Acquisitions and Partnerships Make This Company a Great Investment

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When Starbucks (NASDAQ: SBUX) opened its first outlet in Mumbai, India, I went just to have a cold coffee out of curiosity and nothing more. In my first visit, I was amazed to see its comfortable couches, great ambiance and, most importantly, the traffic it had generated.

Almost a year since, I've become a regular there and enjoy five cold coffees a week almost religiously. This article is my first attempt to think beyond the mindset of a satisfied customer and try to analyze the company as an investor. 

Smart offerings

Starbucks is not just about coffee because with its strategic addition to its menu card, the company has thus been able to grow its comparable sales by over 8%. The product offerings have grown through several shrewd acquisitions the company has made over time. Let’s analyze them one by one.

Starbucks’ acquisition of the bakery chain La Boulange has already started delivering results as the company’s revenue has grown considerably. Currently, the company has started serving La Boulange’s baked items in over 1,000 stores and has plans to serve it in over 2,500 stores by September, still leaving considerable opportunities to grow with over 10,000 more stores in the U.S. alone to expand to.

If we want to gauge the growth potential from adding pastries and other baked items, we should try breaking up the results of Panera Bread, a major bakery chain. It generated revenue of $1.89 billion from approximately 1600 locations in fiscal 2012, which means about $1.2 million per store. Even if we're conservative and assume that half of the revenue came from baked items it amounts to $0.6 million per store. So, if we assume Starbucks adds $0.5 million to its sales through baked items per store, that will amount to an additional $6.75 billion ($0.5 million per store X 13,500 stores in U.S.) when all of its outlets in the U.S. start serving baked items.

Another key Starbucks addition to its menu is its fresh fruit refreshers and Frappuccino ice beverages that have improved sales, especially in weak summers. The company started selling fresh juice in over 2,000 of its own stores and 2,000 grocery stores post the acquisition of Evolution Fresh. The cold-crafted juice industry is broadly a part of the health and wellness business, which will eventually grow more as the consumers become more health conscious and will thus eventually benefit the coffee giant. Starbucks has plans to roll out its Evolution Fresh juice in all of its stores in the U.S. by 2014, which will come as a good addition to its current revenue.

Another important acquisition for Starbucks was Teavana, a company with deep knowledge of the $40 billion tea industry. I believe the acquisition of Teavana was yet another strategic move by the company to dominate the beverage industry by adding variety of tea offerings to its product lines. Also, an important fact is that Starbucks will be benefited further from the acquisition in China and India, where people prefer tea over coffee.

The company’s performance has been phenomenal, which can be gauged from the 9% increase in comparable store sales in China and a tremendous response in India, so opening new stores should make things that much better. As the company has only 700 stores in these two countries, which house half the world’s population, there is tremendous potential to grow. Further, lower costs of opening stores and labor will increase its margin from operating in the Asian countries.

Some important partnerships 

Yogurt is one of the hottest products in U.S. grocery stores. Demand is increasing, and Starbucks has entered into an agreement with Danone (NASDAQOTH: DANOY.PK) to make and sell Greek yogurt in cafes and supermarkets in order to capitalize on the trend. The sale in the U.S. retail market for yogurt has increased 8.5% per year and is expected to grow at 5.9% in the next five years.

Danone’s expertise is clearly evident from the fact that it has the highest market share, holding 30% of the market with its Dannon, Activia, Stonyfield Farm and Danimals brands. Starbucks will sell its yogurt under the Evolution Fresh name with its first product being a ready-to-eat Greek yogurt parfait. The company will be selling yogurt first in its cafes in the U.S., starting next year and then to food retailers in 2015. Further, the company will expand its yogurt offering globally.

I see it as a win-win situation for both the companies, as Starbucks will get a product that is expected to keep growing with rising health consciousness of people and Danone will be benefited from the partnership, as Starbucks will market the product in the U.S. solidifying its image further.

Starbucks has signed an agreement with Green Mountain Coffee Roasters (NASDAQ: GMCR), which includes a five year partnership extension between both the companies. The deal includes manufacturing, marketing, distribution, and sale of Starbucks and Tazo-branded single serve packs for use in Green Mountain’s Keurig single serve machines across the globe. The partnership started in March 2011, and since then, Starbucks has shipped more than 860 million Starbucks brand K-Cup packs.

The agreement in the past has improved revenue of both the companies’ in the past and has been a major boon for Green Mountain’s stock, which has appreciated well in the last couple of years since the partnership started. Coffee being a $30 billion industry in the U.S., and with people preferring convenience of one-time, ready to make coffee, both companies will benefit in the future too.

Bottom line

Starbucks has evolved itself into a chain that has a lot to offer other than just coffee. The product offerings are also strategic, complementing one or the other products well, thus enhancing revenue. I believe strongly that the coffee giant is destined to grow and benefit its investors, but my only concern at the moment is that it is already trading at its all time highs. So, if the stock experiences any correction, it will be a better opportunity to buy than now.

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pranay agrawal has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of 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!

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