Brew-haha at Starbucks Investor Conference
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Starbucks (NASDAQ: SBUX) has issued more game changing press releases in the past two weeks than most of its competitors have announced in the past year. Soon after Starbucks unleashed its plans to expand into the $8 billion premium single-serve coffee market, as well as its full launch into the premium juice market with its Evolution Fresh branded stores, the retailer has shown that it still has other tricks up its sleeve. In digesting the message from the coffee king’s March 21st investor conference, it is clear that the relevancy of the Starbucks brand is swiftly growing.
The retailer’s latest venture uses the extract of unroasted (green) coffee to create a light and, as the product name implies – refreshing – energy drink entry into the $8 billion industry. Refreshers, sweetened with stevia and lacking huge energy boosters like taurine and additional caffeine, will be a lighter competitor to popular market incumbents including Red Bull and Monster (NASDAQ: MNST). However, this should not imply that the product has little chance of success, as it will be targeted towards a more sophisticated, coffee-enjoying adult core group, and is intended to further boost the traffic that patronizes Starbucks stores in later day parts. Many of the corporation’s new product offerings, including juices, teas, expanded food menus, and even after-work alcoholic drinks (wine/beer) have acted to spread out the traffic at worldwide Starbucks locations.
Although more than three-quarters of the traffic has traditionally come in the morning day parts (5 am – 11 am), an increasing percentage has been spread out into early afternoon and late night day parts. Refreshers are intended to further enhance this trend, evening out the number of employees the corporation needs on staff throughout the day, and creating a less crowded, more intimate Starbucks experience for consumers.
If Starbucks Refreshers enjoy even a fraction of the success as other entries in the market – Monster’s revenues have grown at a 30+% CAGR over the past decade – the new venture should add a hearty revenue stream in addition to the corporation’s core offerings.
Deeper Penetration into Single Serve
The Starbucks/Green Mountain Coffee Roasters (NASDAQ: GMCR) pairing to co-produce Starbucks-branded k-cups for the Keurig machine has been a suitable first step into the premium single-serve market. Starbucks shipped more than 100 million branded k-cup packs during the first quarter of the year, and the retailer’s own venture into the market with its upcoming Verismo machine will give it further access to unlock the benefits of Green Mountain’s razor/blade sales model.
Being released during the holiday season alongside Starbucks’ Verismo is Green Mountain’s own high-pressure Vue machine. Similar to the existing low-pressure Keurig, Starbucks will continue its relationship with Green Mountain through the Vue machine, co-branding Vue packs for release in department stores and general merchandise retailers.
The Vue packs, which are at the beginning of their patent life cycle, should continue to protect Green Mountain’s positioning in the single serve space, as many have been concerned over the pending patent expirations of its k-cups and the flood of me-too products that are bound to be released later in 2012. Likewise, because the success of the Starbucks Verismo venture is still going to be met with significant competition from both the Vue and the powerful incumbent in the Nestle (NASDAQOTH: NSRGY) Nespresso machine, the Vue pack partnership should act as additional security for Starbucks.
Nespresso’s rather limited penetration in the United States market (when compared to its success in Western Europe) is likely due to its rather limited access through the distribution amongst higher-end specialty housewares retailers like Williams-Sonoma (NYSE: WSM). The long-term success projections of the Verismo will undoubtedly be artificially boosted with its launch during the holiday shopping season, so it will be another several quarters until the overall return of the project can be estimated.
Starbucks’ multi-pronged marketing approach should further enhance the success of all of its recently announced ventures. Not only is the retailer able to sell goods and reap the benefits of customer sampling to the 60 million weekly customers that visit its 17,000 worldwide coffee shops, but it has significantly further reach through its CPG division. Starbucks branded coffee, the Verismo machine and related refills, the Refreshers energy drinks and the Evolution Fresh juices and smoothies will all be pushed through general merchandise retailers’ systems.
Likewise, all of these growth initiatives go without even mentioning the expansion in the company’s core coffee shop concept. Starbucks still has an extremely small worldwide footprint in terms of total coffee consumption – only one in one-hundred cups of coffee served today are Starbucks-branded. The corporation has a huge growth potential in terms of expanding its worldwide footprint and enhancing its brand recognition and popularity.
After returning to the CEO post in 2008, Howard Schultz drastically scaled back the growth projections of the previous management team. More than 900 underperforming stores worldwide were subsequently closed, and Schultz launched an initiative to focus on the existing store experience. Alongside the slow recovery in the general economy, a new period of growth is yet to come. Yesterday’s investors meeting once again highlights that China will be the focus of this growth, and Starbucks plans to nearly triple its China footprint to nearly 1500 stores by 2015. With more than 160 cities that contain more than 1 million residents, and with the middle class expected to double over the next decade, China is expected to soon become the corporation’s most lucrative market.
Motley Fool newsletter services recommend Green Mountain Coffee Roasters, Monster Beverage, Starbucks and Williams-Sonoma. The Motley Fool owns shares of Starbucks. gibbstom13 has no positions in the stocks mentioned above. 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.