Will Starbucks’ Cost Saving Initiatives Help Expand Margins?
Starbucks is at the cusp of great changes, with the old CEO Schultz stepping down and the new CEO Kevin Johnson taking hold of the reins. Along with the change in leadership, the company has talked about a new five-year plan, which pivots on a five-part strategy. In a series of articles, we have already discussed the important role digital developments will play towards integrating the Starbucks customer experience, expansion of Starbucks’ store portfolio across different geographies and its affect on sales, increasing reliance on consumer packaged goods for revenue growth, impact of product innovation and brand elevation on sales, and the dependence on China as the engine of future growth.
In the period between FY 2013-2016, Starbucks grew its revenues at a CAGR of 12% y-o-y to $21.35 billion. The rise in sales was facilitated through increased store presence which grew to approximately 24,700 at the end of FY 2016. However, the company’s margins didn’t see a consequential improvement during the period, despite a 17% y-o-y improvement in operating income, due to rising costs.
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Under the guidelines of its five-year growth plan, Starbucks has laid down a strategy to control costs in order to expand margins. As a part of its strategy to control costs, Starbucks has revised some of its targets. However, according to our analysis, these initiatives may not necessarily improve upon the ones announced in FY 2014, resulting in only a minimal improvement in margins. Following is the synopsis of the analysis:
- Cost of Sales
Instead of $1 billion cost saving announced between 2014-2018, the target has been revised to $1.4 billion between 2015-2021. Although in absolute terms, the number may seem larger, but when broken down per year, the earlier target meant savings of $250 million in each year until 2018, as opposed to $200 million until 2021 now. Furthermore, the cost of sales considered excludes the occupancy cost involved in operations.
*excludes occupancy cost and the effect of 53rd week of Q4 2016
- General and Administrative Expenses
The target for general and administrative expenses has also been revised. In FY 2015, total G&A growth was pegged to 50% of the revenue growth rate. Although the target has remained the same, the G&A expenditure now excludes non-routine items and other company initiatives. Consequently, we can expect the rise in total G&A to be more than previously expected.
Accordingly, we don’t expect a significant improvement in operating margins as per the announced cost saving measures, despite the 10% y-o-y rise in revenues and almost doubling of operating income until FY 2021. The likely expansion in margins may be limited to 200-300 basis points in the period FY 2017-2021.
*FY 2016 operating margins exclude the impact of the 53rd week of Q4
Have more questions on Starbucks? See the links below.
- Will Starbucks’ Stock Fly Higher In 2017 On The Back Of Its Digital Flywheel Strategy?
- Part II: Starbucks’ Consumer Packaged Goods Segment To Contribute More Towards Revenues
- What Are The Challenges Facing Starbucks And How Can It Overcome Them?
- What Is The Path That Lies Ahead For Starbucks?
- Starbucks’ Continues To Grow In September Quarter, Though Downtrend In Comps Persists
- Starbucks Q4 FY 2016 Earnings Preview: Focus On China To Continue; Reverting Comps To Historical Levels A Priority
- How Is Starbucks Maintaining Its Competitive Edge?
- Why Are We Bullish On Starbucks?
- Why Is China The Center-Piece Of Starbucks’ Growth Story?
- Why Has Starbucks’ Stock Price Stagnated In The Year So Far?
- What Is Starbucks’ Growth Strategy?
- K-Cups, Expansion In China Drive Growth For Starbucks In The June Quarter
- Starbucks Q3 FY 2016 Earnings Preview: Continued Focus On China, Expansion Of The Single-Serve Segment To Drive Results
- Starbucks’ Expansion Plans in China & Digital Channels Drive Growth In Q2 FY 2016
- Starbucks Q2 FY 2016 Earnings Preview: New Developments In China/Asia Pacific Region To Steal The Limelight
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