Coffee and a Danish
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nordic countries have the most loyal coffee drinkers in the world, led by Finland, Denmark and Norway, according to The International Coffee Organization. In 2010, the average Danish resident consumed some 20.8 pounds of coffee, surpassed only by Finland's 26.7 pounds per capita that year. So why has it taken coffee phenomenon Starbucks (NASDAQ: SBUX) until now to grow its footprint in the region?
For one, it's expensive. Labor costs in Nordic countries exceed those in the United Kingdom by a range of between four-and-eight, percent, according to sources cited in The Wall Street Journal. Employment costs are also higher in the region, and in Sweden comprise as much as 30 percent of revenues, which is seven percent higher than personnel costs command in most European countries. Nonetheless, citizens are not likely to be sticker shocked when they are asked to pay ten bucks for a latte because they are used to it.
It seems like coffee giant Starbucks, with a market cap of some $38 billion, was the only thing holding itself back from growing market share in the Nordic region, as the company already operates some 500 locations internationally. Now, with its Asia strategy well underway and the U.S. streamlining behind, the Seattle-based brewer says now is the time to take on more of Europe.
Currently, European sales at Starbucks are light at best. They constitute approximately 8.5% of revenues and that's including Africa and the Middle East. Starbucks is hoping to change that. Details of the expansion remain somewhat sketchy but Starbucks has outlined part of its strategy. It is turning away, at least at first, from positioning retail locations in strip-mall type settings and instead will launch in standalone locations across Oslo, Norway to begin.
In its plan to populate the Nordic region Starbucks has selected Michelle Gass, head of Starbucks European operations, for the job. Gass was instrumental in the streamlining of Starbucks' U.S. operations several years ago and the plan now is to draw from that very effort and apply it to the Nordic strategy. Starbucks won't go it alone and has strategically partnered with Umoe Restaurant Group in Norway to accomplish its Oslo push. Starbucks is in the region for the long haul and has its sight set on becoming a household name in the Nordic region, according to the WSJ.
It's impossible to ignore the economic headwinds that continue to blow from parts of Europe, but the company is not deterred. Indeed, Starbucks CEO Howard Schultz recently told CNBC that "glimpses of optimism" were beginning to emerge tied to the coffee giant's strategy in the continent, which we now know involves bolstering its now rather weak presence throughout economically stable Nordic countries.
Also making a Scandinavian push is Mr. Capoferro's Espresso House, which was recently acquired by Herkules Private Equity group and according to the WSJ has a similar offering to Starbucks' items. The Seattle-based coffee brewer is joining a club of about 300 coffee shops, the WSJ notes, but given the demand in the region the market is far from saturated.
Starbucks has been on a marketing blitz of late, and as has been widely reported recently introduced its single-serve coffee pods and brewing machine under the Verismo label. Starbucks is entering what Schultz describes as an $8 billion market that is growing hand-over-fist, or some 100 percent each year, according to CNBC. The lion's share of Starbucks' customers, Schultz says, were waiting for this product launch before bringing the single-serve machines into their homes.
Since Starbucks announced its debut into the single-serve home market, the Verismo coffee, espresso and latte brewer has exhausted the inventory, according to Bloomberg. Starbucks rival Green Mountain Coffee Roasters (NASDAQ: GMCR), which is behind the Keurig brand, has feeling the heat all year as shares are off more than 50 percent year to date. Incidentally, the two competitors are also partners. While Green Mountain has a grasp on more than 75 percent of the at-home single brew market, Starbucks sells its coffee for the Keurig brand and has a 15 percent stake in the company. Starbucks has no intentions of abandoning that relationship, according to CNBC.
Starbucks decision to populate the Nordic region in what it dubs a European Renaissance Plan is no coincidence. These countries have managed to avoid dangerous debt levels, unlike many of their European counterparts, and can boast of sound local economies.
Nordic countrymen have an affinity for American brands, and that has attracted the likes of not only the world's biggest coffee maker but also media companies. Time Warner's (NYSE: TWX) HBO is close to launching HBO Nordic to compete with the likes of Netflix, which is also making a push in the region. To compete, Time Warner's HBO is making available pay and non-pay versions of its offering across Sweden, Norway, Finland and Denmark, according to Variety.
For its part, high-end coffee maker Starbucks is likely to be received well in Nordic countries. In its favor are a love for the beverage shared amongst the region's adult population and a willingness to pay for the product. At the very least consumers will try the brand out of curiosity, although Starbucks is banking on much more. Perhaps it won't be long before Danish residents, in a nod to America, are sipping a Starbucks while watching HBO programming.
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GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters, short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters, and short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters 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.