Starbucks Sees Its Future Outside High-Cost Cities: Conor Sen


(Bloomberg Opinion)—It’s been the big economic question of 2018: How much more room is there for growth before we hit supply bottlenecks and inflation becomes a concern? Starbucks, whose stock has struggled this year as they deal with saturation concerns of its own, brought us a little closer to an answer in its earnings conference call Thursday.

The company still sees opportunities for growth in the U.S., but increasingly not in the dense urban areas the company is known for. If Starbucks is any indication, one bottleneck has appeared, and economic growth may be largely tapped out in coastal markets for now. Whatever growth is left in this cycle will have to come from the central and southern U.S.

Comparable-store sales growth was a meager 1 percent, the net effect of a 4 percent increase in average guest ticket and a 2 percent decline in customer traffic. This is particularly tepid performance in the context of a U.S. economy that grew at a real rate of over 4 percent in the second quarter. Starbucks seems to be squeezing about as much out of existing stores as it can.

With growth from existing stores struggling to improve, overall growth in the U.S. will rely on new stores. Here’s where things get interesting. Starbucks noted that more than 80 percent of store growth over the next few years will be drive-throughs, particularly in suburbs in middle America and the South, as their analysis suggests “significant opportunities for store expansion in higher-growth, lower-cost markets, especially when considering rising wages and occupancy costs.”

What might be surprising to residents of dense, wealthy cities like Seattle and New York is that Starbucks says these suburban drive-through locations in middle America are outperforming their traditional urban locations that don’t have drive-throughs. The company noted that these drive-through locations have 25 to 30 percent higher revenue than their typical metro locations with no drive-through.

So for Starbucks at least, it’s proving difficult to grow profitably in high-cost urban, walkable areas. And if Starbucks can’t manage it, it’s probably just about impossible for local or independent businesses dealing with the same labor and retail rent issues that Starbucks is, without its economies of scale. At the same time, in middle America and the South geographies, not only are labor and real estate costs lower, but revenues are actually higher.

The Starbucks situation is particularly noteworthy in light of its Seattle counterpart, Amazon, which has been seeking a second North America headquarters for about a year. At this point the challenges in cities like Seattle are well-known. Housing costs are very high, and it’s hard to add supply, both for cost reasons and because of entrenched opposition from local residents. This has put upward pressure on labor and real estate costs for businesses. Now we’re seeing that even flagship companies in the U.S. are starting to realize that they just can’t grow profitably in these cities anymore.

Assuming the U.S. economy can stay out of recession for the next few years, we may have a vision of what the U.S. economic future looks like: In high-cost cities, it will be a zero-sum competition for resources, where new residents and businesses that raise costs need to displace existing residents and businesses. Which means the lion’s share of economic growth will be happening elsewhere in the U.S.

This may not be the way to resolve economic inequality that some are looking for, but at least it means more Cold Foam Cold Brews in Tennessee.

To contact the author of this story: Conor Sen at [email protected]

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