Starbucks (SBUX): Not Just a Purveyor of CoffeeSubmitted by William Allan Financial Services, LLC on September 8th, 2017
Over the years, Starbucks (SBUX) has evolved into one of the world’s most recognized brands. With nearly 27,000 locations how can they not be well known?!?! SBUX means many & different things to people around the globe. To some, it is great coffee, to others is their “3rd place,” and even others it is a tech company where you can pay for and receive your java with just a few clicks.
Regardless of why you visit SBUX, the underlying strength of this firm is its direct connection it has to its customers. This aspect is so valuable in today’s information overload society, that I wouldn’t be surprised it will be emulated by many companies across different industries over the next decade. Without this connection how does any firm keep its loyal customers far into the future?
SBUX founder, Howard Schultz says if SBUX was a 20-chapter book, they are currently in chapter 4 or 5. So, rather than rehash what SBUX is today (you can read plenty about them as well as conjure up opinions based on personal experience) or discuss what we think today’s SBUX is worth from a financial perspective (for the record, we feel they are quite undervalued), let’s open our minds and outline how this company will write the next 15 chapters of their history.
- Domestic Grocery Store Sales: SBUX has a scant percentage of in store sales. With 400 million cups of coffee drank daily (and most of this at home) SBUX has a giant opportunity here. In addition, their ready to drink business continues to grow as well. Ultimately, SBUX is a consumer goods product and a large percentage of their business will be in the grocery store.
- China Sales: The recent unveiled expansion plan for 5,000 stores in China in 3 – 4 years is ambitious if we weren’t talking about the most populous country in the world. Today, the average Chinese coffee drinker partakes in 2 cups of coffee a year! In contrast, Americans drink 2 cups a day! Any inroads into creating coffee drinkers will lead to outsize success in this region.
- Implementation of Technological Solutions: The mobile app is a huge success for SBUX. They are light years ahead of even tech companies (i.e., Apple) when it comes to the acceptance of the mobile payment app. SBUX will continue to advance and perfect this giant asset as well as invest in other tech solutions. Imagine having your coffee made by a robot or pouring the coffee yourself? It’s coming and SBUX will profit from it.
- Complimentary Items (To Coffee): Food, food, and more food. Picture a café, where people not only come for the coffee but the delicious menu that tastes like it’s made on premise but is not (due to the advancement in cooking tech).
- High End Coffee: I’m sure most people (not named Howard Schultz) never thought the average person would pay $2 for a cup of coffee. Well, get ready for high end coffee via the Roastery. By the way, this is Mr. Schultz’s personal project.
- Deserts, Anyone: To a certain extent, SBUX already sells deserts (i.e., Frappuccino’s, etc.), but how about an actual desert lineup?
- Adult Beverages Now Being Served: Sure SBUX attempted wine bars with little to no success. I’m sure it won’t be long before we see SBUX branded coffee & liquor beverages. Imagine the Frappuccino taking on the form of a “hot totty” or an after-dinner desert drink.
These are seven ideas that SBUX could easily add to their repertoire.Will they, who knows.But the message is, that they can because of their base product (coffee) and their connection to their customers.This brand identity will continue to drive growth into different products that will be sold through different channels leaving SBUX with a very long runway to build upon.
Let me leave you with one last thought… what is the value of this future SBUX?We are not presuming SBUX is changing businesses, they will continue to operate in the very solid business of selling coffee, but will do it in different ways while capitalizing on their strengths.Where does this take them?I think there’s a very good example right in front of us… The Coca-Cola Company (KO).
The similarities between SBUX and KO are very clear.Both:
- Are a worldwide brand,
- Have a large, loyal customer base (i.e., “I don’t drink Pepsi, I drink Coke,” or “I only drink Starbucks coffee” is murmured daily around the world),
- Are a simple product (at its core) but with variety,
- Are an addicting product, and
- Are sold in stores and served in eateries (3rd places).
The big difference between these two iconic brands is the connection SBUX has with its customers through their tech and their 27,000 door fronts.Imagine if there was a Coca-Cola parlor on every other corner.How much more would KO be worth?
SBUX and KO create comparable amounts of free cash flow (as a % of their market capitalization).Therefore, if KO today is a preview of what SBUX may one day become, what size can we expect SBUX to become?KO is nearly a $200b company, while SBUX is just under an $80b market capitalization.So, is $200b our target for SBUX?Not hardly!
KO’s market value is a guide, but the connection SBUX has with its customers and the natural opportunities right in front of them, it seems SBUX has a very long runway of growth for years to come.Applying a little BIG PICTURE thinking it’s not hard to see why Mr. Schultz is only a quarter of the way thru his novel…. Starbucks, Not Just a Purveyor of Coffee!