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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (6) 

Starbucks' Expertise in Managing Capital

The company's return on invested capital is more than twice that of its closest competitors

May 12, 2020 | About:

In my opinion, Starbucks (NASDAQ:SBUX) is well-positioned to ride the Covid-19 economic recovery in its home market, the U.S., as well as in its fastest-growing overseas market, China. For one, the company's high returno on invested capital (ROIC) indicates leadership in profitability.

Additionally, as equity analyst John Zolidis pointed out, Starbucks will be "a beneficiary of the secular theme of share consolidation as small indie players in the U.S. fold and as Luckin wraps-up its operations in China."

Luckin Coffee Inc. (LK) was founded in Beijing in October 2017 and began expanding quickly, evenutally opening one store every 15 hours, according to Statista.com. That’s how Luckin Coffee reached 4507 stores by January 2020, beating Starbucks, which has 4,200 stores. Luckin Coffee’s rapid expansion had been stealing the buzz from Starbucks by opening up stores in high profile places like the Forbidden City, where Starbucks was famously evicted from a decade ago.

However, Luckin’s recent accounting scandal, in which a top company executive was found to have been fabricating sales numbers, have both Chinese and American regulators looking into its operations. That’s good news for Starbucks, which is best positioned to increase its own market share in response to its competitor's negative publicity.

Additionally, when it comes to managing investor money, Starbucks has a return on invested capital of 14.96% according to GuruFocus data, which is much higher than the weighted average cost of capital of 5.33%, indicating high profitability.

Starbucks' leadership in the effective deployment of capital in the franchise industry has thus far been attributed to the “early mover” advantage that allowed the franchise giant to acquire the best locations at home and abroad. Then there’s the company’s business model that features the so-called “third place,” an “affordable luxury” away from work and home where people can enjoy a cup of coffee with friends and colleagues.

Of course, the company faces significant headwinds from travel restrictions and stay-at-home orders. The pandemic will likely continue to challenge the company after these policies are eased in the coming weeks and months, slowing recovery.

This means that investors may want to temper investor enthusiasm for Starbucks’s stock after the big run-up from its March lows. In my estimation, there will likely be a better opportunity to begin buying shares again in the coming months.

Disclosure: I own shares of Starbucks.

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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