The empire strikes back: how Starbucks plans to get bigger by going smaller
STARBUCKS' problems are not limited to Ireland. The company closed more than 800 of its flagship cafes worldwide in the past two years as overbuilding and a consumer-led recession prompted a full year of quarterly declines in comparable-store sales, the company's worst performance in at least a decade.
It is also facing increased competition as McDonald's and Dunkin' Donuts introduced lattes that cost less than they do at Starbucks.
The coffee-shop operator is striking back by creating a new franchise chain to fit into smaller spaces called Seattle's Best Coffee in the western US and Midwest.
Since opening Seattle's Best to franchising last year, the company has signed deals with 10 new operators that plan to open stores in California, Illinois and Texas, vice president of franchise development John Wuycheck said recently.
Starbucks is recovering from a strategy of opening too many cafes too quickly, executives have said. The company has shifted growth plans to its junior brand. The company is adding smaller kiosk-sized locations in places such as New York and Houston, where a full cafe won't fit.
"We're always looking for full cafes, but many times it's easier to fit a smaller kiosk into those spaces," he said. The western US markets "are very strong influencing markets for the rest of the country. We're getting strong interest there".
The company is also offering 20pc discounts on franchisee fees to army veterans and ethnic minorities in a partnership with the International Franchise Association, a Washington-based trade group. Franchisees invest from $265,200 (€217,000) to $440,000 to open a Seattle's Best location.
Starbucks shares more than doubled last year on hopes that the strategy will work.
The biggest challenge to developing the chain may come from the company's flagship brand, said Greg Schroeder, a restaurant analyst with Jesup & Lamont in Madison, Wisconsin. He said he doesn't expect Seattle's Best to become a "several-thousand-store concept."
"I hesitate to believe that Seattle's Best will be a meaningful driver against US retail, because they would be competing against Starbucks," said Schroeder.
Seattle's Best has about 550 locations in the US, primarily through licensing agreements. Retailers such as bookseller Borders and Subway restaurants added the coffee to about 9,000 locations last year and other fast-food sellers are testing the brew, Ehlers said.
"We can go to places with Seattle's Best that we wouldn't want to go with" the Starbucks brand, he said. "Starbucks roast is a little more assertive or aggressive, while Seattle's Best is smoother. Consumers like variety."