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Starbucks could become No. 1 food chain

Think there's already a Starbucks on every corner? Just wait. The fast-growing chain plans to nearly triple in size and some see it growing even bigger, one day topping hamburger giant McDonald's Corp. as the largest fast-food brand in the world.
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Starbucks is credited with rapidly transforming coffee from a 50-cent staple to a $3 indulgence with its chain of comfortable cafes, where customers often hang out with their laptops or newspapers for hours.Damian Dovarganes / AP
/ Source: Reuters

Think there's already a Starbucks on every corner? Just wait. The fast-growing chain plans to nearly triple in size and some see it growing even bigger, one day topping hamburger giant McDonald's Corp. as the largest fast-food brand in the world.

The chain has set a goal of 30,000 units, half in the United States, but last month the company's chairman suggested the target is too low, leading to speculation on what is the limit for the chain — and when Starbucks will set a new goal.

Starbucks is credited with rapidly transforming coffee from a 50-cent staple to a $3 indulgence with its chain of comfortable cafes, where customers often hang out with their laptops or newspapers for hours. The chain has been criticized for driving independent coffee shops out of business while aiming to give its own stores a local feel by sponsoring community events and steering clear of national advertising.

Already the world's biggest coffee shop chain, Starbucks' store count has soared to over 11,000 from less than 200 since the Seattle-based company went public in 1992, and at current growth rates it could hit its target in about five years.

Starbucks has several things going for it, analysts say. First, new products like holiday drinks have kept customers coming back for more. Plus, coffee is a habit for many.

"Really important to the company is the new product introductions — it keeps the customers coming back," said JMP Securities analyst Kristine Koerber, who has a "market outperform" rating on Starbucks shares and owns none. "And it helps selling a product that is considered habit forming."

In addition, Starbucks' brand has a cachet that consumers want to associate themselves with.

"It's not a restaurant, it's a lifestyle model," said ThinkEquity Partners analyst Nicole Miller, who has a "buy" rating on Starbucks shares and owns none. "McDonald's is really a fast-food restaurant. That's why (Starbucks) will be able to have more stores."

CIBC analyst John Glass agreed, writing recently that Starbucks could well become the largest quick-service restaurant brand in the world. Glass has a "sector outperformer" rating on the chain's stock.

30,000 goal ‘light’
Starbucks itself has begun to raise the possibility that it's 30,000-store target, set in late 2004, is too low.

"I'm quite sure that number is going to be light," Starbucks Chairman Howard Schultz told investors. He did not give a revised figure or a timeline. Starbucks executives were not available to be interviewed for this article.

There is room in the United States and abroad, backers say.

"It's ridiculous to think they can't have more than two times the number of stores internationally than domestically," said Miller. "They could have 30,000 just internationally."

Starbucks has said its 230-store China unit is its biggest opportunity outside the United States. With roughly 250 million people in China's upper income bracket that market could near the ultimate size of Starbucks' U.S. business, Koerber said.

"They could have over 10,000 units in China," she said.

Glass said there is plenty of room to grow at home, as well. Seattle, Starbucks' hometown, has one coffee shop for every 11,754 people, but rival Dunkin' Donuts has built out even more densely in its own home turf, Massachusetts, with a store for every 8,400 people.

Thus much of Starbucks' U.S. growth will come in markets where there are already hundreds of stores, such as the West Coast.

The United States has room for as many as 22,000 locations, compared with the company target of 15,000, and Glass projected the company would raise that goal later in the year.