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This Coffee Company Can Revamp Your Portfolio For Growth

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Nov 24, 2013
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Starbucks Corporation (SBUX, Financial) is a marketer and retailer of coffee, and has its presence in about 60 countries. The company started off in 1987 with a mere 17 stores. Now, Starbucks operates more than 17,650 locations across the globe, and its brand is universally recognized. This year seems to be great for this Seattle-based coffee giant.

Recent Report Card

The Q4 profits of Starbucks are up by a jaw-dropping 34%. There is a 7% increase in global same-store sales and a 13% increase in revenue, no small feat for a company of Starbucks' size. The stock has doubled exactly 8 times in its 21 year stock history. The inelasticity of demand for their coffee leaves a lot of room to maneuver, and this works in Starbucks favor profit wise. Their profit margins stand at 10% and gross annual profits at $1.3 billion. Revenue rose to $3 billion, while the operating income surged 28.7% to $668.9 million. For the full year, Starbucks revenues surged 12% to $14.9 billion, while the net income jumped 24.4% to $1.7 billion. The company’s earnings have benefited from strong performances in the U.S. and China, where same-store sales grew 8% in both markets. Sales are getting boosted by higher customer traffic as a result of increased usage of mobile apps to place orders.

Getting Some Competition-Really?

Starbucks faces some competition in the form of McDonald's (MCD, Financial), and Dunkin Brands (DNKN, Financial).McDonald’s doesn’t specialize in making coffee, and donut maker Dunkin Brand has almost no presence in some parts of the US, including California. McDonald's, though a large and capable organization, isn't quite selling to the same customer base as Starbucks nor is it trying to offer a similar customer experience to capture that base. Buying coffee is usually not the first thing on McDonald's customers’ minds, and if it is, they want it cheap and fast. In contrast in the Starbucks stores people are willing to wait in line patiently, even long lines, just to get their coffee and pastries .

McDonald's and Dunkin Donuts' serve an entirely different segment of customers than Starbucks. This surely goes in favor of this coffee giant. Starbucks has a strong edge in Washington, DC, with more than 80 stores. Dunkin has about 12. While the companies are battling it out in a number of communities and states, like Detroit, they aim at slightly different demographics . Texas, too, is dominated by Starbucks. This far west, there are no Dunkin strongholds or even any competitive battlegrounds.

International Presence

Starbucks has great potential in the area of selling tea. Tea consumption is much higher in the Middle East and Asia, where this coffee scion is still looking for big growth. Last year the company purchased Teavana for $620 million. That brand is now the face of Starbucks' first stand-alone tea bar, located in New York City. Teavana is also going to be used as a rebranding for Starbucks' other tea brand , Tazo. One of Starbucks' biggest hopes has to be the possibility of selling tea in countries that have eschewed coffee. It is just one of the many companies looking to take its products to the international market.

Starbucks acquired La Boulange, a trendy, popular Bakery started in San Francisco for $100 million, in 2012. Since acquiring La Boulange, they have added some of their great pastry items to their menu. They are planning to open up about 600 locations in North America, and another 600 in Asia. China is a key part of the company’s global expansion plans, with the store count in the nation set to rise to 1,500 by the end of 2015.

To Rightly Conclude

The business is one of the earliest coffee shop chains. Let’s accept the fact - coffee is itself a great business. There is a large and a worldwide base of repeat customers, especially morning customers, who will always need coffee. Even if the coffee production prices are up, customer willingness to pay higher prices remain mostly undeterred.

As consumers become more health conscious day by day, they prefer beverages such as juice, tea, and coffee over soda and other carbonated drinks. This is the opportunity where Starbucks can capitalize. It can provide greater shareholder returns in the times to come. It is betting on the second most consumed beverage after water, tea . The global tea market is worth $90 billion. This holds tremendous potential for the company.
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