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Investment Overview for Starbucks (NASDAQ:SBUX)
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, the margins dropped to 17.5%, primarily due to high coffee prices. In 2012, they remained relatively stable. In 2013, the margins increased to 19.4% as a result of low arabica coffee prices. The arabica coffee prices have been rising since the onset of 2014 and if it touches $3 per pound mark, long-term margins might decline to 17.0% and we could see a 10% downside to the Trefis stock price. However, if arabica coffee prices decline again continue to test new lows, margins may improve to 21.0%, leading to an upside of 10% to the Trefis valuation.
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.
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 four times more franchised restaurants than company owned restaurants, making the franchise business more valuable to its stock. However, Starbucks has almost equal number of company owned stores and franchised stores. As of March 30, 2014, Starbucks had 10,125 company-owned stores and 10,394 franchised stores making it a total of 20,519 stores.
International expansion fueling growth
During 2014, Starbucks plans to open more than 1,500 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 further accelerate growth in the next 2-3 years.
Ease and convenience of payment through mobile apps helping domestic sales
At the end of 2013, there were 10 million active customers who used Statbucks' mobile app. Consumers can load the money on to the app and then present a 2D bar code to pay at the register. With this app, it’s easy to pay with a phone, track purchases and view ones My Starbucks Rewards Stars and rewards. Mobile payment now represents 14% of all Starbucks in-store transactions in the U.S. Twenty five percent of all transactions are made by loyalty members.
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 Average Number of Franchised Stores
This is the average number of coffee stores operating under the licensing arrangement between Starbucks and its various partners across the globe.
In 2011, the average number of franchised stores increased by 1.9% to 8,121. In 2012, the growth accelerated as the figure rose 4.5% to 8,410. The trend continued into 2013 as the figure surged 8.4% to 9,117 stores.
The positive growth of franchised stores internationally has been negatively offset by store closures in the U.S. as part of the company's restructuring efforts to reduce self-cannibalization.
With restructuring now complete, we forecast more aggressive store openings. For 2014 and beyond, we expect the increase in the average number of franchised restaurants to be around 600-700 stores annually.
Trefis considered the following factors for its forecast
- Rate of growth for franchised restaurants greater than company-operated restaurants
- Franchised restaurants require low investment and offer high margins (as high as 75%). Most of the new restaurants that the company is opening are franchised restaurants.
- International markets are under-penetrated
- Most of the new restaurants the company plans to open are in China/Asia Pacific. The number of Starbucks outlets in these countries are only a fraction of what they are in the U.S. New outlets opened will be a mix of company-operated and franchised restaurants.
- Starbucks plans to triple the number of restaurants in China to 1,500 by 2015. Similarly, it plans to double the number of restaurants in South Korea to 700 by 2016. The company also opened its first restaurant in India in 2012 and plans to accelerate the expansion in the coming years.
Back to Company Overview
- Lack of transparency in developing markets creates difficulty to franchise the restaurants
- It is often more difficult to franchise the restaurants in developing markets due to lack of big franchisees which can match the stature of Starbucks. Similarly, there are quality issues with franchisees which could permanently damage the company's reputation in that particular region. In such a scenario, Starbucks is better off opening company operated restaurants.
How 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.
See more on: DCF Methodology
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