Growing Pains For Starbucks As It Seeks New Ways For Continued Expansion

| About: Starbucks Corporation (SBUX)

At Starbucks' (NASDAQ:SBUX) current business stage, continued expansion hardly means adding more stores, at least not in the U.S., where Starbucks stores are found almost every few city blocks. Internationally, there's no guarantee that Starbucks can achieve the level of home success when the same coffee culture may not be present in every market around the globe and as a result, demand for opening more stores may never be there in certain countries. For example, China has proved to be a market hard to penetrate for Starbucks given that ordinary Chinese consumers are unlikely in favor of coffee drinking over their own tea sipping that has been there for them thousands of years. Other new ways to keep its business growing haven't been as effective as the company's traditional coffee store operations.

Having built one of the most recognizable consumer brands, Starbucks surely wishes to further leverage its wide name recognition and go beyond selling coffee drinks at its retail stores. However, not everything that Starbucks experiments with outside its coffee stores, where the company has had its most success, may produce the same positive results if the makeup of customers and markets becomes different from running a typical Starbucks store calls for. Over the years, Starbucks has tried to repackage its coffee drinks and distribute them to various grocery stores. But the plan to sell more of its coffee drinks through a mass retail channel has at least one challenge: consumers visiting a grocery store already have too many beverage choices before them. The sale percentage for this kind of business remains at low single digits to the company's total revenue, to which Starbucks stores still contribute the most, almost 90 percent.

To stem the potential loss of customers to companies such as McDonald's (NYSE:MCD) to Dunkin Brands Group's (NASDAQ:DNKN) Dunkin Donuts that all offer coffee drinks conveniently at better value propositions, Starbucks has decided to take over Seattle's Best Coffee, a former coffee chain operator similar to Starbucks, and transform it into quick coffee serving stands that can now be found in many Wal-Mart parking lots. The goal is to expand the company's business by reaching customers who may not frequent a Starbucks store but still want to grab a cup of coffee that's inexpensive at their convenience while shopping at Wal-Mart or taking care of other chores. But one drawback with this business initiative is that it's not a natural extension of Starbucks' core coffee business and doesn't use the company's strength of making quality coffees. Such an unfocused business strategy, while consuming company resources, may even dilute Starbucks' brand image.

Speaking of expanding business not in a coherent way, Starbucks' jumping into certain food services such as selling sandwiches at its coffee stores hasn't proved to be particular successful either. Again, revenue from the company's "food service" represents only a small percentage of the company's total sales. When a Starbucks coffee store doesn't really emit the pure aroma of its best roasted coffee, but rather a mixed sandwich smell of cheese, veggies and meats, what that may tell its core coffee-drinking customers about whether Starbucks intends to uphold its coffee originality that its many loyal customers have come to identify with? While coffee could be the choice of drink for some when having a sandwich, the choice of companion food for drinking coffee is most likely not be a sandwich for many. Starbucks may have chosen to serve food to a few new customers that may be only onlookers who just happen to drop in at the expense of its many hardcore coffee-drinking frequenters.

Most coffee drinkers would probably like to have a donut or croissant to go with a cup of coffee, and Starbucks could certainly heat up a lot more of its baked foods. Expanding bakery offerings may well please Starbucks' core customers and further improve its in-store coffee business, which should be where the company keeps its focus on. Instead of going out and chasing unproven business activities not closely related to its classic coffee operations, Starbucks should have just run down to the bakery counter right next to its coffee brewers and dish out a richer selection of quality pastries. Currently, bakery counters at some Starbucks stores can hardly serve up to its customers' needs. By improving its bakery offerings, Starbucks may see a meaningful revenue growth as coffee and donut sales can easily go hand in hand.

With annual revenue growth hovering at around 10 percent for the last five years, one can't be sure whether Starbucks is in the group of this majority of all public companies that have their annual revenue growth at below 10 percent or one of the fewer companies that have their annual revenue at above 10 percent. To clearly stand apart from the potentially underperforming larger crowd, Starbucks needs a breakthrough in growing its business. The company cannot expect to deliver a high level of performance for its investors unless it can effectively address its growth problems at a time when its business is seemingly maturing.

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.