Starbucks (SBUX)

Starbucks still has significant growth potential, albeit at a slower pace. SBUX still has some room to grow domestically and plenty of room internationally. Their main problem actually happens to be store cannibalization and not McDonald's or Economy Fears. Starbucks cut its previous forecast for 2008 new stores from 1,600 to 1,175 (US), plus mentioned closing 100 or so underperforming locations. This latest move represents a shift in focus from the company's core U.S. market to much more exciting international opportunities; particularly in Europe where the company has relative little exposure^[1].

Arround the world, caffeine is a basic need. From 14 yrs old to late 40 yrs, everyone needs caffeine. Despite any argumentation regarding health issues, it is a fact that todays society is a fast society. Is a performance society. Energy is required all the time: to study, to work, to stimulate, to drive, to stay awake...

Starbucks still has significant growth potential, albeit at a slower pace. SBUX still has some room to grow domestically and plenty of room internationally. Their main problem actually happens to be store cannibalization and not McDonald's or Economy Fears. Starbucks cut its previous forecast for 2008 new stores from 1,600 to 1,175 (US), plus mentioned closing 100 or so underperforming locations. This seems to be an admission that cannibalization seems to be a major problem. The management needs to be more deliberate about expansion, instead of shooting from the hip putting stores any and everywhere.

Starbucks has not identified which 600 stores it plans to close between now and March, but the news is trickling out through baristas, the media and others.

75% of starbucks business comes from drinks. Only 25% is food related. I see a lot of potential of food introduction to the Starbucks business. New innovation on food and drinks will suprise customers and attract more customers to the stores.

Howard Schultz told Daily Frankfurter Allgemeine Zeitung (FAZ) that the company is planning a more aggressive expansion into overseas markets to compensate for weakness in the U.S. Starbucks plans to license 150 new coffee shop locations in Germany, Britain and France in the next three years, with 120 of those in Germany.

Europe will offset slow U.S. Growth

“The international business is cushioning the weakness in America at the moment,” Schultz said. The king of coffee aims to raise its sales abroad by 20% per year over the next three years while annual growth of only 6% is expected in the U.S. But Schultz noted that the coffee-drinking culture in Europe is vastly different than in the U.S. “In America, 80% get their coffee to go and only 20% sit down and stay. In Europe, it’s the other way around,” he told FAZ, explaining why more floor space is needed in European locations. The new stores may also become a bellwether for how much Europeans will embrace grab-and-go coffee.

and maybe farther East

Schultz, who recently visited Poland, the Czech Republic and Turkey, said he also sees potential for more stores in Eastern Europe.

Starbucks' US success is not a fluke. The company saw a need for a chain coffeeshop, but it also saw a need for a place that could provide a feeling of sophistication and comfort that would be appropriate for semi-casual meetings, working alone, a moment of private time, and conversations with friends. Each Starbucks cafe filled both needs in a way that no existing chain could, be it Dunkin Donuts or the unknown local coffeehouse. But the need for a "Third Place" is not exclusive to America. Urban China seems to be an especially good market for the Third Place idea. Ridiculously crowded and noisy and generally dirty/parched for peace, Chinese cities need Starbucks to be that haven even more than US cities do. Also, Chinese urbanites are extremely willing to pay high premiums for "foreign luxuries"--and like McDonalds, the Starbucks experience is not the kind of luxury that you can bootleg.

McDonald's (MCD) wants specialty drinks in 14,000 stores to add $1 billion to sales. In 2006 Starbucks had an average store count of approximately 6,500 and produced $6.5 billion in sales from them. In other words, they are still selling 14 times as much coffee per store as McDonald’s. The further incursion from the remaining one-third of McDonald’s expansion, even under the generous assumption that 100% of those sales would have otherwise gone to Starbuck’s, amounts to about 4% of Starbuck’s trailing twelve month company-owned retail sales – about one year’s worth of same store sales growth at worst.

Meanwhile, over the last 12 months Starbucks has generated $1.2 billion in cash flow from operating activities, and used just $1 billion to expand those operations by 15%. Assuming that two thirds of the capital expenditures went to open new stores and the rest was routine maintenance, the free cash flow from their existing store base is approximately $700 million per year, for a 3.5% free cash flow yield on the $20 billion enterprise value. It isn’t what I would call cheap, but it is much less like a wounded animal than a healthy tiger pouring its energy into a continued pounce by opening still more stores. At its current expansion rate, in two years the free cash flow yield would exceed that offered by treasuries, and Starbuck’s would still be only halfway through its expansion plans.[1]

Deliberate Growth will overcome the cannibalization issue

Starbucks still has significant growth potential, albeit at a slower pace. SBUX still has some room to grow domestically and plenty of room internationally. Their main problem actually happens to be store cannibalization and not McDonald's or Economy Fears. Starbucks cut its previous forecast for 2008 new stores from 1,600 to 1,175 (US), plus mentioned closing 100 or so underperforming locations. This seems to be an admission that cannibalization seems to be a major problem. The management needs to be more deliberate about expansion, instead of shooting from the hip putting stores any & everywhere.

Starbuck’s generates high returns on capital and equity. Usually competition and market forces drive returns down to a more normal rate, yet Starbuck’s possesses a very strong competitive position that will keep returns above normal for a considerable time. These factors underlie premium multiple that investor’s have placed on SBUX.

