only one new Starbucks, but usually multiple.  There is one small mall in Burnaby that has two...and no other coffee shops other than a McDonalds!  Metrotown, which is the largest mall outside of the Mall of America and Edmonton's Mall, has four Starbucks and one other coffee chain, as well as a McDonalds.  No competition. 

 

Starbucks actually entered the Toronto market en masse much later than Vancouver's.  Already they are the dominant chain, with several going out of business or acquired by Starbucks.  But they did elevate the coffee culture there.  I remember going to Toronto eight years ago, and going what is this shit?!  You couldn't get a decent mocha anywhere.  Today, you have some very good cafes in Toronto, albeit, they are mostly independents and stand alones, not chains.  Cheers!

 

Were this chains multi city? Why did they not expand?

[Parsad]

 

Why oh why didn't I hold onto my SBUX?

 

Tell me about it.  Bought it at a little over $7 during the credit crisis for my own portfolio.  Sold out at $20 a couple of years later!  :'(  Cheers!