QUOTE AND NEWS
BusinessWeek  Sep 17  Comment 
Starbucks sees if new 10-oz. Frappuccino will quench small thirsts
Motley Fool  Sep 17  Comment 
Tea is under consumed in America, and Starbucks is trying to make us into a nation of tea lovers.
SeekingAlpha  Sep 17  Comment 
By Team Money Research: It may seem as though Starbucks (NASDAQ:SBUX) can't get any bigger. After all, head down to any US town or city and you're pretty much guaranteed to find one of its coffee houses. Indeed, Starbucks has over 13,000 stores in...
newratings.com  Sep 16  Comment 
SEATTLE (dpa-AFX) - Fitch Ratings said Tuesday that it has affirmed Starbucks Corp.'s (SBUX) long-term Issuer Default rating at 'A-' and short-term IDR at 'F2'. The Rating Outlook is Stable. Fitch said the ratings...
Motley Fool  Sep 16  Comment 
Video game giant Electronic Arts just made what could be a key hire.
USAToday.com  Sep 16  Comment 
Starbucks is testing the Frappuccino Mini at stores in Denver and Houston.
CANOE.ca  Sep 15  Comment 
Do you really care if the person making your latte has "Mom" on his arm?
Motley Fool  Sep 15  Comment 
With a focus on employees, communities, and investors, Starbucks operates at the fore of American business.
Motley Fool  Sep 15  Comment 
Apple Pay is here, and Facebook's version likely won't be far behind. In order to succeed, both should look to Starbucks for guidance.
Forbes  Sep 15  Comment 
A video, Why Starbucks Spells Your Name Wrong, has gone viral in the last few days, garnering more than six million views to date. It's a hilarious take by Paul Gale on the practice of Starbucks writing your name on your special order coffee cup....




 


Starbucks Corporation (NYSE: SBUX) is an international coffeehouse that has built one of the world's most powerful and recognizable brands of high-quality coffee and the unique "Starbucks Experience."[1]

Starbucks first revolutionized the coffeehouse industry by marketing expensive, high-quality coffee as well as a "third place" between work and home - a warm, clean, and inviting environment where customers go to escape the chaos of daily life. [2] However, while the company faced significant growth in the early 2000s, Starbucks faces significant headwinds as its stores face saturation in the domestic market. A shift in consumer spending triggered by the global recession has also driven consumers to less costly competitors such as McDonald's.

Business Overview

Starbucks Corporation generates revenue both from its company-operated retail stores and from specialty operations.

Through its "company-operated retail" coffee houses, Starbucks sells high-quality whole bean coffee, freshly brewed coffee, premium teas, a variety of cold blended beverages, various food/pastry items, and coffee/beverage related equipment and accessories, as well as a line of CDs. Starbucks operates 11,131 retail stores in North America and 5,727 stores internationally.

Third Place Experience

Starbucks’ success is due in large part to the trendsetting triumph of its coffeehouses as an informal and convenient "third place" outside of home and work, ideal both for informal meetings and a quiet moment away from the hubbub of daily life. Wi-fi internet access in all stores also makes it a place where customers can work. Book and music events also take place at Starbucks, in accordance with the company's goal of making each location a community center of sorts to garner the loyalty of local customers. [3]

Specialty Operations

Starbucks’ specialty operations segment tries to develop the company's brand through third parties outside the traditional coffeehouse.

  • Licensed Stores: Located in places like airports and supermarkets, licensed stores generate licensing fees and royalties as well as revenue from Starbucks’ coffee, tea, and CDs resold in the licensed locations.
  • Packaged Tea and Coffee: Starbucks sells its packaged coffee and tea as a retail product at various food stores.
  • Branded Products: Starbucks has partnerships with Pepsi and Dreyer's to develop and distribute ready-to-consume beverages and ice creams.
  • Foodservices Operations: Starbucks sells its coffee to foodservice operators like restaurants, offices, hotels, and cafes (including the Barnes and Noble Cafes) that operate under different licensing contracts.
  • Other: Starbucks also has entertainment business relationships with Hear Music, Satellite XM Radio (24-hour Starbucks Hear Music digital music channel), and provides wireless broadband Internet service in company-operated retail stores in U.S and Canada. Starbucks also has a credit card agreement with Chase.

