Starbucks Looks Forward To Winter Season, As Single-Serve Market Share Improves

Throughout the world, if anyone thinks of coffee, the first name that comes to mind is probably Starbucks (NASDAQ:SBUX). The Seattle based coffee leader has been enjoying dominance in terms of revenue growth as well as margins. Over the last 5 years, the company’s stock has mushroomed up nearly 4 times, whereas the S&P 500 rose just 68% over the same period.

Starbucks has been able to beat the market expectations over several consecutive quarters, with an 18% year-over-year (y-o-y) growth in the net revenues in its June-ended quarter of 2015. Riding on high K-Cup sales, strong single-serve market share, and a gradual increase in customer traffic, the coffee giant has been posting robust top-line growth numbers. ^[1]

Apart from its core high quality coffee products and food items, Starbucks has been focusing on its Consumer Packaged Goods segment equally. According to a recent research report by UBS group, Starbucks’ industry-wide market share in the K-Cups segment rose by 40 basis points to 16.7%. ^[2] This is another major achievement for Starbucks, who is already enjoying dominance in other core segments.

Trefis estimates the stock price for the company at $55, which is roughly 3% below the current market price.

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K-Cups Battle Intensifies

According to UBS analyst Keith Seigner, Starbucks’ single-serve sales rose nearly 41% y-o-y for the one month period ended September 5, 2015, primarily due to volume growth of 53% y-o-y over the same period. This data is, however, collected from the Nielsen All Outlet Coverage plus Convenient Stores. ^[3] As a result, the company’s market share improved 40 basis points month-over-month to 16.7%, highest this year.

Apart from the K-Cups (Single-Serve segment), the company’s traditional ground packaged coffee segment witnessed sales growth of 14% y-o-y during the 4 weeks period ended September 5, 2015, compared to the overall category’s 2.5% growth. This robust performance in the category was driven by 20% volume growth, compared to 14% growth in the prior 12 month period. Starbucks’ marketing strength, innovative products, and operational efficiency led to an extraordinary growth during this stiff competition.

The takeaway from this report is that the company’s growth in this particular segment came at a point when the growth in the overall U.S. single serve segment was 16%, which is less than the 18% y-o-y growth during the 12 month period ended August 2015. This indicates the rising popularity and strength of the company’s products, the impact of which will be reflected in the September-ended quarter, and hence, the fiscal 2015 results of the company.

Trefis estimates Starbucks’ Consumer Packaged Goods (CPG) segment to witness close to 9% growth in revenues, with a 100 basis points improvement in EBITDA margins. According to our estimates, the CPG segment will account for 9% of the company’s total revenues, and one-eighth of the total profits.

Winter Season: Starbucks Looks To Capitalize

With winter season approaching, the demand for these products will only increase further. Furthermore, being one of the top brands in the segment, coffee lovers will not only opt for in-store coffees, but those who love to enjoy their coffee at home, will be going for the company’s packaged coffee and K-Cups. Although, other competing brands, such as McDonald’s McCafe and Dunkin’ Brands, are also enjoying a significant amount of market share in the category, the combined market share of these two companies is still less than that of Starbucks.

With this significant gap in market share, Starbucks will be looking to widen the gap further with innovative offers and competitive prices, and such a strong hold in the market, just before the onset of winter season, is a huge plus for the company. It would be interesting to watch how the company retains it hold, or even takes it one step further, during the next quarter.

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1. Starbucks, Q3 2015 earnings call transcript [↩]
2. Starbucks sees K-Cup sales accelerate, UBS notes [↩]
3. Ref: 2 [↩]