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Investment Overview for Starbucks (NASDAQ:SBUX)
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Below are key drivers of Starbucks' value that present opportunities for upside or downside to the current Trefis price estimate for Starbucks:
Company Owned Stores
- Company Operated Stores EBITDA Margin :The margins improved to 18.7% in 2010 from 15.6% in 2009 due to restructuring and store closures. However, in 2011, due to high coffee prices, the margins dropped to 17.5%. In 2012, they remained relatively stable. For 2013 and thereafter, we expect the margins to stabilize to around 17.7%. However, if commodity prices (especially arabica coffee) continue to test new highs, we could see the margins getting squeezed once again. Passing on the costs to customers will decrease the number of daily customers visiting the restaurant. Should margins fall to 15.0%, there could be a 10% downside to the Trefis price estimate. At the same time, if the margins continue on their growth trajectory and improve to 19% by the end of the Trefis forecast period, we could see an upside of 10% to the estimated price.
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Starbucks is the world’s leading roaster and retailer of specialty coffee. Through its global network of owned and franchised coffee retail outlets, Starbucks offers a wide range of products like high-quality whole bean coffees, freshly brewed coffees, Italian-style espresso beverages, cold blended beverages, food items like sandwiches, premium teas and coffee making equipment.
Starbucks' own stores are located near offices and residential areas and are larger in size, compared to its licensed stores that are much smaller and mostly located at airports and supermarkets.
Starbucks also sells its packaged coffee and tea through retail channels such as grocery stores, warehouse clubs, convenience stores and US food service accounts.
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The Company Operated Stores division is more valuable than the Franchise Stores division for Starbucks because of the following two reasons:
Company operated stores generate more revenues than franchised stores
Starbucks makes money through its company-owned stores as well as through franchise fees and royalties from franchised stores. Starbucks earns higher profit margins from franchised stores compared to company-owned stores because there are no operational and employee costs involved with franchised stores, hence Starbucks gets to keep the entire royalty & rent fee without paying for any costs.
Revenues earned from Starbucks' company owned stores are much higher than the franchised stores. This is because, although there are costs involved, Starbucks owns 100% of the revenues from its own restaurants, while it gets a percentage of the revenues (in the form of royalty fees) from its franchised restaurants.
Number of company owned stores comparable to franchised stores
Food & beverage companies, in general, increase their reach and profits by having a large base of franchised stores. For example, McDonald's has three times more franchised restaurants than company owned restaurants, making the franchise business more valuable to its stock. However, Starbucks has more company owned stores than franchised stores. As of December 30, 2012, Starbucks had 9,462 company-owned stores and 8,816 franchised stores making it a total of 18,278 stores.
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International expansion fueling growth
For the fiscal year 2013, Starbucks plans to open more than 1300 new stores most of which will be concentrated in the China/Asia Pacific region and South America. In China, the company plans to triple the number of outlets to 1500 by 2015. In South Korea, Starbucks will double the number of stores to 700 by 2016. It also opened its first outlet in India in 2012 and plans to accelerate growth in the next 2-3 years.
Ease and convenience of payment through mobile apps helping domestic sales
Since the launch of its mobile app 15 months ago, the company has processed more than 42 million mobile payments in the U.S. Consumers can load the money on to the app and then present a 2D bar code to pay at the register.
Global Consumer Products Group (CPG) revenues helped by direct distribution model
The CPG segment consists of packaged coffee and tea, Starbucks VIA Ready Brew and other branded products sold worldwide. Transition of these products from in-house stores to a direct distribution model (i.e. through grocery, drugstores and other sales channels) has helped boost the sales of products of this segment.
Trefis Forecast Rationale for Number of Daily Customers per Store
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This is the average number of customers who visit a Starbucks store on any given day.
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The ${forecast} has witnessed a rapid growth in the last three years. In 2009, the figure stood at 424 in 2009 which jumped by more than 10% to 475 in 2010. In 2011, the number surged to 517. The trend continued in 2012 as the figure rose to 563.
Going forward, we expect the ${forecast} to grow at a more moderate rate of 5-6% annually.
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Trefis considered the following factors for its forecast
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- New stores in emerging markets attract high footfalls
- Starbucks generally opens its stores at highly visible, upscale and busy trade areas in the metropolitan cities of emerging markets. These locations have high footfalls but the average spend per customer is usually lower due to limited purchasing power of an average citizen.
- New items added to appeal to a wider customer base
- In January 2012, the company launched the Starbucks Blonde roast which is a lighter roast, as preferred by a large number of American customers. It goes without saying, that the company incurs a substantial amount of expenditures on research, development and product testing to ensure it meets or exceeds the expectation of customers.
- Extensive use of IT in operations results in faster services
- Starbucks relies heavily on information technology systems across its operations, including supply chain management and point-of-sale processing at stores for processes and transactions.
- These systems enable the company to provide faster and better services to its customers.
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- Smaller outlets in China/Asia Pacific
- Most of the new outlets are being opened in China/Asia Pacific. The outlets in these countries are usually smaller in area, due to high rentals and a lack of space, than those in the U.S. Smaller outlets will tend to attract fewer customers.
- Increased competition from rivals such as McDonald's
- McCafe has successfully positioned itself as a brand offering premium coffee products. Moreover, McDonald's is revamping its outlets and a greater proportion of its restaurants now offer free amenities such as Wi-Fi. It aims to give consumers a similar experience as Starbucks at lower prices. In such a scenario, the ability of Starbucks to dictate menu prices gets eroded significantly.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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