Part II: Starbucks’ Consumer Packaged Goods Segment To Contribute More Towards Revenues

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In an earlier article we discussed the first part of Starbucks five year growth plan. The article “Will Starbucks’ Stock Fly Higher In 2017 On The Back Of Its Digital Flywheel Strategy? talked about Starbucks reliance on its digital flywheel strategy to help improve its stock price which has suffered through most of 2016, despite the company being one of the better performers in the restaurant industry. In this article, we elaborate on the second strategy that the company has laid down, relating to consumer packaged goods, to achieve the following targets in a span of five years:

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Consumer packaged goods (CPG) share of revenues at Starbucks has been growing at an impressive pace over the last few years. From $1.4 billion in FY 2013, it has increased at a CAGR of 11%, to $1.9 billion in FY 2016. As the costs relating to this segment are lower than other segments which require higher marketing spend and rely more heavily on human labor, the operating income has grown at an even more impressive rate of CAGR 24% between FY 2013-2016. As a result, the improvement in the CPG’s margins is approximately 12% over the aforementioned period.

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Furthermore, Starbucks’ contribution towards U.S. at-home coffee is the highest. The growth of Starbucks’ coffee has consistently exceeded that of the category, as can be seen in the graph below. This is likely due to the fact that Starbucks’ coffee commands more loyalty than any other brand due to its status as the number one premium coffee brand.

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Currently, Starbucks has secured 15% of the 20% total at-home coffee share at the top three retailers it sells its products through. This leaves it with a 5% opportunity to further grow at these retailers alone, corresponding to $400 million in net revenue. This is not to mention the other small retailers the company can look at to expand its market share.

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By means of local partnerships, such as Dongsuh and Suntory in China, Arla in Europe, and PepsiCo in America, the company’s reach across the ready-to-drink industry is already matchless. Through innovation within the single serve segment (K-cups), such as making the capsules compatible with Nespresso machines and offering Stars with CPG products, the company hopes to tap into the huge opportunity available in the ready-to-drink tea and coffee market. Already Starbucks is the world’s leading ready-to-drink coffee brand with $2.5 billion in system-wide sales. It is also successfully making its mark in the ready-to-drink segment with $4 billion in system-wide sales.

Next spring, Starbucks will launch a number of new bottled drinks, including Starbucks Cold Brew Cocoa, Honey with Cream, and Teavana Craft Iced Tea. The expansion in product offerings to appeal to varied tastes globally is expected to add precious points to Starbucks’ market share.

Consequently, the channel development segment is expected to generate an incremental $1 billion in revenue and increase its operating income by 75% (cumulative) by FY 2021.

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Have more questions on Starbucks? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Starbucks

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