Starbucks Growing its Grocery Business

Starbucks (NASDAQ:SBUX) is looking to drive growth through its grocery business, in which it sells packaged tea and coffee through its own stores as well as supermarkets and groceries. Going forward it hopes to leverage the strong equity of the Starbuck’s brand to sell bottled Frapuccino and Via instant coffee across the world. Selling consumer packaged consumer goods currently accounts for a very small proportion of its revenues, but going forward, it the company hopes this channel will grow. ^[1] The company 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’ packaged coffee, tea & other constitute around 20% of our estimated $30.50 value for the company’s stock while franchised stores generate an incremental 30%. Company owned stores add a further 43.5%. Our current price estimate is  nearly 20% below the market price.

Starbucks Looking to Grow its Grocery Business

To grow its grocery business, the company is also putting in place a health and wellness strategy to woo higher wage earners, who are less impacted by the economic slowdown. The company may be selling herbal teas and fruit juices in the future. ^[2]

As a part of growing its grocery business, the company is also looking to further penetrate the $1.6 billion single serve coffee market, which the company believes has accounted for around two thirds of the total growth in the US coffee market over the last year. To further this initiative, it has entered into a deal with Green Mountain, which is expected to generate around $1 billion. ^[3]

Starbucks Packaged Coffee & Tea Revenues

We expect packaged coffee & tea revenues for Starbucks to increase in the coming years at a substantial rate with consumer spending expected to increase in favorable economic conditions at an average growth rate of 5%, reaching towards $550 million towards the end of our forecast period. However, it appears that the company is shifting its focus on this business and so there can be an upside to our forecast. If packaged coffee & tea revenues increase at an annual growth of 14%, reaching around $1 billion by the end of our forecast period, it would imply about 10% to our current price estimate for Starbuck’s stock price.

See our full analysis on Starbucks

1. Starbucks promises huge growth in grocery [↩]
2. Starbucks plans health and wellness strategy:CEO [↩]
3. Starbucks to grow grocery business tenfold [↩]