Starbucks: Strengths, Weaknesses, Opportunities, Threats
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Evaluating a company's Strengths, Weaknesses, Opportunities, and Threats (SWOT) allows us to develop a detailed picture of company's resources and competitive position in the market. Today, I'd like to take a look at Starbucks (NASDAQ: SBUX), the American global coffee chain which in just a few decades has grown from a lone Seattle coffee shop to the largest coffeehouse company in the world.
4-Star Brand: Starbucks has a highly developed brand, logo, copyrights, trademarks and website. Starbucks' profit margins were hit hard by the Great Recession, but the company recovered quickly, posting a 12.7% increase y-o-y in 2012. The Starbucks brand name is famous for its intense customer loyalty and innovative products.
Strong financial picture: EPS, net revenues, comparable store sales, operating income and margins were all up. CPG Revenue grew 45%, driven by increasing share of premium coffee category.
Expansion: Starbucks plans to open 1,200 net new stores in fiscal year 2013, many in the United States and China.
Market dominance: The company's aggressive "Starbucks on every corner" strategy has allowed Starbucks to dominate local markets. Starbucks is the world's largest coffee chain, with approximately 20,000 stores in 60 countries, 12,937 of which are located in the United States.
Starbucks is having difficulty penetrating Europe's "cafe culture", so much so that the company is considering scaling back its European presence. Different regional tastes have also been a concern - most notably in France, where Starbucks expresso is considered "too charred" for French palates. Even if European traffic picks up, customers could switch to lower priced menu options. (self-cannibalization) Higher real estate and labor costs in Europe are also compressing margins.
Franchised store margins repeatedly outpace company-operated margins, meaning that higher profit margins are not necessarily the result of improved performance.
The company also faces an increasing number of competitors, especially niche competitors. Companies like Coffee Bean & Tea Leaf and Caribou Coffee (NASDAQ: CBOU) are carving out a confortable space for themselves in the margins of the premium coffee market. London-based Costa Coffee is undermining Starbucks' push into India.
Deep-pocketed competitors are beginning to compete for the premium coffee space. McDonald's (NYSE: MCD) recently announced plans to sell bagged coffee in its Canadian stores. That could be a prelude to a similar marketing campaign in the U.S., despite assurances from McDonald's PR that the company "has no other plans to sell the coffee elsewhere at this time."
Strengths + opportunities = a company's competitive advantage. Starbucks breakthrough deal with Square puts Starbucks on the front line of innovation. CEO Howard Schultz predicts that customers who currently using a Starbucks card will "...migrate off the card on to the Square platform very quickly."
After hitting a 34-year high of $2.31 per pound in April 2011, the cost of wholesale green coffee beans has fallen by nearly 40% over the past year on speculation of increases in Brazilian production. This development should translate into higher profit margins for Starbucks going forward, as existing inventory is consumed and replaced at a cheaper cost.
Starbucks Verismo single-serving coffee machine is debuting just in time for the Christmas shopping season. The company's announcement of the Verismo line and subsequent downgrade by fund manager David Einhorn has forced a decline in Green Mountain Coffee Roasters' stock, maker of the Keurig single-cup coffee machine, from around $70 to $24.08 in less than a year.
A double-dip recession within mature Starbucks markets (i.e., United States, Canada, U.K.) could alter long-term customers' spending patterns. According to the company's 10-K filing, Starbucks “is increasingly dependent on international markets for growth, especially Canada, Japan, the U.K., and China.” Europe, the largest single market in the world, poses a number of challenges for Starbucks. While earnings in the U.S. and China remain strong, European sales have fallen off in 2012, as European consumers dial back discretionary spending.
Nestle's Nespresso espresso makers hold a 35 percent share of the global single serve coffee cartridge market, with a heavy concentration in Europe. Given Starbuck's difficulty in penetrating the European Market, its Verismo brand machines could effectively be locked out of the Common Market, further hampering growth.
The Foolish Takeaway
While faltering European sales and heated competition in emerging markets remain serious concerns, they are off-set at present by both the sharp decline in coffee futures and Starbucks' aggressive new marketing initiative in the single-serve coffee cartridge market. Starbucks has plenty of upside ahead, and there is every indication that the company will outperform the market in Q4.
FatalX has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.