For some people, it's their routine. They get up, get dressed, leave for work, and go to Starbucks (NASDAQ:SBUX) before anything else gets done that day. The smell of freshly ground coffee, the friendliness of their barista that knows them by name and their special order are irresistible to them. They are the people that keep the coffee brewing and the profits flowing through Starbucks. Starbucks has been brewing up success since they first opened their doors in 1971 at their original Seattle location. This quaint coffee shop started to explode in the late years of the 1980's, and the company had 84 stores by 1990. Since then, the company has continued this rapid expansion, and today they have over 17,000 locations.
Needless to say, their success has been enormous and has built a brand that is now a household name, food that rises above the standard coffee shop fare, and a cult following for the record books. The questions to ask are what is their secret recipe to brewing up the perfect cup of Joe, and how will they remain a cut above everyone else who sells coffee.
The Starbucks Difference
There is coffee, and then there is Starbucks. Starbucks has made a name for themselves in many different ways. The first way they separate themselves is superior quality. You can get a cup of coffee anywhere but people will go to Starbucks, wait in line, and pay $4 for a cup of coffee that they could have easily gotten at a convenience store. In 2007, Starbucks stopped using milk that comes from cows raised with the rBGH growth hormone because the long-term effects of consumption are still unknown. All of their food products are made without artificial ingredients or high fructose corn syrup which has attracted more health-conscious consumers without affecting the cost of goods dramatically. Another difference is the experience that you have when you go into a Starbucks. There is the aroma of freshly ground coffee, the buzz of the morning rush, and the barista that knows you by name and already has your order brewing once they see you. The free Wi-Fi access lets you use your smartphone to quickly surf the internet while you wait in line, or use your laptop to check your email while you relax and drink your coffee. From the time that you walk in the door, until you leave, you have the ultimate coffee shop experience.
Another way that Starbucks sets itself apart from the competition is their sustainability practices. The have made a concerted effort to reduce their carbon footprint and use more recycled materials to become an increasingly environmentally responsible company. Starbucks has set a goal to reduce their energy consumption by 25% and to draw 100% of their electric power from renewable sources by the year 2015. They plan to do this by replacing incandescent bulbs with more efficient LEDs, installing energy management systems for HVAC that are reducing consumption by 20%, and the purchase of renewable energy credits from wind farms all over the USA.
However, Starbucks does not stop there. Water conservation is also a large part of their overall strategy. The new filtration system being used by their stores reduces waste by 50%. A special task force called "The Starbucks Energy and Resource Management Team" studies locations that are using more water in relation to other locations. The sources of the problems are investigated and fixed resulting in millions of water being saved every year. Stores are being outfitted with new low flow faucets, toilets and spray heads to also reduce water consumption. Even the stores themselves are built in an environmentally friendly way. All of their locations are LEED (Leadership in Energy and Environmental Design) certified which is the industry standard for sustainable practices in commercial operations. All of their efforts towards running a more environmentally responsible operation has not only improved their public image, but also directly affects their bottom line. Every dollar that they save from their sustainable practices allows them to make more profits for their shareholders.
In addition to serving the needs of their morning customers, Starbucks is making efforts to attract customers at a different time of day. When Starbucks noticed that a majority of their profits were coming from customers that were visiting in the morning, they started to experiment with ideas that would draw more evening profits. One idea that they are currently trying at seven different locations is to serve beer and wine during the evening hours. This is starting to gain traction, but will take some time catch on because the Starbucks brand is heavily associated with coffee. It will not be until a majority of the stores start serving beer and wine later in the day that the brand will start to be recognized as an evening destination. However the initial results have been positive and Starbucks has will continue to pursue this market and grow their brand.
An Enormous Success
All of these factors have contributed to enormous success of the Starbucks brand. In June of 1992, the company went public for $17 per share. The price did take a significant hit during the 2008-2009 financial crisis, but the price in mid-2011 had already surpassed the pre-crisis numbers. By 2012, SBUX had reached over $60, increasing nearly 4x since its IPO...and this doesn't account for the numerous stock splits the company has had. During their recovery, the company also began to pay their very first dividends on their shares and have consistently paid increasing dividends for the past twelve consecutive quarters. It is clear that all of the efforts towards sustainability have definitely increased their profit margin and their brand value.
As with any large success, there are people who criticize some of the ways that Starbucks has achieved it. One area where there is criticism, is the practice of saturating markets by the process of moving into a certain area, buying out leases of smaller coffee chains, and operating at a loss for a number of years in order to gain dominance in a particular area. Some people view this as a savvy business move where others might view it as anti-competitive and unfair to smaller competing coffee houses.
Another threat to Starbucks is the constant expansion of their stores. In some parts of the country you can see one Starbucks from another Starbucks indicating that the market has been too saturated. Recently, they are beginning to expand mostly in new markets such as China which could be a tremendous opportunity to increase the bottom line. The only threat in China will be to maintain the culture of quality, service, and sustainability in a market with a different culture of business and business regulations.
Starbucks has clearly shown over the past 30 years that it has the ability to grow, evolve, and continue to improve their brand and their profits. If they continue to differentiate themselves as they have done so well in the past, coffee will always be different from Starbucks.
Additional Disclosure: Catalyst Investments is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. This information is not investment advice or a recommendation or solicitation to buy or sell any securities. Catalyst Investments does not purport to tell or suggest which investment securities readers should buy or sell. Readers should conduct their own research and due diligence and obtain professional advice before making investment decision. Catalyst Investments or anyone associated with Catalyst Investments will not be liable for any loss or damage caused by information obtained in our materials. Readers are solely responsible for their own investment decisions. Investing involves risk, including the loss of principal.