A Locational Analysis of Starbucks Coffee Locations in Metropolitan Denver

A LOCATIONAL ANALYSIS OF STARBUCKS COFFEE
LOCATIONS IN METROPOLITAN DENVER
A Short Introductory Paper to Excercise Hypothesis of Starbucks Outlets in Denver Area (simulated with GIS ArcView) by Rez.Nurt


Introduction

This report is divided into five sections. The introduction presents an overview of the current tendency of demographics, employment, and housing including their forecast trends in the Denver Metro Area. Section I presents an overview of retailing, a brief history of the Starbucks organization as well as the background, assumptions, and hypotheses developed by our group. Section II presents a description of the methodology employed in this study and the relevant data gathered. Section III presents the regression results and discusses the relationship of these variables to our hypotheses. Section IV is the conclusion, in which the relative strengths and weaknesses of our model and results are discussed. Also in the final section, our group offers suggestions as to how future analyses conducted by students in Urban Spatial Analysis may be strengthened.

The Denver Metropolitan area became attractive to a number of national retailers in the late 1980’s and 1990’s. While the rest of the country enjoyed economic growth in the 1980’s, Denver’s economy continued to struggle.

This introduction presents an overview of some recent population and employment trends and forecasts for the Denver metro area. While the rates of growth are not forecast to continue at rates recorded in the 1990’s to date, rates of growth in the Denver metro area will be strong compared to other areas of the country and thus have a positive impact on retail location strategy.

DEMOGRAPHICS

Historical Trends

During the past five to six years, the local Metro Denver economy has been expanding rapidly. Much of the economic growth has been the result of large-scale construction projects and growth in several sectors of the local economy such as communications, tourism, and services. Expansion of the local Metro Area economy has generated strong population growth as well. Much of the population growth is attributable to in-migration of new residents from outside the state. In 1995, in-migration accounted for 72% (46,000) of the Metro Area’s total population growth, marking the highest level of migratory growth in Metro Denver since 1972. The recently announced relocation of major firms such as Level 3 Communications and Merrill Lynch also contribute to growing population trends. Since the beginning of 1991, the population in the Metro Denver Area has grown by approximately 2.5% annually. This translates into absolute population growth of approximately 50,000 new residents each year.

Recent population growth trends in Metro Denver present a dramatic contrast to the latter portion of the 1980's when population growth increased by less than 1% each year. During this time period, annual population growth in Metro Denver averaged approximately 6,500 new residents each year. During the late 1980's, population growth in the Metro Denver area was negatively impacted by the area's poor economy. As the economy and job market suffered, large numbers of people relocated to other areas of the country. This downward economic trend impacted all segments of the real estate market but has since been overcome and robust growth has been occurring throughout the real estate market, particularly the residential sector.

As with population growth trends, the number of new households formed in the Metro Area has increased during each of the past six years, averaging approximately 18,500 per year. As of January, 1997, there were approximately 854,000 households in Metro Denver. This represents an increase of 112,000 households since completion of the 1990 Census when there were 742,000 recorded households.

Based on the 1990 Census, the average household size in the Metro Denver area was 2.46. It is believed that the average household size in Metro Denver may have decreased marginally since completion of the 1990 Census, although recent Denver Regional Council of Governments (DRCOG) estimates indicated that the current average household size in Metro Denver remains at 2.46 person per household.

Forecast Trends

In late 1995 DRCOG completed long-range population and employment forecasts for the Metro Denver Area. Our Urban Spatial Analysis Team (USAT) has utilized portions of the DRCOG forecasts to complete a forecast of household growth for the Metro Denver Area. As of year-end 1996 (which is the most current data available from DRCOG), the population in the Metro Denver area was estimated at 2,129,000. From 1996 through 2000, DRCOG forecasts that the average annual population growth rate in the Metro Area will increase by less than 1%. This translates into population growth of 18,750 new persons each year with overall population increasing to a level of 2,203,700 by the beginning of year 2000.

The rate of economic and population growth in Metro Denver during the next several years is anticipated to decline somewhat from current levels. Many experts have expressed that it may be difficult for the Colorado and local Metro Area economies to sustain the level of growth, which has occurred during the past few years. Several of the following factors may contribute to slowing the pace of current economic growth; decreased in-migration to Colorado, completion of several large Metro Area construction projects, slow / no growth orientation in many local cities and counties, and impacts from decreased military spending. However, even when considering these contributing factors, economic and demographic growth in the Metro Area is forecast to remain very positive. At this time there are no significant indicators, which would signal a significant slowing of the Metro Denver, Colorado or regional area economies. Therefore, the DRCOG long-range population forecast may be too conservative, particularly during the near-term from 1998 through the year 2000.

