Starbucks: Fueling Future Growth With Addiction

| About: Starbucks Corporation (SBUX)


Caffeine reported to be the world's most widely used drug.

Starbucks adding to its addictive product portfolio with moves into tea and alcohol.

CEO Howard Schultz says that growth is still in its "early stages" - I agree.

According to a recent study published by John Hopkins University, "caffeine is the most commonly used drug in the world." This might come as a surprise to some, often times when drug addiction is discussed the media is focused on illegal drugs, specifically marijuana due to the publicity that it has received recently. In this country especially, I think people tend to look past caffeine as an abused substance due to our widespread dependence on it. A related article to the study published on John Hopkins' news website states that "more than 90 percent of U.S. adults use caffeine regularly." The article goes on to say that most use is within the FDA's healthy guidelines for caffeine consumption, meaning that most Americans aren't doing themselves harm with caffeine, but this doesn't mean that a dependence on the substance isn't being developed. Any avid coffee drinker whose experienced headaches after having missed out on their morning brew can attest to this.

So, with this information in mind, it seems that Starbucks' decision to expand its newly purchased Teavana franchise into stores and even tea bars is a no-brainer. Americans need caffeine and with the current crusade against "sugary" drinks causing health conscious consumers to stay away from soda, tea and coffee have arisen as acceptable means to get one's caffeine fix. Another catalyst that Teavana has going for it is Oprah's support, carrying her product and encompassing her widespread marketing reach will help greatly with the initial boost to get Teavana started and recognizable to the public's eye. I think Schultz has hit the nail on the head with this one; I wholeheartedly expect Teavana to take off and be another strong growth engine for this company.

A strong move into the tea space shouldn't come as a surprise to the SBUX investor due to the fact that the tea and coffee business are similar. The announcement that came out of SBUX's shareholder extravaganza in Seattle yesterday that did surprise me was its move into alcohol. Here is the Seeking Alpha report:

  • Starbucks (NASDAQ:SBUX) plans to sell alcohol in the evening at thousands of its stores.
  • The revelation came from COO Troy Alstead during an interview with Bloomberg.

  • The company says testing of the concept at select stores has gone very well.

Personally, I had no idea that Starbucks was seriously testing this concept. It makes a lot of sense to me, especially when considering the fact that the vast majority of Starbucks' business is focused around an acceptably addicting product. I know that adding alcohol to coffee is already exceedingly popular through products like Bailey's, a Diageo (NYSE:DEO) product, which was a highlight for the company, citing its strong performance in North America, China and Latin America and Caribbean and an increased marketing campaign for the brand in its most recent interim report released Dec. 31, 2013.

Starbucks had already shown investors its willingness to step outside of the box as it leads its industry into the digital age with its mobile payment system. With this move into alcohol, Schultz continues to show a willingness to break down barriers typically associated with your average corner coffee shop.

Will there be a cost barrier for entry into alcohol? Yes. There will be licenses and training to be paid for as well as possible litigation risk that comes with an alcoholic beverage license. However, I think these costs will be minimal compared to the revenue that this will generate. Alcohol is an incredibly high margin business and I expect we'll see improvements in this regard for Starbucks as the concept gets up and running.

SA reported that, though the coffee chain has no plans to raise prices, it will look to improve its average customer transaction amount which is north of $5. Obviously, adding alcohol to a drink will achieve this purpose. Also, I imagine that the alcoholic offerings that SBUX will have for customers will be more upscale and therefore carry a higher price tag. This is a genius strategy to boost average transaction cost without alienating its existing customer base through major coffee product cost increases. What's more, this strategy will likely augment SBUX's customer base hitting the consumer interested in an alcoholic beverage who isn't interested in stopping by a bar or sit down restaurant during an outing.

All in all, I really like a lot of what I heard out of Seattle yesterday. I'm already long SBUX having disregarded its high multiple for a purchase in the low 70s during its recent pullback. I think that Schultz is correct in saying that SBUX is still in the "early stages" of its growth and I expect the stock to continue to trade at a lofty multiple as it continues to expand its business both domestically and internationally. I am not adding shares at this point but would strongly consider adding to my position on significant weakness.

Disclosure: I am long SBUX. 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.