Starbucks: Technology, International Growth, Food, And K-Cups All Point To A Bright Future

Sep.27.13 | About: Starbucks Corporation (SBUX)

I believe that Starbucks (NASDAQ:SBUX) could drive further revenue increases through the continued innovative use of new technologies, (particularly those associated with its mobile payment app), continued success in international expansion, growth within the single serve market, and an improved food offering.

Technology: Playing a more important role

Starbucks has begun to make technology a key part of the user experience to improve on brand loyalty, introduce new products to its consumers, all with the final objective of improving throughput at its stores. Equally important in improving the user experience is to offer a shorter waiting time. An article by Venturebeat made a compelling case that the use of Starbuck's app results in a shorter wait line for everyone.

A key part of the company's effort has been the move to turn its loyalty cards into mobile payment applications. In 2012, consumers have spent $500 million using mobile wallet apps with "most" of that spending being done on the Starbucks app. The company has reported that the mobile app is now used to pay for 10% of all consumer visits in the US. Total money loaded on to the app (through credit card, or PayPal with an automatic reload function) is up more than 100% year over year.

More often than not (being guilty of this myself) payment applications such as smartphone apps increase customer spending as the consumers often fail to equate virtual money on a smartphone to real money. Starbucks has not disclosed if the company is seeing such upticks in activity, but one could reasonably assume this to be the case.

Further down the road, the company is likely to expand the app's capabilities by adding gifting options and ultimately even tie-ins with other brands and companies.

Still room to grow international

Investors can expect the company to continue growing in most markets around the world, with a particular focus on large markets like China. The company recently opened its 1000th store in China during the June quarter, and aims to have 1,500 locations throughout China by 2015. Across the Asia-Pacific region, the company now has more than 4,000 stores, which reported 9% comparable-store growth, with traffic increasing by 8% year over year.

The company has seen continued success in international markets by offering relevant menu offerings and tailoring to local tastes. Recent success is a positive sign of a business model that is increasingly resilient against macro weakness. Using the strength of the brand and the operational excellence across channels (retail, packaged goods), geographies (The Americas, Asia Pac, EMEA) and product markets (coffee, non-coffee beverages, better food offerings), it will increasingly benefit from more rapid growth in higher margin and lower cost markets, especially in Asia.

In the coming quarters, the company will likely deploy its digital platforms such as mobile apps to international segments, which will further enhance customer loyalty.

Single serve coffee

Single serve products (K-Cups) are generating an increasingly large share of the company's business, and will only grow over the coming years. According to a Starbucks press release, the single cup category is growing 9 times faster than the overall coffee category during the past year and accounts for more than 25% of total coffee sales in grocery.

The recently expanded agreement with Keurig which is owned by Green Mountain Coffee Roasters (NASDAQ:GMCR) will bring Keurig owners a range of Starbucks coffee, teas, and other hot beverages. In the third quarter, Starbucks shipped 1 billion K-Cups, having only expanded to this market 20 months prior. Management revealed during its recent conference call that its share of the single beverage category reached 14.9%. Sales grew 51% over the year compared to the overall industry that grew at 46%.

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Improved food offering

Starbucks recently acquired La Boulange Bakery in early 2013 for $100 million. Improved food offerings can increase revenues from the 'every day' type of customers. More importantly, an improved food offering can drive additional store visits from customers looking to buy a croissant or pastries (and have a cup of coffee to go along with it.) Food could represent the single largest incremental driver of U.S. comps over the next few years, as currently the majority of transactions are beverage only.

Starbucks has also pursued an alcohol license in a very limited number of locations where the right demographics exist.

Conclusion

Despite shares trading near all time highs, current investors have plenty of reasons to hold off on selling, and new investors shouldn't be afraid to buy. Investors can expect Starbucks to continue to build a foundation for future growth through food and beverage innovation, an upgraded food offering and continued success in international growth. The company's industry leading innovative loyalty/mobile/digital assets will further reinforce customers' positive views of the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.