Bull #1: Expansion Abroad and The "Third Place" Niche

Starbucks' US success is not a fluke. The company saw a need for a chain coffeeshop, but it also saw a need for a place that could provide a feeling of sophistication and comfort that would be appropriate for semi-casual meetings, working alone, a moment of private time, and conversations with friends. Each Starbucks cafe filled both needs in a way that no existing chain could, be it Dunkin Donuts or the unknown local coffeehouse. But the need for a "Third Place" is not exclusive to America. Urban China seems to be an especially good market for the Third Place idea. Ridiculously crowded and noisy and generally dirty/parched for peace, Chinese cities need Starbucks to be that haven even more than US cities do. Also, Chinese urbanites are extremely willing to pay high premiums for "foreign luxuries"--and like McDonalds, the Starbucks experience is not the kind of luxury that you can bootleg.

Caffeine as a smoking subsitute

Since the restaurants, offices and practically everybody else have banned smoking, ADHD people have had to turn to other ways to control their brain functions. As a self medication, nicotine is out, so caffine is in. That's it, a pure and simple explanation of why coffee shops are doing so well. (I am not a doctor and do not play one on TV, but I observe life and can think on my own two feet.)

Caffeine - who doesn´t need it?

Arround the world, caffeine is a basic need. From 14 yrs old to late 40 yrs, everyone needs caffeine. Despite any argumentation regarding health issues, it is a fact that todays society is a fast society. Is a performance society. Energy is required all the time: to study, to work, to stimulate, to drive, to stay awake...

As the company refocuses on its core value and looks into international markets, margins will improve (overseas markets tend to have higher margins). Based on the current price, the downside is very limited as Starbucks reorganized into a more competitive company.

Howard Schultz, the founder of Starbucks is back as CEO. He is key reason for it become such a dominant business as it is now. The company suffered under leadership from previous CEO Jim Donald. Donald did not understand the importance of customer "experience" and demonstrated that my many of his decisions. Schultz is a great manger and knows exactly what SBUX needs to turn it around, further more he has already demonstrated plans to improve the customer experience.. i.e Customer feedback website, removing breakfast menu, planned to use new machines that will increase the coffee aroma in stores.

Since the restaurants, offices and practically everybody else have banned smoking, ADHD people have had to turn to other ways to control their brain functions. As a self medication, nicotine is out, so caffine is in. That's it, a pure and simple explanation of why coffee shops are doing so well. (I am not a doctor and do not play one on TV, but I observe life and can think on my own two feet.)

There are certain CEOs you simply take notice of when they step back onto the scene, and Starbucks (Nasdaq: SBUX) head honcho Howard Schultz is definitely one of them.

Back last year, he made the difficult decision to close 900 stores. Most of them were in the continental United States since we had a definite overpopulation of Starbucks, especially in states such as California and metropolitan New York. Those stores turned a pretty penny back when everybody was spending money like there’s no tomorrow, but as people tightened their purse strings, they found that they could actually live without their pricey morning pick-me-up. Yes, a Venti Frappuccino with whipped cream hits the spot when you just need a little chocolate with your caffeine, but that kind of soothing treat has to take a backseat to bills when money gets tight.

The once mighty coffee maven has definitely tripped, but it isn’t down for the count at all, as Schultz is out to prove. Along with closing those U.S. stores, his chain is now offering value meals, Starbucks Style: $3.95 breakfast combos. And no, don’t think you can order a McMuffin there anytime soon… we’re talking about parfaits, granola and other items you wouldn’t be surprised to see at a store selling drinks in Italian sizes.

But all the same, Schultz stressed, “We can no longer sit back and ignore the pressure our customers are under. We are being incredibly smart, we’re giving everything we can to be sensitive to the needs of our customers.’

And, he asserts, that consideration is just now beginning to pay off. “We are seeing the beginnings of things starting to gain traction on many of the initiatives we put in place.”

Those words were and still are being warmly welcomed by investors, who are pushing up share prices despite the faltering larger market.

Starbucks has a tremendous head start on the rest of the industry, its coffee beverages currently holding 90% of the U.S ready-to-drink coffee market and its coffeehouses without a significant national competitor from among upscale specialty coffeehouses.

Coffee consumption in Asia is at a fast rate of 15%. Why? during crisis Asians tend to converge and analyze situations in places like starbucks. For a minute Asians would tend to forget the challenges facing them by enjoying a cup of coffee. Other times they would drink beer just to forget temporarily these challenges. Just to re-charge. Beer drinkers would now have a better alternative. Espresso! If I were Howard, I would open more stores in the Philippines,Guam,Malaysia etc.

Starbucks still has significant growth potential, albeit at a slower pace. SBUX still has some room to grow domestically and plenty of room internationally. Their main problem actually happens to be store cannibalization and not McDonald's or Economy Fears. Starbucks cut its previous forecast for 2008 new stores from 1,600 to 1,175 (US), plus mentioned closing 100 or so underperforming locations. This seems to be an admission that cannibalization seems to be a major problem. The management needs to be more deliberate about expansion, instead of shooting from the hip putting stores any and everywhere.

Starbucks' US success is not a fluke. The company saw a need for a chain coffeeshop, but it also saw a need for a place that could provide a feeling of sophistication and comfort that would be appropriate for semi-casual meetings, working alone, a moment of private time, and conversations with friends. Each Starbucks cafe filled both needs in a way that no existing chain could, be it Dunkin Donuts or the unknown local coffeehouse. But the need for a "Third Place" is not exclusive to America. Urban China seems to be an especially good market for the Third Place idea. Ridiculously crowded and noisy and generally dirty/parched for peace, Chinese cities need Starbucks to be that haven even more than US cities do. Also, Chinese urbanites are extremely willing to pay high premiums for "foreign luxuries"--and like McDonalds, the Starbucks experience is not the kind of luxury that you can bootleg.