Starbucks downgraded over concerns about competition in premium coffee

Starbucks downgraded over concerns about competition in premium coffee

Starbucks Corp. was downgraded to market perform from outperform at Cowen on Friday, with analysts citing concerns about the competition the company will face as it increasingly turns its attention to craft coffee.

Cowen lowered its price target on Starbucks’ SBUX, -0.32% stock to $65 from $68.

Craft coffee has become more important as Starbucks tries to give its loyalty efforts a jolt.

“Starbucks experienced a seasonally light period of Starbucks gift card activations during the Holiday 2017 period, which we believe to be a leading indicator of the success of loyalty efforts for the following year,” the note said. As a result, Starbucks is targeting both new and lapsed customers.

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However, with more craft coffee players, it will be difficult for Starbucks to recapture lapsed customers.

“Our optimism behind an Americas same-store sales rebound is diminishing as our work suggests craft coffee competition is intensifying while the timeline and magnitude of success with wider loyalty efforts is uncertain,” analysts said.

RBC Capital Markets analysts, on the other hand, are hanging on to hope that efforts to drive digital usage will also boost sales in the U.S. Reasons for optimism include Starbucks’ partnership with JPMorgan Chase, a debit card that is coming soon, and a new mobile app option for easy checkout.

“We believe having a larger group of consumers with this entry-level relationship could increase the base of consumers within Starbucks’ digital marketing reach,” RBC analysts led by David Palmer wrote.

Analysts bemoaned the “low visibility” of some recent beverage creations. But, “the company is transitioning marketing dollars away from short-term ‘sparks’ like Frappuccino Happy Hour in favor of platform innovation (e.g. Nitro),” analysts said.

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RBC rates Starbucks shares outperform with a $65 price target.

One place where Starbucks is shining right now is the coffee aisle. Market share in the ground coffee category was 13.2% for the four weeks ending March 24, up from 12.5% for the year prior, according to a Wells Fargo note published last week.

“Despite increased competition, we continue to believe Starbucks is solidly executing on its packaged coffee strategy with a compelling loyalty program and premium brand equity,” the note said.

Wells Fargo rates Starbucks shares outperform with a $65 price target.

Starbucks shares are down nearly 2% for the last three months, but are up 3% for the last 12 months. The S&P 500 index SPX, -0.29% has rallied 14.1% in the past year.

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