Digital Payments & Ultra-Premium Coffee Drive Revenue Growth For Starbucks In Q3

Starbucks Corporation (NASDAQ:SBUX) beat market expectations in its June-ended quarter (Q3 2015) as the company continued to enjoy dominance in the industry. The coffee giant reported 18% year-over-year (y-o-y) growth to $4.9 billion in net revenues, driven by strong global comparable store sales growth of 7% vs. 6.2% expected. Starbucks witnessed sales growth in all geographical segments, primarily driven by an increase in customer traffic. ^[1]

Mobile payments, the introduction of ultra-premium coffee through its Reserve stores, and an increase in customer traffic with improved average spend are some of the reasons for Starbucks’ knockout performance in the third fiscal quarter. The stock rose nearly 5% in the after trade hours, despite already trading at a high P/E ratio. (See: Starbucks-Sprinting on a jogging track)

Trefis estimates the stock price for the company at $48, which is roughly 14% below the current market price.

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Grande Size Growth In All Segments

Reserve Coffee Improves Average Spend In Americas

Q3 was one of the impressive quarters in the company’s history, with record revenues and equal contributions from all segments. In the Americas, the company’s comparable store sales rose 8%, due to a strong 4% increase in customer traffic and 12% y-o-y increase in revenues. Due to the introduction of premium and ultra-premium reserve coffee, the average transaction improved by 4% y-o-y, resulting in a 120 basis points improvement in operating margins.  The increase in average transaction was a result of creative beverage and food innovations. Starbucks opened 658 net new stores in its Americas segment over the past 12 months.

With Starbucks Reserve coffees spreading across all of its stores in the U.S., consolidation of Starbucks Roastery and Tasting room in Seattle, and introduction of delivery services, coupled with mobile ordering and payments, the coffee giant has a lot to look forward to in the fourth quarter.

New Venues In EMEA 

The EMEA (Europe, Middle-East and Africa) segment posted a 3% increase in comparable store sales, driven by a 2% increase in customer count and 1% improvement in average ticket. On the other hand, revenues for the segment declined 9% y-o-y due to unfavorable foreign currency translations and a shift towards more licensed stores. However, this shift led to a 320 basis points increase in operating margins. Excluding the effect of foreign currency translation, revenues increased 5% y-o-y.

The company plans to open its first store in Johannesburg, South Africa, in the first half of 2016, after joining hands with an established food retail operator, Taste Holdings Limited. Starbucks aims at opening roughly 150 stores in the country.

After Japan, All Eyes on China

One of the highlights this quarter was the 127% y-o-y increase in revenues and 11% growth in comparable store sales for China/Asia-Pacific region, driven by incremental revenues from the Starbucks Japan unit. However, this effectively drove margins down tremendously by a net 1,200 basis points to 23%. The acquisition of the Japan unit was aimed at expanding into this lucrative coffee market and thereby expanding product sales through food service channels, to accelerate retail sales, and provide a boost to the smaller share of RTD products.

On the other hand, in March 2015, Starbucks signed an agreement with Tingyi Holding Corp., a leading food and beverage producer in China, to manufacture and expand the distribution of Starbucks’ ready-to-drink (RTD) products. ^[2] The RTD coffee, coupled with the energy sector, is a $6 billion category in China and is estimated to grow by 20% over the next three years.

The company added 750 net new stores over the past 12 months in the China/Asia-Pacific region and is confident of taking the total store count in the region to 5,500 by the end of 2015. Moreover, the company has surpassed the target of 1,700 functional stores in over 90 cities in mainland China. The company expects revenue from the CAP region to triple over the next five years, with strong growth opportunities in China, Japan, and India.

Digital Payments Boosted Revenue Growth

Starbucks’ mobile payment and ordering initiative is proving to be a huge success and has become a convenient option for customers. By providing fast and efficient services, it has managed to increase customer traffic by 4% in Q3. This innovative feature is now available in nearly 4,000 of the company’s U.S. company operated stores, and will be available throughout the country by the end of the holiday season. Considering that the rollout of this feature to 4,000 stores occurred during the month of July, the real impact of Mobile Order and Pay will be visible in the Q4 fiscal results. For the third quarter, mobile payments accounted for 20% of all in-store transactions in the U.S.

By reducing the volume of people who have to stay in line for ordering, more customers than usual are coming in to Starbucks stores. Moreover, the distinguishing factor in Starbucks’ mobile commerce feature, apart from the fact that no other company is close to such a huge amount of payments per week, is that the company has strategically integrated an innovative reward programs and ‘Stars as currency’ feature with mobile payment. Starbucks has roughly 10.4 million active My Starbucks Reward members, up 28% y-o-y, with 6.2 million Gold members, up 32% y-o-y. This resulted in an increase in average transactions during the quarter. The accelerating growth through this feature might provide a further boost to revenue growth in the fourth quarter as well.

PepsiCo Deal: Expansion In Latin America

In the Latin America region, the company plans to further expand the ready-to-drink portfolio with a new agreement with PepsiCo (NYSE:PEP). This new agreement will help Starbucks in expanding its ready-to-drink coffee and energy portfolio in Latin America, where the company currently has 870 stores in 14 markets. The enhanced agreement with PepsiCo for marketing and distribution of Starbucks’ ready-to-drink bottled beverages will enhance customer reach and will further help Starbucks in tapping into this growing $4 billion market in Latin America. In 2016, Starbucks’ ready-to-drink coffee bottled beverages will be available in grocery and convenience stores in 10 of the Latin America markets.

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1. Starbucks, Q3 2015 earnings call transcript [↩]
2. Starbucks signs agreement with Tingyi Holding Corp. To expand in China’s $6 billion RTD coffee and energy category [↩]