Based on the DRCOG population forecast, the number of households formed in Metro Denver is expected to increase from a current level of 854,000 to 888,253 by the year 2000. This equates to a growth rate of 1% annually or in absolute terms, an increase of 8,500 new households per year. Beyond the year 2000, it is forecast that 12,000 households per year will be formed in the Metro Area, translating into an average annual growth rate of 1.25%.

The average household size in Metro Denver is anticipated to decline from a current level of 2.46 persons per household to 2.45 by the year 2000. Smaller household sizes have been a trend in the Metro Area as well as throughout the United States for a period of 20 to 30 years and are reflective of demographic and socio-economic patterns. It is anticipated that this trend will continue during the near future. Beyond the year 2000, average household size will continue to decline slowly to a level of 2.41 persons per household by the year 2015. It should be noted that the average household size is based on total population, less population in group quarters (which has averaged approximately 30,000 persons in Metro Denver during the last twenty years). The following table presents demographic trend and forecast information for the Metro Denver area.

Metro Denver Demographic Trend and Forecast Information
1990 – 2015
1990 1995 1996 2000 2005 2010 2015
Population 1,859,000 2,067,000 2,129,000 2,204,000 2,333,000 2,458,000 2,612,000
Group qtrs. Population 30,000 30,000 30,000 30,000 30,000 30,000 30,000
Population in households 1,829,000 2,037,000 2,099,000 2,174,000 2,303,000 2,428,000 2,582,000
Households 742,000 829,000 854,000 888,253 945,791 1,002,270 1,071,369
Average household size 2.46 2.46 2.46 2.45 2.44 2.42 2.41

Source: Non shaded area, DRCOG
Note: Shaded area represents DRCOG / USAT demographic forecasts.
The Metro Denver area includes; Arapahoe, Adams, Boulder, Denver, Douglas and Jefferson counties.



EMPLOYMENT

Historical Trends

Strong population increases in Colorado and Metro Denver during the six year period from 1990 through 1996 have been the result of employment growth in the region. During 1996, wage and salary employment in the Metro Denver area averaged approximately 1,157,000 and the unemployment rate was 3.8%.1 From 1990 through 1996, the average annual Metro Denver employment growth rate has been 3.21%, which has out-paced employment growth in many areas of the country. Employment growth has increased most dramatically in the construction, retail trade and service sectors of the Metro Area economy. According to data released recently by the Colorado Department of Labor, employment grew 4% in 1997.

Forecast Trends

It is expected that the Metro Denver economy will slow somewhat during the next five years from current growth levels. A decline in the overall level of construction, closure of military related facilities (Rocky Flats) and reduction in military spending are a few factors which are anticipated to contribute to slowing of the Metro Area economy. Further, during the past five to six years, the local economy has been expanding at a tremendous rate. It is unlikely that the current pace of economic growth can be sustained throughout the next several years. DRCOG forecasts that employment will grow to a level of 1,313,300 in Metro Denver by year-end 2000. This represents an average annual increase of 1.6% or in absolute terms, formation of 19,979 new jobs each year. By 2015, it is projected that there will be 1,560,350 jobs in the Metro Area, representing annual job growth of 17,347 or an average annual increase of 1.43%. The following table presents Metro Denver employment trends and projections.

Metro Denver Employment Trend and Forecast Information
1990 – 2015
Employment estimates (1) Employment forecasts (1)
1990 1995 1996 2000 (2) 2005 2010 2015
Total Employment 1,001,000 1,172,000 1,170,000 1,313,000 1,395,000 1,476,000 1,560,000
Unemployment Rate 4.5% 4.0% 3.8% N/A N/A N/A N/A
Notes:
(1) Total employment estimates from the State of Colorado, Employment forecast completed by DRCOG
(2) DRCOG employment forecast information (shaded area of the table) is not directly comparable with State of Colorado total employment information. DRCOG employment estimates and forecast are approximately 2% - 5% higher than those provided by the State of Colorado.

Overall, the rate of population and employment growth in the Metro Area is forecast to remain positive throughout the forecast period, but is expected to decline slowly from current trends. The DRCOG demographic forecasts presented in the previous paragraphs may be too conservative in light of recent strong economic growth in the Metro Denver area which has seen the local economy become much more diverse and competitive on both the national and international level.


