Multiple Growth Drivers for Starbucks

Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Starbucks (NASDAQ: SBUX), as the premiere roaster and retailer of specialty coffee in the world, continues to extend its commitment to wellness and will include calorie information on menu boards at all company-operated and licensed U.S. Starbucks stores starting June 25. By raising its standards, Starbucks also delivers solid results for its shareholders.

The company is targeting to deliver 10%+ revenue growth on a sustainable annual basis. Starbucks has achieved between 12% and 14% revenue growth in 2012, and expects to deliver between 10% and 13% revenue growth by the end of the year. As for earnings, Starbucks is aiming for 15% to 20% sustainable growth, whereas the company has delivered compound growth rate and earnings of 19% over the past three years.

What is Starbucks doing?

Starbucks continues to work on the food quality and innovation to pursue two opportunities: attach more food to the existing transactions and attract new customers into the stores. On the beverage end, the company continues to focus on beverage innovation, such as the Hazelnut Macchiato and Vanilla Spice Latte, which helped improve incremental comps by about two points in Q2.

In addition, the management also sees great opportunity for drive-through as the company continues to improve its drive-through operation. Lastly, with the acquisition of Teavana, it provides Starbucks three growth opportunities: open new Teavana stores with stronger offerings, use tea as a growth driver in the Starbucks stores, leverage into consumer packaged goods (CPG) channels over time with Teavana.

Home consumption

As the coffee consumption at home becomes more convenient and easier, Starbucks is innovating aggressively into the home space with packaged coffee. While most consumption at home in the U.S. is in the low-pressure brewed category, Starbucks’ partner Green Mountain Coffee Roasters (NASDAQ: GMCR) has successfully penetrated the market with its Keurig system. Starbucks sees higher consumption of coffee driven by single-serve executions and intends to provide coffee on other platforms. By recognizing itself not as an equipment company, Starbucks will continue to strengthen its relationship with Green Mountain Coffee Roasters to grow into the home space.

Competitions

As Starbucks continues to drive into food area, the competition against McDonald's (NYSE: MCD) McCafé is expected to intensify. By introducing two new offerings, Blueberry Pomegranate Smoothie and Dulce de Leche Shake, McDonald’s continues to expand its offerings with new, great-tasting beverages and desserts. By optimizing its menu, modernizing the customer experience as well as broadening the accessibility, McDonald’s continues to post solid results, where its global comparable-store sales increased 2.6% in May. However, with differentiated offerings and core strengths, such as Starbucks’ premium coffee and McDonald’s burgers, both companies are finding ways to boost traffic and revenue.

Take away

The growth prospects for Starbucks look promising. By focusing on food and beverage innovation, improving its operation efficiency and expanding more drive-through locations, Starbucks is expected to reach its annual growth target. By leveraging the acquisition of Teavana and partnership with Green Mountain, Starbucks can expand its complementary offerings while focusing on its core strengths to capture the fast growing home market. Moreover, with a solid balance sheet ($1.7 billion total cash and $549.6 million total debt) and steady cash flow, Starbucks remains a solid buy.

McDonald’s turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? The Fool's top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.


Nick Chiu 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!

blog comments powered by Disqus