Starbucks facing fresh foes in pumpkin spice wars

The pumpkin spice wars may be heating up, but it doesn’t look like Starbucks Corp. will be giving up its crown just yet.

A proliferation of fast-food chains selling lattes — including versions of Starbucks’s signature fall drink — along with the rise of the so-called “third-wave” artisanal coffee movement prompted Morgan Stanley last week to examine the specialty coffee sector, and those that are trying to cut in on the Seattle giant’s action.

“Given the backdrop of comp store sales deceleration at Starbucks and anecdotal observations that there are an increasing number of specialty coffee shops, the question of increased competition has become one of the key debates on SBUX,” wrote analyst John Glass.

Morgan Stanley estimated the size of the U.S. coffee market alone was approximately US$75 billion a year, including the coffee people drink at home.

“There is a bit of a coffee war going on because it’s a great hook to generate repeat business,” said Sylvain Charlebois, a professor of food distribution and policy at Halifax-based Dalhousie University. “Other chains have done a great job in narrowing the quality gap between, I would say, the regular coffee retailers and Starbucks.”

The Morgan Stanley report, however, concluded that Starbucks’s competitors have yet to reach the critical mass necessary to truly threaten the ubiquitous chain, which was found to make up nearly 50 per cent of the specialty coffee shops in the United States.

“Softer sales, increased (quick service restaurant) competition, and sightings of more ‘Third Wave’ coffee shops have fuelled fears SBUX may finally be feeling the heat,” wrote Glass. “Our work shows while specialty coffee continues to grow, the competition is still too small and geographically concentrated to have impacted SBUX yet.”

One source of competition for Starbucks is from Third Wave artisanal coffee shops that have popped up,” said Morgan Stanley, which pointed out that these brands often set up in big cities and catch investors’ eyes. “These are brands that artisanally source, roast and brew coffee in novel ways, and seek to elevate coffee to a new level of connoisseurship, much in the same way connoisseurship in other categories, such as beer, wine and cheese, has developed,” they noted. “The fact that many of these brands have formed beachheads in high profile cities — and especially NYC — has probably coloured investors’ view on increased competition.”

Morgan Stanley also noted that private investors are showing interest in “super premium” coffee chains, citing Nestlé’s recently announced purchase of a majority stake in California-based Blue Bottle Coffee. Given those investments, the firm predicted the “Third Wave” would continue to grow, although it is still “a very small portion of overall specialty.”

“Starbucks’ significant scale in all aspects of the business should give them a competitive advantage in this venture,” Glass added.

Starbucks is also facing fast-food chains that now have specialty coffees on tap, such as McDonald’s Corp. and its caramel pumpkin spice latte.