Two Starbucks Growth Initiatives for 2013

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Starbucks (NASDAQ: SBUX) just provided some more detail about its plans for 2013, and two initiatives could help the company hit its growth targets. Home coffee brewing machines and drive through coffee shop expansion plans appear prominently in the coffee shop's earnings call transcript at Morningstar. These initiatives could also mean more competition for Starbucks though, so 2013 could become an eventful year for the company.

Overall Results

Starbucks had a good holiday season, reporting 10.6% higher sales and 13.1% higher income for the quarter. Unlike many other restaurants and food sellers, Starbucks actually has a supply chain trend in its favor right now, as Arabica coffee beans keep getting cheaper. According to YCharts, Arabica prices dropped by 35% in 2012. Even with many customers that need their caffeine fix in the morning, this coffee shop chain could still report weaker sales if the economy dips and shoppers stay home, and cheaper coffee beans could cushion the blow to some extent. Starbucks does have an answer if shoppers decide to drink their coffee at home though.

Home Coffee Brewing

Starbucks also achieved 7% comparable store sales growth for the quarter, which would have been 6.5% without its new Verismo machines. The store rollout process for the Verismo is still underway, so these home brewing machines could provide a long term boost for Starbucks. Once again, Starbucks has created a product with both mass market pricing and an upscale image, and the Verismo also benefits from Starbucks' reputation in the coffee business. Starbucks isn't the only home coffee machine seller with these strengths, though.

Starbucks has to convince shoppers that its Verismo machines surpass Green Mountain's (NASDAQ: GMCR) Keurig machines, which could become a problem for Green Mountain. Last quarter, the Keurig maker achieved even better numbers than Starbucks, reporting 33% higher sales and a 21.9% sales improvement. Strong Verismo sales could be bad news for Green Mountain, but there's also possible upside for Green Mountain here. Starbucks just told lots of coffee drinkers about the appeals of home coffee brewing machines, which could expand the size of the home coffee brewing market overall. Investors will find out when Green Mountain reports on February 6th. Starbucks also has a plan that could get its store customers spending more.

Drive Through Stores

Starbucks plans to add about 900 additional drive-through coffee shops in the United States over the next five years because drive-through stores achieve higher margins, according to the earnings call transcript. A menu redesign might have helped the drive through shops post strong results. Bruce Horovitz, at USA Today, reported that Starbucks created a streamlined drive through menu that did not list some small drinks it sold, although customers who knew Starbucks' menu could still order these drinks. A streamlined menu can lead to high margins and rapid earnings growth, as Chipotle investors know. Drive through chains can also go after Starbucks' coffee customers, though.

McDonald's (NYSE: MCD) already offers blended coffee drinks and fruit smoothies through its McCafes. The chain's expanded coffee lineup could convince a coffee drinker in a hurry to pick the drive-through burger chain. The McCafe product lineup also includes flavored hot chocolate, iced mocha drinks and McCafe frappes that compete with Starbucks drinks such as the Frappucino. McDonald's reported 1.9% sales growth and 1.4% earnings growth last quarter, so the burger chain isn't growing as fast as Starbucks at the moment. The home coffee market may offer a growth opportunity for McDonald's, though. Canadian McDonald's customers can purchase a bag of the restaurant's McCafe coffee to take home, although this product is only available to Canadians for now, according to a press release.

Dunkin' Donuts (NASDAQ: DNKN) competes for drive through customers and supermarket shoppers with both Starbucks and McDonalds. In an interview with Carolyn Walkup at QSR Magazine, Dunkin' Brands CEO Nigel Travis explains that two out of three Dunkin' stores already offer drive through service, and the company plans to add more drive through stores as it expands. Additional drive through stores could help Dunkin' Donuts compete in regions that have strong driving cultures, such as Southern California, where the donut shop has announced new expansion plans. The press release about the company's Southern California expansion initiative also states that Dunkin' plans to increase its United States store count by 330 to 360 total stores in 2013.

Takeaway

Both drive through stores and home coffee machines offer convenience, which helps Starbucks compete with burger chains and donut shops that offer quick and convenient service as their main customer attractions. Starbucks' brand still serves as its main competitive strength, and these growth strategies seem like they can provide effective brand extensions without distracting the coffee shop from its core competency. After a strong first quarter, Starbucks looks like it's off to a good start in 2013 and the company looks like it's found decent long term growth drivers.


enovinson has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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