Starbucks (SBUX) is one of the most recognised brands in the world. It is the one and only truly global retail coffee company. The retail and restaurant industries they operate in are extremely competitive. These industries have low barriers to entry and tend to have strong number 2 competitors. There are plenty of examples in burgers with McDonalds and Burger King, pizza with Domino’s and Pizza Hut, donuts with Krispy Kreme and Dunkin Donuts. However in coffee there is no one else who comes close.
SBUX was successful as it developed a brand which stood for more than just coffee, what SBUX would term a “third place”. SBUX became a place where customers could relax in-between pressures from home and work. Management early on realised that to accomplish this goal their competitive advantage had to be their employees. As a private company SBUX offered part time workers health care benefits and distributed stock options to staff. They empowered their employees to become partners in business. The CEO Howard Schultz granted stock options to every level of staff, at the time all 700 employees. These initiatives reduced employee turnover and more importantly gave SBUX a more local feel as the baristas acted more like owners than employees.
SBUX has proven itself to be a great business. It is the dominant coffee chain in America and operates 17,000 stores in 55 countries. Amazingly it still has plans for growth with two key initiatives. The first is SBUX international store rollout. SBUX international store count (see chart below) pales in comparison to industry peers such as McDonalds and Yum Brands (YUM). SBUX currently has 500 stores in China with plans to have 1,500 stores open by 2015. Just this year they announced plans to open their first store in India.
Source: Company 10K
At their 2010 investor conference SBUX disclosed that its US operations have 36 stores per active million customers. YUM, the owners of KFC and Pizza Hut in China have 12.2 stores per million customers in China. While SBUX only has 0.7 stores per million in China. SBUX is dominant in the US but globally serves just 1 in 100 cups of coffees.
The second growth initiative is in coffee away from stores. In America SBUX currently serves only 1 in 7 cups away from home and 1 in 25 at home cups of coffee. Offering consumer products such as single cup brewers allows customers to enjoy the SBUX experience outside of the company store base. According to Schultz this division may one day rival the profitability of the retail business. A big statement considering sales of packaged coffee and tea comprised 7% of 2011 revenues.
SBUX is a very innovative company, they were early to digital and have one of the most liked brands on Facebook. They also enabled mobile payments early last year. Mobile payment use has increased ten fold from 2011 to 2012. It has generated more than 45 million payment transactions in the last 14 months, the largest for North American retailers. This has generated savings in credit card charges and has helped improve customer service times. There is also potential upside with the acquisition of Evolution Fresh and La Boulange Bakery. SBUX intends to be the leader in the juice and bakery markets, just like they have become the leaders in the coffee market.
SBUX has a lot more flexibility than other chains as they own and do not franchise their stores. This flexibility gives SBUX the opportunity to sell their branded consumer products through other channels. This ability combined with the overseas roll out opportunity, suggests this growth story seems set to keep on delivering.
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Disclosure: Decisive is long SBUX
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
Disclosure: Decisive is long SBUX
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
