Starbucks Expands Overseas and into Tea

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

I cannot wait for the neighborhood tea bars to spring up. Starbucks (NASDAQ: SBUX) did it for coffee a while back. Now it is time for tea lovers to get a place to sit down with their iPads or work on their screenplays. That I am so impressed shows how low the bar has been with acquisitions. Just in general some acquisitions are not as organic as coffee to tea, or the acquisition ends up being crazy expensive. The Teavana acquisition is not for pennies, but I can understand why Starbucks would spend so much for such a natural fitting business with established locations and suppliers.

The acquisition of Teavana is a good one for now. It will help Starbucks expand in the saturated U.S. market by drawing the segment of the population that simply refuses to drink coffee, and to expand into Asian countries where tea is bigger than coffee. Though, Teavana is probably better for China than it will be for India, because white tea, oolong tea, and green tea are more popular in China than India. No one seems to mention the potential in the U.K. because it is a smaller market, but tea is popular. I was being flippant about the UK not providing real analysis.

I am really excited about this acquisition, and I hope it makes changes to normal Starbucks stores as well. The acquisition of La Boulange led to a nicer choice of food in the stores. I would like the option of getting some better tea at a Starbucks location. I want my neighborhood tea bar as well, but a few selections of tea at first would not be unwelcome. At Peet’s Coffee & Tea I could grab a coffee to go and a multiple tins of regular and fancy teas, which I appreciated. I am a coffee in the morning and early afternoon, and tea at all other times kind of person. So I hope that the original stores benefit from this new acquisition.

The push into China and India will not be easy, and I doubt the level of success will mirror what we see here in the US. Obviously, it needs to be modeled as a high class establishment that people will pay a premium for. It is not like Starbucks is filling a void of cafes. Coffee might not be widespread, but that is because coffee is less popular. Though in India people might be surprised at how popular coffee is, especially in some parts of the country. The country is not uniformly attached to coffee.

I do think the expansion into those countries will be good for the company, because it seems to be avoiding rapid and haphazard expansion. Yum! Brands (NYSE: YUM) has this problem in China with the excess amount of stores competing with each other for sales. That might not be YUM's primary problem with the chicken crisis at its forefront, but it is a concern. YUM is still increasing the number of stores in China, which might be a reason to avoid it until the dust settles and it is clear that the expansion is well planned.

Starbucks is also using local established partners for its expansion, and I think that will be the reason for its success. Local knowledge and expertise is critical when you are expanding into markets that do not have a natural affinity for your product. Partners also help you navigate the local politics and regulations.

Looking at news that is not as headline worthy, but still offers some value to the company. I really like the idea of the Rubi machines from Coinstar (NASDAQ: OUTR) that use Seattle's Best Coffee, which is a subsidiary of Starbucks. The Rubi will be better for Coinstar than Starbucks. Coins and Redbox will not go on forever, and I am negative on Redbox Instant. There are too many big players in the streaming market, and I do not think Redbox Instant is necessary. Though, I think the actual boxes will provide good revenues since not all people want subscriptions for their content. The boxes will not be around forever, but I think they will be around longer than most people think.

Speaking of machines I really like the Verismo machine is fantastic. I really get a lot of use out of it. It is annoying that most places do not carry pods for the machine. Safeway and most Starbucks stores have the coffee beans or the K-cups. So I either have to go to the stores that carry the cups I need or order them online. However, I think that when most Starbucks stores carry the cups and Safeway carries them as well, it might be a good idea to be far away from Green Mountain Coffee Roasters (NASDAQ: GMCR), though not a short because Starbucks will still make K-cups. I eagerly await to see the sales numbers for Verismo machines, because I think when the replacement time for the Keurig machines comes up many of them will be replaced by Verismo.

GMCR's cash leaves something to be desired. If you want to believe the growing revenue and earnings will continue then you can. I would prefer to see a larger cash balance if I was going to invest. Also, with my Starbucks machine I prefer SBUX as my ticker of choice.


TheArchivist 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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