HOUSING

Since 1990, the number of building permits issued for new residential units in the Metro Area has been very positive. In 1990 the 5,944 residential building permits issued reflected a near record low for development activity in Metro Denver. However, by 1994, development in the Metro Area had turned around completely with the issuance of 19,900 residential building permits. Building permit activity seems to have stabilized with an average of approximately 19,500 permits issued from 1994 through November of 1997. During 1997 the number of Metro Area building permits issued reflects a 21% increase from 1996 activity. However, the number of building permits issued is expected to gradually decline over the next several years due to predicted slowing of the Metro Area economy as discussed previously. The following table presents building permit information for Metro Denver during the period 1990 through 1997.

Metro Denver Building Permit Trends
Single Family Multi-family (1)
Year Number Percent of total Number Percent of total Total
1997 17,662 76.03% 5,415 23.31% 23,230
1996 15,614 80.98% 3,666 19.01% 19,280
1995 14,923 74.69% 5,057 25.31% 19,980
1994 15,257 76.60% 4,660 23.40% 19,917
1993 14,228 87.54% 2,026 12.46% 16,254
1992 11,567 86.55% 1,798 13.45% 13,365
1991 7,613 97.14% 224 2.86% 7,837
1990 5,459 91.84% 485 8.16% 5,944
Source: Metro Denver Home Builders Association.
Note: (1) Multi-family refers to rental apartment units

The above information is presented as general background data concerning the past and future status of the Denver metro area.

Section I

Retailing is generally accepted as the activity of selling goods and services in small quantities directly to the end user or consumer. Wholesaling is an activity where a bulk shipment is received at a warehouse, divided into many smaller units, and shipped to retailers in a regional geographic area. When considering the organization of the structure of retailing, it is essential to differentiate between retail organization and retail technique. Retail organization or structure relates to the form of management, whereas retail technique refers to the method or selling. There are three major forms of retail organization: consumer cooperatives, corporate chains (including franchise operations), and independents. Each of these organizational types may employ any of the several retailing techniques currently utilized: counter service, self-service, catalog buying, internet retailing, mail-order, and may operate through a variety of retail outlets: stand alone stores, ribbon type clustering, department stores, websites, strip shopping centers, malls, entertainment based retail, and others.

Starbucks Coffee began in Seattle, Washington. The original store had approximately 450 square feet of retail space. The name “Starbuck” was chosen from Herman Melville’s literary classic Moby Dick. Expand History Section----

Starbucks Coffee Co. is a national success story. Since 1990, the company has grown from 84 to more than 1,500 across the country. According to recent publications in several newspapers, Starbucks coffee has a huge staff composed of 20,000 employees, an average of 800,000-a-year cafes and one of the best paid for entry level food service. The company provides health insurance to all employees including part-timers. By its sheer size this store has economies of scale to absorb higher coffee prices better than others peddling lattes and cappuccinos do. This company also is using its brand name as a strategy to sale new products like BIC pencil Co. did when introduced a detachable shaver using its brand name.

The 1, 145-store Starbucks Corp. proved that the public’s fancy for gourmet coffeehouses in not a fluke. But judging by the stock prices of its rivals – all of which are considerably smaller.

In San Francisco, Starbucks run classes back to back bringing from 300 to 400 people nationally every month. In 1996, it had opened a new store every business day, and it opened another 325 in fiscal 1997. Perhaps the biggest concern about the future of Starbucks is that it will not be able to keep it up. However, this company plans to expand to 2,000 locations by the year 2000.

While some caffeine lovers may argue otherwise, gourmet coffee is a luxury good, in that the population served must be of a certain income level in order to justify the expenditure. Consumers have the choice of consuming a $0.75 cup of regular brewed coffee at any number of restaurants or convenience stores or paying upwards of $3.00 for a caffe latte or caffe mocha at a specialty or gourmet coffee haus. What are the motivations that drive the expenditures on this beverage?
Denver Study Area Hypotheses

1. The total number of Starbucks outlets. The total number of retail outlets has expanded in direct proportion to the population of the Denver PMSA.

2. Location Pattern. Locations will be found most often in areas that have high density residential populations, daytime working populations, and substantial evening/weekend populations.
3. As Starbucks coffee is posited to be classified as a “gourmet” product, the locations of stores in the Denver metro area is closely correlated to high income census tracts or DRCOG regional statistical areas (RSAs).
4. Success of individual outlets. Stores which stress pedestrian access over vehicular access have higher per square foot sales figures than do those stores in the latter category.
5 Small business like Starbucks requires strong spatial relationships to other commercial activities to maintain a client base and profitability.
6 Generally, the two chief methods in sitting new small stores are high traffic flow and visibility.


