Surprised that Starbucks SBUX stock has risen 33% in the last year? Its strategy suggests that there could be further growth potential on offer.
Increasing innovation, an alliance with Nestle and the continued growth of its loyalty program could catalyze its financial performance.
Although the stock may not be cheap, while there are risks ahead in China, further outperformance of the S&P 500 could be ahead over the long run.
Innovation
The company’s continued focus on innovation could strengthen its competitive position. It has recently invested $100 million in Valor Siren Ventures, which will provide Starbucks with early visibility and access to the latest technology within the retail industry.
In addition, the company lunched its Tryer Lab, which creates and benchmarks new concepts in areas such as store design, in-store equipment and a variety of other projects. It enables cross-functional teams to work together more closely, and makes it easier to bring new ideas to market.
New product innovation has included the deployment of nitro cold brew, which has crossed the 50% mark of availability in its U.S. stores. The cold beverage space is expected to drive incremental customer visits, with feedback from customers having been mainly positive so far.
Customer loyalty
Starbucks’ loyalty program continues to provide it with a wide economic moat. For example, it offers access to a wide range of data that enables the company to deliver better-targeted advertising that is increasingly personalized. In the most recent quarter, 41% of sales in its U.S. stores were from members of its loyalty program, while its active member base increased 13% to 16.8 million.
The company’s new loyalty program was launched in China around four months ago. Since then, member acquisition has accelerated, and 90-day active rewards members increased in the most recent quarter to reach 8.3 million. Plans to offer mobile order and pay in China by the end of fiscal 2019 could increase the appeal of its loyalty program and further accelerate its growth rate.
Coffee alliance
The global coffee alliance between Starbucks and Nestle is expanding the reach of the company’s brand. It could build customer awareness of the brand and lead to increased footfall in stores, as well as strengthen customer loyalty.
In the most recent quarter, Nestle launched the first 24 Starbucks retail products across 16 global markets. There is a burgeoning pipeline of new products and markets in beverages and food services that are expected to be launched over the medium term.
China prospects
One risk facing Starbucks is a continued slowdown in retail sales in China. It is becoming an increasingly important market for the company, with 553 net new stores opened in the country in the last year. It plans to open 600 net new stores annually in China, as it aims to reach 6,000 stores in total by 2022.
Retail sales growth in China has averaged 8.3% in the last five months. This is significantly lower than the average of the last five years, which stands at over 10%. In the company’s most recent quarter, it experienced a 3% rise in comparative sales growth in China. While this was up from 1% in the previous quarter, it represents a disappointing performance. Competition and discounting are both high in the Chinese beverages industry. When allied to slowing sales growth, it may mean that the company’s performance in the region disappoints to some degree.
In response, Starbucks is seeking to differentiate itself more effectively from rivals. It is investing in the quality of its product, as well as in the customer experience. Recent customer feedback from a brand equity survey showed that the company leads its rivals across key consumer metrics in the specialty coffee category. The company remains the first choice for consumers seeking away-from-home coffee, according to the survey. With new partnerships such as a delivery service with Alibaba BABA across 35 cities in China, Starbucks may be able to build an increasingly dominant position in what remains a relatively fast-growing economy.
Outlook
In the current year, Starbucks is forecast to post a rise in earnings per share of 16%. This is expected to be followed by growth of 12% next year. Although it has a relatively high price-earnings ratio of 33, the stock’s long-term growth potential is high.
Strategy changes including increased levels of innovation could catalyze its growth outlook, while its alliance with Nestle may improve brand awareness in new markets.
Similarly, its loyalty program may provide a wider economic moat that makes it worthy of a premium compared to its industry peers.
Having gained 33% in the last year, further outperformance of the S&P 500 could be ahead as the company’s strategy impacts its financial performance.
