Big-name investors might be warming up to high-end coffee shops, but they still aren’t a threat to Starbucks, thanks to the coffee chains sheer scale.
“High profile private investments in specialty coffee’s ‘Third Wave’ are making headlines,” Morgan Stanley analyst John Glass said in a note out Wednesday, “but that may overstate their competitive relevance, at least for now.”
Blue Bottle, for instance, was acquired by Nestle at a $US700 million valuation despite having just 40 stores. Luxembourg-Based JAB Holdings, which already owned some mass-market coffee brands like Krispy Kreme and Peet’s, recently snapped up high-end brands Stumptown and Intelligentsia.
Still, Morgan Stanley says these specialty chains are barely a blip on the radar when compared to Starbucks’ more than 24,000 locations worldwide.
“Our informal tally suggests there are less than 20 of these high profile ‘Third Wave’ chains with more than a small handful of units, with a total of under 400 units in operation,” Glass said. “Many of them happen to have a presence in New York and California, making them appear to investors perhaps more common than they actually are.”
The bank estimates there are between 25,000 and 32,000 specialty coffee shops in the US, with Starbucks making up about 8,500 of those and being thirty times larger than Caribou Coffee, it’s biggest competitor.
To be sure, specialty coffee chains with more than 10 units are starting to eat into Starbucks’ footprint, but the chain is still steadily growing.
“The artisan segment of specialty coffee remains a very small portion of overall specialty,” Glass said.
“However, given the investment flows into the category, we’d assume that growth in artisanal, Third Wave coffee will continue. It also validates Starbucks’ own investments in Siren Retail, its upstart division that is working to develop Roasteries (large format stores) and Reserve stores, which in many ways resemble their smaller, startup brethren.”
Morgan Stanley has a $US62 price target for Starbucks shares — just under Wall Street’s consensus of $US63.71, according to Bloomberg.
Shares of the coffee chain have fallen 2.6% this year.