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Damian Illia
Damian Illia
Articles (175)  | Author's Website |

Starbucks Is Keeping It Hot

March 11, 2014 | About:

There’s no doubt that when it comes to coffee, Starbucks Corporation (NASDAQ:SBUX) is the leading roaster and retailer in the world. With more than 20,000 company-owned and licensed stores in 63 countries, Starbucks not only sells coffee, but also offers premium teas, cold blended beverages as well as various food items. Starbucks generates revenues through both company-owned retail stores, licensed stores and consumer packaged goods and foodservice.

The company’s most popular brands include Starbucks Coffee, Tazo Tea, Seattle’s Best Coffe, K-Cup, Verismo, La Boulange bakery products and Evolution Fresh juices. Furthermore, it markets bottled beverages, ice-creams and liqueurs through various partnerships and offers a foodservice supplying its products to restaurants, office coffee distributors, hotels and airlines. This company is one of the few to have reached almost every segment of the coffee-retailer industry. Regarded as one of the most compelling firms in the consumer space today, Starbucks represents about one-third of coffee cups sold at retail and 4% of total coffee cups brewed at home in the U.S.

The restaurant-retail industry, as we know, has been under the weather for some time, but for a company with a global strength as Starbucks, the market’s instability is no threat. Its determined drive for innovation, its constant brand diversification and geographic expansion efforts embody the core of Starbucks’ competitive advantages. With a strong brand equity, a bargaining clout and a highly leverageable model, analysts tend to agree Starbucks is one of the few companies in this industry to have a wide moat.

Although the last fourth quarter delivered mixed results, with higher-than-expected earnings and lower revenues, sales are expected to go up in the remaining quarters driven by food and beverage innovations, higher card reloads on their loyalty program and new store openings in China and Asian/Pacific markets.

All Across the World

When thinking about company’s expansion plans, what we usually try to ponder is whether the firm will be able to establish its brand on the foreign markets and replicate its concept successfully. Well Starbucks is one company which can definitely brag about customer loyalty: Its loyalty cards increased 24% to 1.4 billion last quarter, meaning millions of consumers for the quarters ahead, and acceptance around the globe. Making its way through emerging markets, Starbucks already works in more than 60 different countries with more than 8,300 units, a number that’s expected to grow even more, exceeding its domestic stores.

For Starbucks, the Chines and Asian-Pacific markets are the target for the next five years. Looking to generate meaningful brand loyalty in these markets, it recently launched the My Starbucks Card in China. Indeed the Chinese market has quite low per-capita consumption, but its middle class is growing and income levels are rising, increasing the demand for convenience food and beverages. Combining original store designs, local product innovations and a solid reward program through My Starbucks Card, management believes China and Asia-Pacific region will represent, by 2014, the company’s second-largest market.

Moreover, the European market is far from being saturated, and the company plans to refresh the business through licensing and creative brand initiatives, an intention which has already showed optimistic outcomes with stronger margins and comps registered in these markets.

Despite macroeconomic uncertainty and consumers' spending volatile tendency, 1,500 net new locations globally are expected to open during 2014, projecting a global store base of 34,500 units by the end of fiscal 2023.

Innovate, Always

Starbucks’ innovation efforts have always been moving tete-a-tete with consumers' shifting behavior and shopping habits. A number of new products such as K-Cups, VIA Latte and Teavana teas have been developed, but indeed Evolution fresh juices and La Boulange baked goods lead their product innovation. Evolution Fresh Juices, the brand acquired by the company in 2011, has been fully capitalized by Starbucks, and the beverage is currently sold both at Starbucks’ stores and Whole Foods locations nationwide.

A healthy program is also being carried on by the firm, bringing more nutritional products to its customers. Teaming up with Danone, Starbucks is developing a Fresh-branded parfait greek yogurt, available in stores as of this year, as well as in grocery channels in 2015. La Boulange has also been a big achievement and the enhanced food offering increased purchases, resulting on higher traffic and ticket growth at its stores.

Starbucks has also been focusing on innovations for an at-home line, launching the premium single-cup domestic coffee machine in 2012. The Verismo system and the VIA Ready Brew allow the company to capture further share of the coffee industry. American market has responded promisingly to these innovations, as revenues grew every year from 7% in fiscal 2011 to 9% in fiscal 2012 and 11% in fiscal 2013.

Booming Loyalty Program

Through digital card, loyalty and mobile capabilities, Starbucks holds a leading position. Social and Digital media are successfully used to attract more customers and increase traffic flow, and the Starbucks’ loyalty cards gain popularity every day. Approximately 30% of all U.S. transactions are mobile and Starbucks card payments. The My Starbucks Rewards program improved consumers' experience and boosted unit-level productivity. The usage of the card allows the company to assure future sales and earnings, and sustain its dividend growth.

Bottom Line

The reinvigorated product portfolio, the development of a new at-home line, and the expansion through Asian markets are the key to the projected Starbucks’ growth for the next 10 years. Despite these optimistic projections, some analysts think the competition put up by companies such as Dunkin’ Brands (NASDAQ:DNKN), Tim Hortons (THI) or McDonald's (NYSE:MCD) is growing, and the minimal switching costs might not be able to prevent consumers from trading to peer companies. Moreover, the diversification and line expansion Starbucks has been undertaking might add some execution risk to management. Macroeconomic environment is challenging, and the U.S. market is always witnessing changes in consumer preferences and posing different setbacks.

Increased taxes, slow job growth and higher interest rates hurt consumer discretionary spending, tendency likely to affect the international markets as well as the domestic. The coffee price is also growing, and the efforts to expand beyond the U.S. will definitely carry more expenses for the company. Nevertheless, this firm has a wide economic moat, and will continue to be regarded as one of the most compelling stocks by analysts.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website

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