Section II

In the present project, a survey will be the main methodology for collecting data. However, information about “Starbucks coffee-shop in the Denver Metro Area will, also obtain from several publications and from Internet.

In order to prove the formulated hypotheses, our survey will focus in three areas – location and site, management, and customer preferences.

Location and Site data will reveal location patterns of this store within the area of study. It will also provide information about spatial relationships and the environmental aspects of the surrounding areas. For example, we can learn if “Starbucks” is a relatively isolated enterprise or whether its success is based on shared relationships with other business in its immediate vicinity. We will find how site economies as related to traffic and site characteristics including speed limit, side street, space availability, visibility, and other factors will directly influence the profit and success of this kind of business.

Data collected in the second section of this survey will include number of employess, amount of profit per day, the range of hours open to the public, quantity of suppliers, system of ownership and rent. Since rent has a direct relationship to square footage and the attractiveness for location and site selection. The analysis of this information will revel how the market forces and attractiveness of small enterprises work.

Information about preferences and frequency of visits will reach in the third section of our survey. This information will provide a good sense in order to figure what kind of strategies this particular store has been following to establish new business.

Throughout the analysis of the collected information, our hypotheses will be clarified or rejected. These results will be treated later in the conclusion section.


Section III

Regression results.
Show formula: F(x)=ai+bi+ci…..

Today, customers can enjoy the convenience of a new retail format created by Starbucks coffee. According to our study, the hypotheses of strong spatial relationship with other commercial activities to support small business is clarified by the information obtained from different locations of Starbucks coffee located in mall areas and Denver downtown.

In shopping areas, large anchor stores like Best Buy, CompUSA, Circuit City, and Kings attract many activities. As a result, a generative - share - suscipient factor takes place in these areas providing many opportunities for development of small business. These enterprises have to have strong relationship with large stores in order to maintain and support their activities. Starbucks proves our hypotheses because its success not only depends on the quality of its products, but also in the strong spatial relationships that it has with other stores in the near vicinity, principally with large anchor stores with compatible activity.

Starbucks takes advantage of this factor of sharing activities, it also maintains and improves the existing spatial relationships in shopping areas by providing variety. Within mall areas Starbucks has being classified as a convenience store because of the convenient and friendly location, accessibility, easy visibility, and high pedestrian traffic flow.

Denver downtown provides good opportunities to establish small business like Starbucks because of the cumulative attraction of activities, high population density, good advertising, and the renovation of older areas. Here the factor of sharing activities, as well as the competition between activities, and other, strongly influences in the success of business.

According to our study the factor of high traffic flow in siting new Starbucks’ is clarified and reflected in the larger amount of people that visit these small stores every day in the metropolitan area. For example, in Westminster Mall this small store has an average of 350 customers during weekdays and 500 customers on weekends. The high quality of service provided by Starbucks and the acceptance of the public are not alone enough to promote this small business to succeed. Its success also requires high traffic flow, a good site selection, visibility, clever marketing, employee-friendly policies and deep-roasted coffee beans.

The tendency to locate small business in high traffic areas like shopping malls has being a most frequent factor for establishments like Starbucks. From our study we found that generally the newer Starbucks coffee shops in the Denver Metro Area have being located near to bagel stores and bookstores because of the complementary activities and the public demand. According to our study, visibility as a factor in the location strategy has played an important roll in establishing Starbucks. This is suggested by the location of these stores near to intersections of main streets. Principally, in shopping areas this store is reached by car; however, almost all stores in these areas poses a patio improving the environment characteristics of the site and giving a friendly and comfortable space for its consumers. In the case of downtown this store is located on streets of high traffic pedestrian flow and high commercial activity like Larimer Street. In this area because of the high competition of activities, Starbucks has leading in the innovation of new commercial techniques and sharing of activities, locating its stores close to bookstores, bagel stores and providing good condition of comfort in patios and open spaces.

Starbucks has instituted all sorts of mechanisms for its consumers to communicate with headquarters: E-mail, suggestion, cards, and regular forms. It also acts quickly on issues that are supposedly important to young people like using recycling bin and improving living conditions in coffee growing countries throughout international organizations like CARE.

Section IV

Discuss results and make recommendations re: how to strengthen future studies.