Starbucks (NASDAQ:SBUX) 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 from coffees and teas to sandwiches and brewing equipment. It competes with McDonald’s (NYSE:MCD), Caribou Coffee (NASDAQ:CBOU) and Peet’s Coffee (NASDAQ:PEET) in the broader market for specialty coffee.
We estimate that Starbucks’ company-owned stores consititute around 46% of our estimated $26.41 value for the company’s stock, while franchised stores generate an incremental 30%. Our price estimate stands well below market price.
Positive Developments at Starbucks
Despite our bearish price estimate, new developments at Starbucks that could increase customer spending at stores could imply upside to our number. We’ve previously discussed how the company is effectively shielded from rising commodity prices due to a relatively price-inelastic customer base (See: Starbucks Shielded from Further Downside Due to Rising Input Costs, Increasing Coffee Prices Could Help Starbucks).
The company is also pursuing initiatives that could increase customer spend per visit. Realizing that over 60% of its iced tea customers order the largest size (24oz “Venti”), the Starbucks decided to introduce a larger size. The new 31 oz “Trenta” will cost 50 cents more than a Venti and will be available in all U.S. stores by May 3. [1]
Starbucks is also encouraging consumers to purchase bags of its Via instant coffee. To make customers more comfortable with trying the product, they’re offering a promotion through Aug 31 that allows unsatisfied customers to trade in their purchase for a bag of ground coffee beans (Starbucks’ House Blend). The initiative could accelerate adoption (and recurring purchase) of Starbucks’ Via product.
Beverage Spend per Customer Visit
Beverage spend per customer visit increased from 2005 by nearly half a dollar to $4.61 by 2009, with a slight correction in 2008 during the economic downturn. We forecast it to further increase at an annual growth rate of around 2% to $5.40 by the end of our forecast period.
However, the above company intiatives have the potential to accelerate the growth rate of consumer spending at Starbucks’ stores beyond our base forecast. If beverage spend per customer visit increases at an average annual growth rate of 3%, reaching $5.85 by the end of our forecast period, it would imply upside of around 5% to our current price estimate for Starbucks’ stock.
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