There are few names that come to mind when talking about the specialty coffee industry, but Starbucks Corporation (SBUX) is the brand that never fades. The global chain of nearly 20,000 company-owned and licensed stores has held the market leading position in this fast paced and dynamic industry for several years now, and the future prognosis looks promising. The firm’s winning sales combination of coffee, espresso, teas, cold blended beverages, food and accessories has won over both customers and investors alike. The challenge for 2014, however, will be further global expansion and product diversification.
Starbucks’ revenue growth until now was consequential of its extensive retail operations in the U.S., where the company owns and licenses 11,000 locations. Nevertheless, due to the established brand popularity and strong customer loyalty, the coffee giant is now looking to focus more money, and energy, on developing its recognition in emerging markets. This process was set in motion over a decade ago via store openings in Japan, and today the Starbucks name is represented by 8,000 units, spread over 60 countries. Since emerging markets like China, Brazil and India currently embody a substantial customer base, they’re the next target. Thus, China’s current 1,000 store units are meant to hit the 1,500 mark by 2015, and expand to over 4,000 in the long run. As for Brazil and India, 1,000 units apiece are planned to develop over the next decade.
While some might argue that a store expansion strategy could raise the company’s debt level and reduce cash flow, Starbucks seems to have evaded this risk. By opening 1,700 new stores across the globe, most of these being licensed stores in Europe, the firm managed to avoid the day-to-day operational expenses tied to company-owned units. Therefore, as the store count grew from 11.9% to 12.4%, store operating expenses only increased by 9.4% since 2012. The firm’s successful expansion strategy is also notable in the following cost-benefit relation: while total net revenues experienced a 12% bump to $14.9 billion, total operating expenses grew 10.2% to approximately $12.7 billion. This significant margin is most beneficial for shareholders, who currently profit from $1.2 billion returned in the form of dividend payments.
More Starbucks for Everyone
Now, expansion is a broad concept and Starbucks’ recent channel development efforts lead me to believe that turning the coffee brand into a packaged goods company will be the next big step. Given its brand recognition strength and the company’s capacity to connect with mass-channel customers, this evolution is not an abstract thought. In fact, the firm’s strong relationship with Costco Wholesale Corporation (COST), The Kroger Co. (KR) and Whole Foods Market Inc. (WFM) could benefit the distribution plans of Starbucks' entire consumer product portfolio. Additionally, entering a new market segment could help the company overcome its current competitors Dunkin Brands Group (DNKN) and Caribou Coffee.
In 2013, the coffee giant impressed us all with its new complimentary brand portfolio, the likes of which includes La Boulange pastry products, Evolution Fresh juices and Teavana tea products. In addition to other product developments, like VIA, K-Cups and Verismo, revenue is suspected to grow annually 20% between 2014 and 2017 in the channel development segment. Despite existing risks due to discretionary headwinds and coffee commodity costs, as well as the economic, legal and political risk associated with its international expansion efforts, I feel very bullish about Starbucks’ future growth. Investment gurus Mario Gabelli (Trades, Portfolio) and John Burbank (Trades, Portfolio)’s recent share acquisitions also lead me to think that this coffee giant is a must-have on every investors list.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.