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Starbucks Corporation (SBUX) is well known for its success as a roaster, marketer, and retailer of specialty coffee worldwide. It is one of the largest and fastest growing names in the beverage industry. The success in the coffee-beverages was good enough for the company for the last many years to show healthy growth, and it may well show similar success in the years to come. But still, the company during the last few years has been entering the new segments to diversify its business beyond the coffee beverages as well as also leveraging its global footprint and retail expertise.

With an aim to further enhance customer experience and to diversify its offerings beyond coffee & beverages, the company during late 2011 acquired Evolution Fresh, Inc. (for $30 million) to establish its presence in fast growing Health and Wellness sector. Discussed below is the company's approach towards the sector, and the opportunities that the company holds in the sector.

Health and wellness sector:

Consumers are increasingly seeking the food products that are natural and organic, due to ever increasing focus on health and wellness. Some of the major factors contributing towards the growth of natural and organic food products are:

  1. Growing concerns of people towards health issues.
  2. Rising consumer awareness about the potential health benefits of the natural and organic food products.
  3. Rising availability of the products.
  4. Greater focus on preventative health measures.
  5. Environmental protection.
  • Growth and market size:

According to Nutrition Business Journal, the sale of natural and organic food grew at a compounded annual growth rate ("CAGR") of 12% from 1997 to 2011, reaching a total market size of $43 billion in the United States and is expected to grow at a CAGR of 10% from 2011 to 2020.

Company's presence:

The company has a growing presence in the sector under its flagship brand Evolution Fresh. Under the brand company offers the products that mostly belong to Health and Wellness sector.

The products include:

  • High-quality, delicious and nutritious cold-pressed juice, under the Evolution Fresh brand.
  • Naturally delicious and nutritious bars, trail mixes, and fruit snacks made with real ingredients, under the Evolution Harvest brand.
  • On July 23, 2013 Starbucks Coffee Company announced a strategic, multi-year agreement with Danone (OTCQX:DANOY), the world's leading producer of fresh dairy products. According to the agreement Starbucks and Danone will jointly offer a portfolio of healthy specialty yogurt products (ready-to-eat Parfait Greek yogurt products) through participating Starbucks stores and other grocery channels. The products will be available through the company's stores in spring 2014, and other grocery channels in 2015, under the Evolution Fresh, Inspired by Dannon brand.

Product-wise market potential:

  • Juice market:

According to research firm IBISWorld, the juice market has been growing at a annualize rate of 4.3% since 2008 and will touch $22.8 billion by the end of 2013. The reasons behind the growth are the increasing product offerings and the rising number of health-conscious consumers who are drifting away from soda-based drinks. The company's focus is on the super premium juice category, which primarily consists of the fresh juice ("never heated" juice products). The current market size of the fast growing super premium juice category is $1.6 billion.

  • Healthy snacks market:

According to Just-food, the sales of healthy snacks worldwide are expected to reach $16.25 billion in 2014 from $13.75 billion in 2009. Nuts, seeds and mixes category is expected to make up the majority of sales.

  • Yogurt market:

Over the last few years, the production and demand of yogurt has been growing at a healthy pace in the United States (see the chart below), due to the rising demand among the consumers.

(click to enlarge)(Source: National Agricultural Statistics Service)

According to an article based on a report published by Packaged Facts, the U.S. retail market for yogurt stood at $7.3 billion in 2012 and is expected to touch $9.3 billion in 2017, representing a CAGR of nearly 5%. The major factor behind the growth is the rising popularity of Greek yogurt. The market size for Greek yogurt touched $1.6 billion in 2012 with over 50% yearly increase.

Conclusion:

  • Huge addressable market (health and wellness sector)

The company is making a place in the sector in a steady way and with selected products. The company is already serving the addressable market of billions of dollar for its each product segments viz. super specialty juices, healthy snacks and yogurt. In the future the company will further enhance its offerings and its reach in the sector.

  • Building-up on the strengths:

The company is using its existing strengths viz. retail expertise and vast reach to create a portfolio for the sector but without altering its existing brand portfolio (Starbucks), as the company is offering these products under Evolution brand.

(click to enlarge)

  • Brand approach:

One unique thing about its entry in the sector is its brand approach. The company is not using its Starbucks brand for any of its offering that addresses the sector.

In fact, it is developing Evolution as a brand for Health and Wellness sector. The use of Starbucks brand could have created an early awareness among the consumers about the products, but the company wants to keep Starbucks as a brand primarily associated with the coffee. This approach will allow it to not only build another multi-billion brand but will also allow it to differentiate its product offerings.

  • Valuations:

The company's market cap. is over $59 billion. It is available at a P/E of nearly 35 (excluding the effect of one time charges related to an arbitration settlement). The current dividend yield is about 1.3%, which represents a dividend payout ratio of nearly 40% for FY 2013.

Despite its huge size, the company is still a growth-oriented company, which is evident from the fact that the company has been showing a significant growth since the last many quarters. During the last 15 consecutive quarters it showed a comparable growth of 5% or more. So far, most of the growth is coming from coffee and related products, but in long term the company's focus on the health and wellness sector will also come into the play and may well become a significant growth factor for the company. However, for the time being, the business will not add any significant value to the company as it's in its initial stages of development and yet to attain a significant scale.

All in all, slowly but steadily the company is moving ahead in a multi-billion dollar market, and it will further augment its product offerings in the years to come. The sector holds a lot of potential particularly for a company like Starbucks, which operates on a global scale and has a significant retail expertise. So, there is every reason for the company to feel excited about its future in the fast evolving sector.

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This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.

Source: Starbucks Holds A Big Opportunity In Health And Wellness Sector