If You Give a Mouse a Coffee...
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Starbucks (NASDAQ: SBUX) has had a huge 2012 thus far. The coffee king recently reported an increase in first quarter revenues of nearly 16.5% as compared to the comparable period in 2011, and the stock has appreciated more than 30% year-to-date on the release of bullish news regarding the corporation’s growth plans through the increase in the number of worldwide stores and the release of new product lines.
Despite the seeming improbability of being able to top the quantity of positive news releases announced over the past three months, the corporation has once again surprised the market with news regarding its pairing with the domestic Walt Disney (NYSE: DIS) parks to offer Starbucks branded coffee to park visitors. Although in-depth deal details have not yet been released, Starbucks’ first opening this June at Disney California Adventure will be the first of six upcoming U.S. park launches.
The venture does not represent the first pairing of the two corporations – Starbucks opened a location within Disney’s Paris-based park in mid-2009 – but the announcement does represent a large step forward for Disney, which has always maintained extremely tight control over the food and beverage offerings within its parks and has traditionally shied away from teaming with external chains.
Likewise, the move should present a meaningful supplement to Starbucks’ mature domestic operations, which have been striving for additional physical footprint growth for several years. The corporation’s previous management team’s extremely optimistic growth plans were halted upon the return of Howard Schultz to the CEO post in 2008, and more than 800 U.S.-based company owned and licensed Starbucks locations have since been closed. Although same store sales have since rebounded, the total store footprint within the U.S. market today is about on par with the level five years ago. The Disney deal may only boost the total domestic store count by a handful of locations, but they may very well become among the highest volume outlets in the U.S. system.
Through the minimal details released thus far, it is clear that Disney will have the primary say in how the outlets are branded (it is their turf, after all). The first Starbucks location within Disney’s California Adventure will be rebranded as the Fiddler, Fifer, and Practical Café, which will boast a 1920s Los Angeles theme and will have interior architecture and employee apparel of the period. It is doubtful that the other locations outlined in the deal will be carbon copies of traditional outlets in Starbucks’ system.
The Need to Keep Up Steam
There can be no doubt that the market has reacted extremely favorably to the abundance of Starbucks news releases thus far in 2012. After announcing its answer to the Green Mountain Coffee (NASDAQ: GMCR) -controlled single serve coffee niche with its Verismo brew system, its jump into the energy drink market with Starbucks Refreshers product line, and its launch of a stand-alone Evolution Fresh juice store chain, the stock has experienced a meaningful 30+% appreciation in the first quarter of this year alone.
The extreme optimism surrounding the stock leaves little room for anything but flawless execution of any of its latest ventures, however.
- Forward P/E based on Average 2012 Earnings Estimates
- Starbucks: 31.7x
- Dunkin’ Donuts: 25.6x
- Green Mountain: 17.2x
- Nestle: 16.6x
- McDonald’s: 16.6x
Despite the excitement surrounding all of the corporation’s newly-announced ventures, however, the Starbucks name alone is not necessarily enough to ensure successful implementation. The Verismo system within the single serve space, as well as the corporation’s launch into the saturated energy drink and premium juice categories, will be met with significant competition. Green Mountain’s own high-pressure system, for instance, which is being jointly developed with Italy’s popular Luigi Lavazza SpA, will be released to compete head-to-head with the Verismo this holiday season.
Similarly, although the corporation has extremely optimistic growth plans for the international market, there are no lack of hurdles over which Starbucks must jump to reap success in the space. Starbucks management has recently stated that success in China will require substantially more than the simple construction of new locations –
- Coffee is still not the most popular brewed drink in the country, and Starbucks’ own industry study shows that consumers in China drink an average of just three cups of coffee per year
- Average incomes may be rising but, priced at similar levels to the product sold in the U.S. market, Starbucks coffee is still a premium-priced aspirational product for many Chinese consumers
- Same store sales performance may not be as robust as many expect in the Chinese market, as it is now being understood that Chinese consumers are showing a lower willingness to linger at Starbucks locations. The “lingering effect” is undoubtedly one of the primary drivers behind the largely successful Starbucks system in the United States, as there is a direct correlation between the purchase of more refills and other snack offerings and the time individual consumers spend within the stores.
The latest Disney venture does show that there is a seemingly endless number of channels through which Starbucks can push its coffee and snack products, but based on current market valuations – average analyst estimates are already above management guidance – investors are undoubtedly paying for more than a substantial portion of that growth that is already brewed into the price.
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