Starbucks Sees Cup as Not Yet Full

One could be forgiven for thinking that Starbucks Corp. executives sound a little over- caffeinated these days.

After all, the frou-frou coffeehouse chain seems pretty darn ubiquitous as it is. Nonetheless, Starbucks this month announced big expansion plans, vowing to put its name on 30,000 stores worldwide -- more than triple the 8,500 locations it currently has (including 6,100 in the U.S.) and over and above its previous goal of 25,000.

A Starbucks on every city block? No problem. As Starbucks President Orin Smith put it: “Americans don’t walk. So if you have to go more than two blocks, they don’t go.”

Yet for all of Starbucks’ swagger, some believe that the company may be growing too quickly in a foolish bid to keep up its numbers and meet Wall Street’s relentless expectations.

Since going public in 1992, the company has quick-marched from $200 million to $4 billion in annual sales. Its profit has soared from less than $8 million to $268 million. And investors have pushed the company’s total market value to $20 billion. Starbucks’ stock, traded on Nasdaq, closed Friday at $50.14, a price that represents a very lofty 53 times earnings per share.

“Is Starbucks expanding for the sake of Wall Street’s demands?” asks analyst Douglas Christopher of Crowell Weedon & Co., a Los Angeles brokerage.

Christopher, an investor in Starbucks, worries that the chain will repeat the mistake that McDonald’s Corp. made in recent years of opening too many stores, leading it to ring up losses and then have to retrench. McDonald’s’ once- highflying stock price is still 40% below its level in 1999.

Meanwhile, some competitors think they can take advantage of Starbucks’ ambitions.

“The larger Starbucks gets, the more it will create niches for smaller retailers to carve out a market” and ultimately steal away business, says Roger Laverty, president of Diedrich Coffee Inc., an Irvine-based company with 482 owned and franchised shops worldwide.

To all of it, Starbucks Chairman Howard Schultz has this to say: The criticism doesn’t amount to a hill of beans.

Is Starbucks simply trying to prop up its stock price? “No,” he says bluntly, “this has nothing to do with Wall Street.” Is the company in danger of over-saturating the marketplace? “Saturation,” he says, “is not even a word we discuss in our management sessions.

“In the last 18 months,” he adds, “our research has shown we have greater demand and opportunities in this country than we believed.”

The upshot: Schultz told investment analysts at a recent gathering in Starbucks’ hometown of Seattle that the company would step up its pace of store openings from 1,300 to 1,500 annually. The chain will more than double the number of its stores in the United States in the next six years to 15,000, and it will multiply Starbucks outlets tenfold in China, India, Brazil and Russia.

“Increasing our long-term store count target to 30,000 demonstrates our commitment to continued growth both domestically and internationally,” Schultz declared.

There is hardly a patch of ground where Starbucks can’t imagine someone craving a decent cup of java. It is going to open more off-highway stores amid the fast-food outlets found at interstate exit ramps. It is going to open more stores in “secondary locations,” as Schultz calls them, entering such smaller cities as Lubbock, Texas.

It is going to expand its 7-year-old joint venture with Magic Johnson’s Los Angeles company, Johnson Development Corp., which now owns 67 Starbucks stores and will open 60 more around the country.

Starbucks also has a joint venture with Sysco Corp., the food service supplier, to distribute its coffees along with the meals delivered to institutional cafeterias. And Starbucks is expanding its licensing of coffee counters in supermarkets.

So what’s the bottom line?

Is Starbucks’ growth plan likely to bring more success? Or does Schultz need to wake up and smell the coffee?

The betting here is that the 51-year-old executive, who has taken on the additional title of chief global strategist, will pull it off. And the reason is this: Schultz has succeeded in making Starbucks much more than a shop that just sells coffee. It is a gathering spot, an inviting shelter to slow down and chat, in a world that has otherwise become all too hassled and unsociable.

To that end, the company is introducing a feature in its shops that will allow customers to listen to music and then burn CDs for themselves right there. Schultz hired Kenneth Lombard, former president of Johnson Development, to head the effort.

Indeed, Schultz doesn’t even see Starbucks competing with other coffee purveyors or restaurants.

“We are different because Starbucks is a place that people come to sit for a while, go on the computer, meet friends, listen to music,” he says.

It is a formula that promises to work not just in the United States but across the globe.

“We have 200 stores in China and will have many more,” Schultz notes, adding with delight: “People don’t speak English yet, but they come in asking for a ‘double latte’ or a ‘Frappuccino.’ ”

In other words, like so many of us, they speak Starbucks.

James Flanigan can be reached at jim.flanigan @latimes.com. For previous columns, go to latimes.com/ flanigan.