Rising consumer spending in the U.S. has given clear indication of growing customers’ interests in becoming more spendthrift. People have increased their spending on food and beverages. On one hand, fast food companies, such as Mc Donald’s (MCD, Financial), are getting into the beverage segment to make more money and on the other hand, coffee giants, such as Starbucks (SBUX, Financial), are expanding into food business.
In fact, this has proved to be particularly successful for Starbucks. Its food segment has been on the surge, providing more avenues of growth for the company. This was affirmed when it reported its third-quarter results, which beat the Street’s expectations.
Into the quarter
Driven by a host of factors, revenue surged 11% to $4.2 billion, over last year. One of the primary reasons for this increase was a 6% growth in same-store sales. Further, the company added 344 new stores, on a global basis, which contributed to the top line increase. Also, higher transaction volumes as well as larger transaction size resulted in higher sales.
Moreover, Starbucks revamped its tea and food offerings, making it more attractive to consumers. For instance, the introduction of “Oprah Chai” was a version of chai tea, which was marketed by Oprah Winfrey. It also introduced Teavana Shaken Ice Tea. In fact, the acquisition of Teavana was one of the greatest moves of Starbucks since it added one of the most popular beverages to its portfolio. Tea is consumed more often than any other beverage. Also, products such as specialty tea have been an attraction for health conscious people.
Another important addition was the bakery business, La Boulange. This added a host of bakery items which are generally ordered by customers along with their coffee. The coffee chain also added breakfast items such as sandwiches to its menu of offerings in order to attract the morning crowd. This move provided tough competition to McDonald’s, who is the biggest player in this segment. McDonald’s is indeed trying to lure customers by providing free coffee with its breakfast.
However, the biggest problem for Starbucks was rising coffee costs, which forced the coffee retailer to raise coffee prices by 1% in cafes and 8% in grocery stores. Nonetheless, customers were equally excited to have its coffee, resulting in higher sales. Hence, earnings jumped 23% to $0.67 per share.
Long way to go
Starbucks has a bright future ahead since it has large number positive points to bank on. Apart from the new additions to its list of offerings, its expansion in China is something to be looked forward to. Also, it plans to open a total of 1,600 new stores globally, which means it is expected to grow bigger.
Also, mobile payment service is to be expanded by the company. It plans to allow customers to order and pay for their coffees through smartphones, before actually arriving in the Starbucks store. Mobile payments already contribute 15% of the revenue and this move should make it even better.
Further, Starbucks plans to introduce new lunch fare in September 2015 and offer wireless charging stations at its stores. These efforts, coupled with new food and beverages, such as Fizzio sodas, make Starbucks look even more attractive.
To end up with
The coffee retailer has been expanding as well as diversifying in order to boost its performance. Its efforts have been interesting, and the results are quite evident. Moreover, the company revised its guidance for the year as it expects to make more money. With so many strategic initiatives, plans to expand and a bright outlook, this coffee retailer should be the ultimate pick for your portfolio.
