Are there too many Starbucks?

The company's weak traffic, despite massive spending on technology, is prompting saturation concerns.

Starbucks did not have a good holiday season, as falling transactions after mid-November weakened sales and disappointed both the company and its investors.

The result has led to questions about whether there are simply too many coffee shops.

“We believe the company is facing saturation in the U.S., and needs to slow growth,” John Zolidis, president of the New York-based firm Quo Vadis Capital, said in a note on Friday.

On Thursday, the Seattle-based coffee giant reported 2% same-store sales growth in the quarter ended Dec. 31, a result that “fell short of expectations,” CEO Kevin Johnson said on a conference call with analysts.

Executives also said they expect weak sales this quarter, which could keep same-store sales at the low end of their expectations for the full year.

The biggest problem, Johnson said, is in the afternoon, when Starbucks hosts its “third place” customers who view the chain’s 28,000 global shops as a place to hang out, or a third place after home and work.

This quarter, however, Starbucks appeared to be more of a stopover than a destination, as morning customers remained strong, but afternoon customers stayed away.

“This is a daypart challenge in the afternoon,” said Howard Schultz, the company’s founder and executive chairman.

Yet the company also acknowledged that its U.S. transaction growth slowed during the holidays. Same-store sales were up 3% in the first half of the quarter, with strong performance during the company’s peak hours in the morning, “more than offsetting some softness in the afternoon,” Johnson said.

But after the company launched its holiday program, same-store sales slowed to 1% after mid-November and transactions fell slightly. The result hurt margins.

Johnson on the call explained that the company’s limited-time holiday beverages, its holiday merchandise and its holiday gift cards all underperformed.

In response, the company is making a huge change in the merchandise available for sale in its lobby.

Starbucks is cutting 200 SKUs from its retail shops, which will lead to a 30% cut in the merchandise available for sale up front. Executives said that sales of such items have been weak, and the cut would hurt same-store sales this year but “have a nominal impact on profit” because the items have lower margins and higher write-offs.

Johnson also blamed “changes in holiday routines” for weakened holiday same-store sales. He said that same-store sales at the chain’s mall stores were “several points below nonmall locations.” That points to changes in retail shopping patterns.

“We have a clear understanding of the issue and are accountable to fix it, just as we did with throughput at peak,” Johnson said.

But the weakness comes as Starbucks is making immense investments in digital strategies and food in a bid to improve throughput and generate more sales.

Starbucks’ loyalty members generate 37% of its U.S. sales, and mobile order and pay represents 11% of transactions. Those are strong numbers for a concept that doesn’t sell pizza.

To many investors, the weak transactions despite those numbers suggest that the efforts aren’t doing their primary job—enabling the company to increase traffic. And that means the company could have too many locations.

Starbucks operates nearly 17,000 locations in the Americas, the vast majority of which are in the U.S., by far the chain’s biggest market. That’s up 1,000 locations from a year ago.

The company has been dealing with concerns about its transactions for some time—in the same quarter a year ago, for instance, its transactions declined 2%, making this quarter’s performance all the more concerning because comparisons were relatively easy.

The problem a year ago, executives said, was throughput at peak times—something the chain said it has fixed.

Starbucks “has spent a lot of time discussing various issues with investors over the past year and a half that it has cited for transaction performance in the U.S.,” Zolidis wrote. “A new excuse each quarter is not the sign of a business that is operating consistent with management’s plans.”

“Rather than a litany of excuses, we believe this is best explained by overcapacity in the industry.”

And it’s not just Starbucks. Dunkin’ Donuts is growing, as are smaller chains like Peet’s. And keep in mind that McDonald’s and its 14,000 locations do an awful lot of coffee business.

For their part, however, Starbucks executives say they are not losing share to rivals. He said that “total customer occasions,” including customers at new stores and new customers at existing locations, grew 5% in the quarter.

That came even though total customer occasions in the food and beverage industry were flat during the period.

“That would imply that we are growing transactions faster than the market and taking some share,” Johnson said.

He also said that the company doesn’t lose share in “micro trading areas” after rivals build locations near Starbucks. “When a competitor builds a new store in the micro trading area, our data shows little to no impact on Starbucks traffic,” Johnson said.

As for those third place afternoon customers, Starbucks says it is working to innovate with its food and beverage offerings to get them to come back. Third place customers are more occasional, rather than the habitual morning consumers.

“We have to continue to enhance the experience in the third place and drive innovation around food and beverage that resonates in the afternoon,” Johnson said.

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