10-year

10-Year Anniversary Promotion (20% off)

Join GuruFocus Premium Membership Now for Only $279/Year

Once a decade discount

Save up to $500 on Global Membership.

Don't Miss It !

Free 7-day Trial
All Articles and Columns »

Starbucks: Onwards VIA China

May 15, 2012 | About:
Vivek Bhardwaj

Vivek Bhardwaj

0 followers
Starbucks has experienced rapid growth since its first store opened in Seattle in March of 1971. In this article I'll be taking a look at a 20 year timeline for the company (consisting of the most recent 17.5 years of operation, and a 2.5 year peek into the future based on my own conservative assumptions).



I believe a picture is worth a thousand words so let's get started with some charts showing store growth:

444984518.jpg

First let me point out that from 2009 onwards Starbucks changed the way it reported its international store count figures and replaced that group with two subsets: China Asia-Pacific, and Europe Middle East & Africa. Also from 2009 onwards the US region now also includes Canada, Central America, and South America.

You can see that when the Great Recession started negatively effecting the western developed economies, net store growth was almost nil in 2009 and very small in 2010 with a number of poorly performing stores being shutdown, notably in the U.S. region.

For 2013 and 2014 I have assumed store growth rates similar to the current fiscal year with most of the growth coming from the China Asia-Pacific region. Recently Howard Schultz, CEO of Starbucks has voiced plans to boost stores in China from the current figure of 500 to 1,500 by 20 15 to meet the coffee needs of the growing middle class in the Far East. He has also stated that China will become the second-largest market for Starbucks after the US. This trend becomes clear from the following chart showing store mix:

2026731834.jpg

I don't foresee any meaningful boost to the store count figures for EMEA in the near future. This is because Michelle Gas, the president of Starbucks EMEA, has recently announced the Starbucks Renaissance plan which aims to revive the business in the area as it suffers from a fall in consumer sentiment due to the ongoing European debt crisis.



Now let's take a look at revenues:

570038050.jpg

From 2003 onwards, Starbucks began to breakout revenue figures into U.S. and International regions, the Consumer Products Group, and a category called Other which includes their subsidiary Seattle's Best Coffee.



For those of you who don't already know, the Consumer Products Group sells bottled frappacinos and lattes among other food/drink items to retail chains such as Tesco and Walmart. The forthcoming launch of the Starbucks own brand Verismo single-serve espresso brewer will also fall under this group, adding more consumer choices on top of the already existing VIA instant coffee product. While the Verismo machine may compete with Green Mountain's Keurig devices in the U.S. market, Howard Schultz has said that it will also be launched in China next year.

A point to note here is that the rapidly growing Consumer Products Group is probably adding as much to the top and bottom line as the entire China store chain — and will continue to rival it well into the future.



The following chart shows how revenue contribution from the U.S. will fall below two-thirds for the first time at the end of this fiscal year. This trend will continue as International sales coupled with Consumer Products Group sales contribute more and more to the business overall:

298027409.jpg



The following chart looks at current operating margins as well as the stated target margins which the company hopes to achieve in the long term:

1322510953.jpg



You can see that while business in the U.S. seems healthy, the EMEA region is suffering due to the European debt crisis having an adverse effect on consumer sentiment. I would argue that the competition in Europe is also greater than it is in the U.S. where Starbucks has a very strong foothold.

Starbucks has extremely healthy margins in the China Asia-Pacific region. This is mainly due to lower labor and rent costs, although this will change as wage inflation becomes more apparent in the region over the years ahead.



Starbucks management aim to increase the operating margins at the Consumer Products Group over time, especially as coffee commodity prices come down from the historic highs of last year.



Finally let's take a look at the net income figures:

156622887.jpg



Starbucks has been growing its annual net income and book value systematically for the last several decades. The Great Recession taught both management and investors the risks of over-expansion, so since then the company has been more cautious with its store openings.



In March of last year Howard Schultz outlined the Blueprint for Profitable Growth at the 20th annual shareholder meeting as the company celebrated four full decades of history.

Going forward there will be a greater push into international store growth with stores in India coming at the end of this year, and also a continuing extension of the brand beyond the retail stores via the newer efforts such as VIA instant coffee, and the Verismo single-serve brewer.

About the author:

Vivek Bhardwaj
Investment banking background, having worked for firms such as Deutsche Bank, Bank of America, and JP Morgan

Rating: 3.8/5 (17 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK