We view Starbucks as one of the most compelling growth stories in the consumer space today, well positioned for top-line growth and margin expansion through product innovations, meaningful cost advantages, and its evolution into a diversified retail and consumer packaged goods platform. Representing about one third of coffee cups sold at retail, and 4% of the 90 billion coffee cups brewed at home in the U.S., Starbucks still has meaningful domestic growth potential, including new beverage innovations and a revamped food platform, expanded peak hour capacity, and My Starbucks Rewards usage. At a time when most restaurant and retailers are struggling to stimulate transaction growth, Starbucks' recent transaction gains are impressive and underpin the global strength of its brand. We also believe operational best practices from Starbucks' U.S. stores can be applied to retail locations in Europe and Asia, driving future unit-level productivity improvements.
Starbucks is also much more than retail expansion story, and we believe the company is just starting to scratch the surface of its longer-term channel development, brand diversification, and geographic expansion opportunities. We believe many of the competitive advantages of Starbucks' core retail operations will extend into these diversification efforts, putting the company in a unique position to capture retail and wholesale market share over a long horizon. Platforms like VIA single-serve coffee, K-Cups, Verismo, and Seattle's Best Coffee should support channel diversification efforts over the near term, with nascent brands like Evolution Fresh, La Boulange, and Teavana becoming important cash flow contributors over a longer horizon. We're also optimistic about potential mobile, digital, and loyalty program synergies across its different business lines. Starbucks' international growth potential is undeniable, particularly in emerging markets like China, India, and Brazil. Formidable threats exist in both the retail and wholesale channels, but we believe a wide moat founded on strong brand equity, bargaining clout with its suppliers, and a highly leverageable model will be enough to stave off rivals.
|Economic Moat||Fair value||Stewardship Rating|
Cycl. consumptiegoed -
- A three-pronged approach (VIA, K-Cups, Verismo) should lead to market share gains in the $8 billion higher-margin premium single-cup coffee category.
- A reinvigorated food menu, La Boulange pastry products, store redesigns, increased usage of social media tools, and the My Starbucks Rewards program have improved the Starbucks customer experience, penetrated new dayparts, and boosted unit-level productivity.
- Despite its growth plans, we believe Starbucks can sustain a 40%-45% dividend payout ratio, implying at least high-teens dividend growth over the next decade.
- Because switching costs are minimal, there is little to prevent customers from trading to other specialty coffee chains including Dunkin' Brands, Tim Hortons, or McDonald's. Joh. A. Benckiser Group's consolidation of Peet's, Caribou Coffee, and D.E Master Blenders could evolve into a formidable specialty coffee rival.
- Nascent brands such as Evolution Fresh, La Boulange, and Teavana could take attention from the core Starbucks brand and add execution risk to management's already loaded agenda.
- Volatile labor costs and commodity prices could weigh on quarter-to-quarter operating results.
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