Financing

Starbucks sees opportunities in smaller towns

The coffee giant, known most for urban areas and more recently suburbs, believes it has plenty of room to grow. And that could include smaller communities.
Starbucks expansion
Starbucks has evolved its development strategy over the years and could evolve it even more to feature smaller cities. | Photo: Shutterstock

Starbucks grew into the world’s largest coffee chain first by tackling urban areas and then retail locations with heavy foot traffic. It then tackled the suburbs with drive-thru units.

Now the chain is eyeing smaller communities. Executives with the Seattle-based chain on Tuesday told investors that there is plenty of room for further development in the U.S., both in existing markets with different formats, as well as smaller towns.  

“We have an opportunity with regard to net store growth in the U.S.,” CEO Laxman Narasimhan told investors on the company’s fiscal third-quarter earnings call. “There’s real headroom for us to locate our stores where we see customer growth, smaller towns, different geographies. And we’re looking at all of it not just with our own stores, but also with licensed stores.”

Starbucks is the second most prolific restaurant chain in the U.S., with 16,144 stores in the U.S.

The brand is well on its way toward overtaking the shrinking Subway (20,000 U.S. restaurants) to become the country’s most prolific restaurant chain. (It remains second to McDonald’s as the largest chain by sales.)

Starbucks has added some 1,500 restaurants in the U.S. since 2018. That included more than 400 restaurants last year alone, when it added more locations than any other U.S. chain, according to Technomic data.

Still, it remains an urban-heavy concept. One out of 10 Starbucks locations are in two markets: New York and Los Angeles, according to Restaurant Business sister company Technomic.

The company has grown this large in part with an aggressive development plan coupled with flexibility for when circumstances change.

For instance, Starbucks pivoted quickly during the pandemic, closing some of its urban locations and shifting its development focus toward takeout-oriented locations, such as walk-up units without seating in urban markets and drive-thru locations in the suburbs.

Growing larger, however, will require the company to broaden its development horizons. So, Starbucks wants to open different types of formats in existing markets—perhaps delivery-only units—that would fit the needs of different consumers.

There are also markets where the brand simply isn’t as strongly penetrated as it could be. And the company could look at smaller communities.  

More chains have started eyeing such locations for development for a variety of reasons. As big chains grow, for one thing, they run out of metro areas in which to build restaurants, and so they target smaller communities. In addition, high real estate costs start making the simplicity of small-town expansion more attractive.

They can be more welcoming, given the general lack of options. Chains such as McAlister’s Deli and the Wisconsin-based burger chain Culver’s have used smaller cities as an expansion strategy for years. But larger chains have found a fertile ground there, too.

Chipotle Mexican Grill, for instance, is doing so well in smaller markets, breaking sales records at some locations, that it has increased its development goals for the year.

Starbucks has more locations than Chipotle, Culver’s and McAlister’s combined. And in its history, expansion has sometimes been met by decreases in unit volumes.

But the company believes that its growth will not necessitate any closures of existing locations, nor does it think expansion will lead to same-store sales challenges. “I am not concerned,” Narasimhan said. “There’s a very small number of stores that we would look at and say we may have a challenge with them. But there’s nothing in there that concerns me.”

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