Starbucks (NASDAQ:SBUX) has diversified to more than just coffee with the recent acquisition of Evolution Fresh Juice and the introduction of wine and beer in various outlets. In fact, Starbucks even changed the logo to drop the words ‘Starbucks Coffee’ to highlight that diversification. At the same time the company is expanding rapidly, especially in emerging markets like China, and recently revealed its plan to open up 300 outlets in the U.K. over the next 5 years.  However, all of these opportunities also present a fair amount of challenges and could potentially cause hiccups in the growth trajectory of the company. Starbucks’ competitors in the broader market for coffee include McDonald’s (NYSE:MCD), Caribou Coffee (NASDAQ:CBOU) and Dunkin’ Brands (NASDAQ:DNKN).
Juice May Not be the Natural Evolution
After acquiring Evolution Fresh last month for $30 million, the company intends to build its health and wellness segment into a multi-billion dollar business. The juice segment might grow but it could potentially cannibalize coffee sales. Moreover, the juice business is highly seasonal as demand slumps during winters. For the health conscious, most Evolution Fresh juice contains more sugar than colas, so it may be a challenge to convince consumers to switch to Starbucks’ juice products as they look for healthy options.
The company also stresses that the acquisition of Evolution Fresh will give them access to High Pressure Pasteurization (HPP), a technology that helps preserve nutrients. Starbucks believes that this will give it an edge in the juice business.
However, the company does not own a patent for this technology and there is nothing to stop its rivals from using the newer technology. Furthermore, recent developments have reduced the price of the technology and as such we expect competitors to switch over if it is proven to be superior to existing processes. 
Starbucks plans to open 300 new outlets in the U.K., of which 200 will be drive-through stores. Back in 2007 and 2008, such aggressive expansion backfired miserably and led to the closure of 600 outlets in the U.S., so it remains to be seen if the company can successfully expand this time. Earlier this month, the company added 5 new outlets in China. Expansion in China is going to be difficult because of intense competition and the fact that the country traditionally has a tea drinking culture.
It also remains to be seen how the addition of wine and beer affects the image of a company trying to focus on a healthier menu. Currently, wine and beer is served only at select outlets and reviews have been mixed.
Our price estimate for Starbucks is about $40, which is about 10% below the current market price.Notes:
- Starbucks reveals UK expansion plans, FT.com, November 30, 2011 [↩]
- Starbucks (SBUX) Juice Bars – Where High Hopes Meet Poor Economics, gurufocus.com, December 22, 2011 [↩]