How Would Revenues From The Ready To Drink Tea Segment Impact Starbucks’ Valuation?

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Recently,  Starbucks Corporation‘s (NASDAQ:SBUX) announced that it is partnering with Anheuser-Busch to produce, bottle, distribute and market the first Teavana RTD (Ready To Drink) tea in the U.S., which will be launched in the first half of 2017. With a CAGR (compounded annual growth rate) of 16% in the last five years premium RTD tea is the fastest growing segment in the RTD category and a generated revenues of $ 1.1 billion, according to a 2014 report by the Beverage Marketing Corporation. Through this partnership, Starbucks plans to leverage Anheuser-Bush’s production capabilities and strong distribution footprint in the U.S., to capitalize this potential opportunity. We believe entering the premium RTD market will diversify Starbucks’ revenue stream and boost revenues of its global consumer products segment, which according to our estimates accounts for about 10% of the company’s valuation.

Global Consumer Products Segment Accounts For Only 10% Of Starbucks’ Valuation

According to our estimates, the “Global Consumer Products” segment of Starbucks  accounts for around 10% of its valuation and revenues from this segment will increase steadily from $ 1.96 billion in 2016 to around $ 3.2 billion by the end of our forecast period.

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With the launch of Teavana Ready to Drink Tea in partnership with Anheuser-Busch, Starbucks estimates that it will be able to claim a market share of $ 1 billion in the premium RTD category. According to the Tea Association of the U.S., 80 percent of the tea consumed in America is iced and Americans drinks about 800 million cups of tea every week.

Based on the company’s estimates, if the RTD segment is able to generate these revenues and grow its market share steadily after the launch in 2017, it can provide a boost to the revenues of the company’s “Global Consumer Products” Segment. If these revenues increase to $ 4.5 billion by the end of our forecast period, higher than our estimated number of $ 3.2 billion, there can be a 5% upside to our price estimate.

Since its acquisition of Teavana in 2012, Starbucks has sought ways to make this brand a revenue driver for the company. It already holds a 75% market share in the U.S. ready to drink coffee market. Accordingly, the company should be able to leverage its brand recall as it enters into the RTD segment with Teavana. This expansion should also provide a boost to the Teavana brand, positively impacting the sales of premium Teavana brewed and iced teas in Starbucks’ stores.  We acknowledge that the direct impact of the increase in revenues of the “Global Consumer Products” segment through sales of Teavana Ready to Drink Tea might not be significant on Starbucks’ valuation.  Still, it also has the potential to increase consumer spending  in the company’s stores. As the recognition of the Teavana brand increases and it gains more popularity, a higher beverage spend per consumer visit can also impact the company’s valuation positively.

 

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