Starbucks To Enter Into New Beverage Segments With Teavana & Fizzio Brands

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The American global coffee company, Starbucks Corporation (NASDAQ: SBUX) is one of the most recognized coffee brands in the world. The company has created strong brand awareness in major markets over the last decade. It currently has 20,863 stores in 64 countries, with nearly 13,900 stores in the U.S., Canada and Latin America. Apart from its renowned coffee stores, the company also owns and operates other brands such as Tazo, Seattle’s Best Coffee, Teavana, Evolution Fresh and La Boulange. In the latest third fiscal quarter report, Starbucks’ global comparable store sales rose 6% yet again, marking its 18th consecutive quarter with above 5% comparable sales growth. Each of the company’s reporting segments delivered excellent performance in Q3, leading to an 11% increase in revenues to $4.2 billion. [1]

The highlight of the company’s performance in the recent quarters is the company’s initiative of entering into new markets. In December 2012, Starbucks acquired Teavana brand and opened net 366 Teavana stores in fiscal 2013. The total net revenues of the company’s other beverage segment, which includes Teavana, Seattle’s Best Coffee, Evolution Fresh and Digital Ventures increased by $185 million in fiscal 2013, primarily driven by additional revenues ($156 million) from Teavana stores. [2] In June 2014, Starbucks introduced Fizzio- the company’s brand of preservative-free, hand-crafted, cold carbonated beverages in nearly 3,000 stores in the U.S. The company is expanding its cold beverage portfolio with the addition of the Fizzio Hand-crafted Sodas and Teavana Shaken Iced Teas.

We have a $76 price estimate for Starbucks, which is 2% below the current market price.

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See our full analysis for Starbucks Corportion

Starbucks is already one of the dominant forces in the coffee industry, with 13% of the single-serve coffee market, only behind Keurig Green Mountain (NASDAQ:GMCR). [3] The company serves around 100 million U.S. customers daily, out of which 30 million prefer speciality beverages such as lattes, cappuccinos and mochas. [4] With its tea segment and recently introduced cold carbonated beverage segment, the company is entering into lucrative markets with completely different target customers. However, years of marketing and advertising experience, well-recognized brand name and quality of products will provide an added advantage to the company. Both the new brands provide excellent platforms for the company to expand into bigger markets, apart from its coffee business.

Tea Market: A $90 Billion Market

In 2012, there were 160 million Americans who drank tea daily in any form-hot or cold, consuming a total of 3.6 billion gallons, or around 80 billion servings of tea in the whole year. Tea companies focus on the fact that over 80% of the tea consumption in the U.S. is iced. [5] Over the last decade, the segment that showed the most growth was the Ready-To-Drink (RTD) segment. While the overall tea sales in the U.S. amounted to $10.41 billion in 2013, up 6.3% year-over-year, RTD tea remained the largest segment constituting almost half the net sales. [6] Every year United States Department of Agriculture (USDA) reports per capita availability figures- an indication of consumption- for all the commodities. According to USDA report, per capita availability of coffee has been decreasing since the past 70 years and has been stable at around 6 gallons for regular coffee and 18.5-19 gallons for instant coffee over the last decade. [7] The total supply for coffee rose only 13% over the last decade, whereas it rose around 42% for tea. Clearly, the suppliers are shifting more towards tea. We have discussed the growth potential in RTD tea market in our prior article. (see Dr. Pepper’s Much Needed Non-Carbonated Growth Could Come From Snapple Tea)

Starbucks’ CEO Howard Schultz mentioned in its recent Q3 earnings call conference that the company believes the tea market is worth $90 billion and this gives them incentive to transform this segment into a core segment in the long run. [8] Starbucks recently partnered with Oprah Winfrey for a collaboration on a tea flavour and introduced Teavana Oprah Chai in the third quarter of fiscal 2014. The company’s new introduction- Teavana Shaken Iced Tea- also received great customer response. Starbucks long term goal is to combine Teavana’s experience in its merchandising with its own brand strength in the retail segment.

Cold Carbonated Beverage Market: A Tough Market To Break

Starbucks introduced three new carbonated drinks under its Fizzio brand- Spiced Root Beer, Golden Ginger Ale and Lemon Ale.  Unlike existing at-home carbonation products where the machine carbonates the water and flavours are added afterwards, Fizzio carbonated drinks are finished beverages, with every ingredient receiving same amount of carbonation. Moreover, Starbucks is also offering its customers an advantage to adjust their carbonation. Any beverage, which is not included in the hot beverage segment of the Starbucks menu can be ordered as carbonated through the company’s Fizzio’s machine for an extra 50 cents.

According to our estimates, carbonated beverage segment constitutes 43% of the total Liquid Refreshment Beverage (LRB) market in the U.S and over 40% of the global beverage market. This segment is dominated by well renowned brands such as Coca-Cola (NYSE:KO) (42.4%), PepsiCo (NYSE:PEP) (28.7%) and Dr Pepper Snapple (NYSE:DPS) (17.5%). Evidently, carbonated beverage segment is a mature market with three major brands controlling more than 85% of the total market. Moreover, the market share of this segment has been decreasing for the past 5 years (from 47% in 2009 to 43% in 2013), with consumers shifting to non-carbonated drinks and sports drinks, due to health concerns.

Starbucks would have a hard time establishing its brand at a large scale in this market. However, it is still a big market and will provide incremental revenues for the company with a steady growth.

Since these refreshing cold beverages were introduced in summer,it will be interesting to see the consumer’s reaction on the new Fizzio drinks in September-ended quarter, which might set the tone for future of this segment.

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Notes:
  1. Starbucks: Q3 2014 earnings call transcript []
  2. Starbucks fiscal 2013 annual report, 10-K []
  3. Green Mountain gains as Starbucks surges in a crowded K-Cup market []
  4. Coffee drinking statistics []
  5. Tea fact sheet 2013, www.teausa.com []
  6. Wholesales tea sales in the U.S., statista.com []
  7. Food availability data system, USDA report []
  8. Ref: 1 []