Part III: Starbucks To Expand And Innovate Its Store Portfolio To Accelerate Growth
Over the last three years, Starbucks has done quite well for itself. While other major participants, such as McDonald’s, Chipotle, and Burger King, in the food and beverage industry, were suffering, Starbucks continued to pave the way for growth. In the period between FY 2013-2016, the company grew its revenues at a CAGR of 12%, while its operating income was up 17% y-o-y. The rise in sales was facilitated through increased store presence which grew to approximately 24,700 at the end of FY 2016.
Furthermore, the average unit volume (calculated as company operated sales divided by number of company operated stores) at Starbucks has remained one of the highest in the industry due to the premium nature of the product offerings at Starbucks.
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As can be seen in the following table, currently, Starbucks has the maximum presence in the U.S. However, going forward it expects to exceed its business in the U.S. by its business in China. The company has immense opportunity to expand its footprint beyond China as well. The following graph shows us that the income adjusted addressable population in countries like India is much higher, while the per capita sales are much lower than those in Japan, the U.K., and the U.S. This means that the markets of India and China are far less saturated, giving Starbucks greater power to penetrate these countries and increase profitability.
In the third part of this series ( Will Starbucks’ Stock Fly Higher In 2017 On The Back Of Its Digital Flywheel Strategy? and Part II: Starbucks’ Consumer Packaged Goods Segment To Contribute More Towards Revenues), we talk about the opportunities available to Starbucks to expand its footprint and accelerate growth in various markets, in order to achieve the five-year plan targets it has set for itself.
- Americas
The Americas has been the single biggest market for Starbucks. The company has successfully grown its revenues in the region in the last three years by 11% y-o-y. Furthermore, the comparable sales growth has been almost 6% y-o-y. This is despite worries that the U.S. market is matured and its growth in the region has reached saturation levels. In the next five years the company wants to open approximately 5,000 new stores in the area. Most of these stores are expected to be drive-thrus, express stores, and kiosks. The management also mentioned that it will be renovating and relocating close to 7,000 stores in the same period. Consequently, the company forecasts a revenue growth of 10% y-o-y until FY 2021. Furthermore, the new store concepts, by being less capital intensive, are likely to lead to a margin expansion of close to 500 bps.
- China and Asia Pacific (CAP)
Previously we have talked about (Read: Why Is China The Center-Piece Of Starbucks’ Growth Story?) why Starbucks has been successful in China, while others have failed, and how it has led to the company concentrating most of its efforts at growing in China. For example, in the last three years between FY 2013-16, the company opened about 6,100 new stores in the CAP region. Of these, 2,300 were opened in China alone. The increased footprint led to a doubling of sales and tripling of operating income in the region. Following up on that, Starbucks wants to open over 5,000 stores in the next five years in the CAP region. We can safely assume most of these will be opened in China, which is also the location of the next Starbucks roastery. As the company continues to reinforce its efforts to promote growth in China, it is also working on increasing the AUVs from the region by appealing to the uber-rich in the region. The introduction of ready-to-drink bottled drinks through partnerships (specifically flavored tea to appeal to the local population), and expansion of the digital flywheel in the area is expected to help attain these goals.
- Europe, Middle East and Africa (EMEA)
The EMEA region has been a drag on the company’s performance. The company has been unable to make its mark in Europe where the coffee culture is already very strong. However, through its partnership with Princi, an Italian bakery, Starbucks has tried to re-position itself. Furthermore, it has converted most of its company operated stores to licensed stores (80% licensed stores) in the region in order to better serve the local customers. The move is expected to reverse Starbucks’ fortunes and expand its margins significantly in EMEA.
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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