Coffee may come second only to water as the most-consumed beverage in the United States, but Starbucks now has its eyes on the drinking habits of the 1.3 billion people who call China home. The cover of the 2010 annual report of Starbucks Corporation (NYSE: SBUX) carries these words among the corporate aims listed: ‘Accelerate growth in China’. With more than 17,000 stores in over 50 countries already, it is following hot on the heels of Subway (privately-held) and McDonalds (MCD) and may already have surpassed Yum Brand’s (YUM) KFC. China looks like being the ultimate battleground on which these fast food chains will fight for supremacy.
Unlike its weighty competitors, Starbucks does not offer direct franchises for stand-alone locations, filling this space in its business model through its wholly-owned and separately-branded subsidiary, Seattle’s Best Coffee. Licensed operations are generally limited to spaces within existing retail premises, such as large bookstores and department stores. Around 75% of store revenue comes from beverage sales and roughly 19% from food, with the balance being coffee-making supplies and equipment to take home. There are also a number of licensing agreements with other companies for the manufacture and distribution of Starbucks-branded coffee, tea and other food products.
Coffee is a global commodity subject to extreme price volatility, even in the market for the high-altitude Arabica coffee purchased by Starbucks. It is affected by weather, politics and economic conditions in producing countries. Starbucks buys using a combination of fixed and future price contracts, as well as engaging in commodity price hedging, so although the supply stream is substantially guaranteed the price is not. The other supply line challenge faced is in the competition with other retailers and food chains for the prime retail locations so necessary to the company’s business model. Starbucks is also particularly sensitive to contractions in discretionary spending which result from an economic downturn, although they have mitigated this to some extent by positioning the prepaid Starbucks Card as a seasonal gift item.
As well as competition from the fast food chains already mentioned, who now offer their own high-quality coffee-based beverages, Starbucks is also challenged by local and smaller chain specialty coffee shops like Peet’s (PEET), and by supermarket coffee brands such as those made by the Swiss giant Nestlé (NESN). In recent times Starbucks has also had to confront allegations that it supports the Israeli army and, on the other hand, fails to support the US military. Such accusations inevitably cause brand damage.
In spite of all these challenges, and except for a slight slackening off in 2009, when the whole world tightened its belt, Starbucks has posted revenue growth every year since 2006. Its operating income soared in 2010 to $1.4 billion ($1.28 per diluted share), 73% of which is contributed by US operations. This was the year which saw the launch of Starbucks VIA® Ready Brew instant coffee for home consumption, already contributing $180 million in annual revenue. Operating margin in 2010 rose to 13.3%, compared with 5.7% in 2009. FY 2010 Annual Report Starbucks newsroom Starbucks company profile
Results for FY 2011, which ended October 2 2011, were released in November. Total revenues reached a record $11.7 billion, an increase of 11% on 2010 on a comparable 52-week basis. (Starbucks has a floating financial year end.) $9.6 billion of total revenue came from company-operated stores. Comparable store traffic increased by 6%, and the average ticket by 2%, both of which bode well for 2012. Operating income and margin lifted yet again, to $1.7 billion and 14.8%. Targets for 2012 include 800 net new store openings, with 150 planned for China alone. This additional capacity will contribute to the 10% revenue growth Starbucks is aiming for in the coming year. A further improvement of 0.5-1.0% in operating margin will also be pursued. Financial release November 03 2011
Starbucks’ chairman and CEO Howard D Schultz elaborated on these results during the fourth quarter earnings conference call on November 3 2011. Q4 was the first $3 billion revenue quarter in Starbucks’ history. There are now more than 3.6 million active members of the My Starbucks Rewards program, $1.1 billion of 2011 sales were paid for with a Starbucks Card (1 in every 4 transactions) and almost 1 million smartphones have the Starbucks Card mobile app. The 500th store in China was opened in late October, and the aim is 1500 stores in mainland China by 2015. Starbucks consumer products are available at more than 100,000 distribution points around the world, and the recently-launched Starbucks single-serve K-Cup® packs are expected to grow into a +$1 billion business. Q4 Earnings Call transcript
If you missed getting in on the ground floor when Starbucks first rode through America, now is your chance to climb aboard for the conquest of your local supermarket and the ascent into China.