Key Trends and Forces

As Starbucks Continues to Saturate US Markets, SBUX Faces both Expansion and Cannibalization risk

Starbucks currently has over 11,500 stores in the United States alone. Over the past two years, Starbucks has expanded aggressively, adding 3,500 stores, often within eyesight of existing stores. Until recently, the company has been blessed with extraordinary growth in transactions per store (traffic) and same store sales, which has consistently been in the high single to low double-digits. Much of this may be attributable to the US economic slowdown, but investors fear that these weak growth figures could indicate saturation in the U.S. market. Regardless, Starbucks aims to double its US locations to 20,000 and eventually open 40,000 locations worldwide. [4]

As the global economy continues its recovery, Starbucks is planning to open an average of more than one store each day. China is SBUX's largest target, as it is expected to be the biggest growth market over the next two years. As such, Starbucks continues to close domestic stores that have already saturated the market, and replacing them with international stores abroad.[5]

Starbucks is Battered by Small and Large Enterprise Market Entries into the Lucrative Coffee Market

Starbucks road to fame was marked by a move into a small coffee drinker market over one decade ago, but as Starbucks starts to hit market saturation, large and small enterprises alike are starting to enter to steal market share.

McDonald's introduced the McCafe to select stores, where customers can purchase espressos and cappuccinos. These drinks, which are priced in the $2-4 range, represent McDonald's foray into the high-margin caffeinated beverages market, currently dominated by Starbucks.[6]

Analysts have taken notice of this threat and expect McCafe to have a negative impact on Starbucks' same-store sales.[7] In a response to the McDonald's challenge Starbucks is teaming up with Burger King, which would begin selling Starbucks' Seattle's Best Coffee in about 7,250 U.S. outlets. The new drinks will sell for $1 to $2.79 and will replace Burger King's BK Joe brew. [8]

The resulting "coffee war" amongst the food giants began to tear away at the premium model which Starbucks used to hold so steadfast. In response, these large companies specifically McDonald's began a large ad campaign to orient customers away from Starbucks and to cheaper alternatives. This bidding war allowed small-time coffee chains such as Green Mountain Coffee Roasters (GMCR) and Caribou Coffee Company (CBOU) to steal market share as unique quality coffees, the very type of business model that Starbucks attempted to implement in the early days.[9] However, as commodity prices for coffee continue to rise, it is uncertain whether these small chains will be able to survive.

SBUX's Target Demographics

Starbucks targets a higher-income crowd of the young and college-educated, a group that tends toward higher luxury-consumption levels. Although this focus allows the company to maintain high profit margins, it also puts Starbucks at greater risk from a shift in consumer spending habits. If Starbucks chooses to expand further into coffee for home consumption, it could find a new consumer base in baby boomers (the largest demographic, 26% of the population), who are more likely to drink their coffee at home but who are more price sensitive than "yuppies" (young urban professionals). Teen coffee drinkers are also important to Starbucks--many believe that this segment will be the main driver of domestic specialty coffee consumption in the next few years.

Competition

Starbucks' close competitors include other specialty coffee shops, doughnut shops, and restaurants.

Starbucks holds a dominant position in the specialty coffeehouse market and has no single clear rival in the sector. (Its closest specialty coffeehouse competitor is Caribou Coffee, with 415 stores in the US--less than 5% of Starbucks' 11,000-plus). Its most intense specialty coffeehouse competition is dispersed among the thousands of independent or small-chain coffee shops around the nation and the world.

The National Coffee Association estimates that the US coffee market will reach $29 billion in 2011 [10], and the markets the two competitors target are different. The former aims at the cheaper coffee to go, whereas the latter aims at providing a premium experience for a luxury price. McDonald's larger retail footprint may overlap more with Starbucks' core markets, but their stark differences as stores are reflective of the general differences between their core customers.

Privately owned Dunkin Donuts is another major competitor, with nearly 5,000 stores in the U.S. Although Dunkin' Donuts' retail footprint also overlaps largely with that of Starbucks, their customer experience is much more similar to the coffee-to-go model rather than the "third place to work and relax" model. Consequently, they are likely to compete more directly with McDonald's than with Starbucks.



....

Appendix

BetterInvesting Files

References

  1. Starbucks 10-K 2010. Section 1 - Business. pg 2
  2. Starbucks 10-K 2010. Section 1 - Business. pg 2
  3. Starbucks 10-K 2008. Section 1 - Business. pg 2
  4. Fox News. “Starbucks Hikes Expansion Plans to 40,000 Stores.” 5 Oct 2006.
  5. Starbucks to Open 500 New Stores
  6. McDonald's owners eye Starbucks with McCafe drinks
  7. Deutsche Bank Cuts Starbucks to Sell, Says McDonald's McCafe Rollout to Hurt Company
  8. [1]
  9. Neither Starbucks, McDonald's Win Coffee War
  10. [Morningstar Analysis of Starbucks]
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