I have been bullish on Starbucks (SBUX) for some time now and in one of my earlier articles this year, I outlined my rationale for why the company has positioned itself for continued growth in the future. In that article, I highlighted the Teavana acquisition, falling coffee prices, and expansions into China and India as the primary drivers for the company. In this article, I would like to give some updates as well as take a look at some recent news.
China's Coffee Craze
The company has been incredibly positive when it comes to its long term future in China. By 2015, it is expected there will be over 1,500 locations in 70 different cities, making China the second largest market for the country. Currently, there are over 800 locations, and the company has begun expanding into the secondary and tertiary cities. In the Annual Meeting of Shareholders Conference, Howard Schultz, Chairman, President and Chief Executive Officer, stated he believed there is the possibility of China surpassing the United States as the company's largest market in the future. During the conference, Schultz highlighted a store in Taiyuan, a city of 5 million people; the store has been packed since day one even without any prior marketing or advertising. The company is creating die-hard coffee addicts who will remain loyal to the Starbucks brand. As of the latest figures, there are approximately 2 million loyalty members in China, which represents 35% of their Chinese consumers. The brand is already strong enough that the company is planning on rolling out its products into grocery stores throughout the mainland. By offering consumers the newly expanded line of pre-made products the company will further cement its foothold in the region. Eventually, when Dunkin' Brands Group (DNKN) gets their act together in the region, I believe it will be far too late. Dunkin' has decided to take a slower approach to the region which will prove to be costly.
With the Teavana acquisition, Starbucks positioned itself well to reshape the tea category as it did with the coffee category. In addition to the mall based locations, the company plans to open newly designed neighborhood stores similar to the classic coffeehouse locations. Schultz has recently stated in an interview on CNBC the company plans to increase its Teavana store count from 300 to 1,000 in the future. Schultz also mentioned the possibility of moving Teavana outside North America which could be very positive for the long term growth of the brand.
Last week, Starbucks announced it purchased its first farm in Costa Rica. The company purchased this farm for two main reasons. The first, is to give the company a canvas to create unique breeds of beans to offer consumers expensive and exotics new choices. The second, is to create a model to teach farmers around the world the process of sustainability. By offering consumers exotic new choices, the company further separates itself from competitors.
I would like to reiterate my "Buy" recommendation on Starbucks. Management is taking the company in all the right directions and has positioned the company well for long term global growth. Coffee prices have remained low, Chinese demand has remained high, and acquisitions have remained a positive driver for the company. My current price target is $66 per share.