Seeking Alpha
Long/short equity, growth at reasonable price, contrarian, growth
Profile| Send Message|
( followers)  

Summary

  • Starbucks has been testing the sale of beer and wine across several locations in the US. Some analysts believe it to be counterproductive.
  • Nevertheless, Starbucks is determined to capitalize on the growth opportunities in the Asia Pacific region by aggressively expanding its network of stores.
  • With the successful mobile app, the company is positioned to offer customized services such as delivering relevant coupons according to consumer spending habits.

Starbucks (NASDAQ:SBUX) recently announced that it would be expanding the sale of alcohol in selected stores, nearly 40, by the end of the current year. This is not the first time that the company has taken such steps. It first tested selling alcohol in a single Seattle store in October 2010, and since then, it expanded alcohol sales to some stores in Illinois, California, Washington D.C, Oregon, and Georgia. In addition, the company continues to receive benefits from the increased comparable sales growth in the US while aggressively expanding its network of stores in Asia. Let's discuss what the future holds for the company.

Expectations from Serving Alcohol

The company is well known for making highly strategic decisions to drive top line growth. Let's analyze whether this move will also be revenue assertive or whether the company has taken an unnecessary step that will cause more harm than benefit.

The company claims that alcohol has the potential to attract customers who have never visited Starbucks. So if these customers enjoy Starbucks in the evening, then they are most likely to also visit the store during the day time.

On the negative side, selling alcohol could also be counterproductive. Brand compatibility will also come into question. Starbucks has been popularly known as a coffee café. Many customers still do not know that Starbucks owns Evolution Fresh. But adding alcohol to the product mix may confuse customers regarding where the company is heading both as a business and as a brand. In addition to this, religious beliefs, negative alcohol experience, and parents forbidding their children can be the reasons that could keep new customers away and also alienate some existing customers.

Exploiting the Potential in Asia

During the first quarter of 2014, Starbucks remained aggressive regarding the expansion of its network of stores, particularly in China and the Asia Pacific region. It added almost 209 stores during the quarter, reflecting an increase of 5% in just one quarter. With the additional stores, the company is now operating more than 4000 stores in the China and Asia Pacific segment.

Going forward, the company is determined to make China its largest market outside of the US. During 2013, Starbucks was able to post 9% growth in comparable store sales. In addition, the established stores' annual pre-tax earnings topped 75% of the investment required to build a new store. With the company's success in Asia and expected profits for many years to come, the aggressive expansion plan seems to be the appropriate strategy.

Mobile App Continues to Bring Benefits

The retail industry is not generally considered innovative, but for Starbucks, innovation has been a major contribution to the company's success. Starbucks is the leading mobile payment retailer, with almost 14% of total transactions conducted using mobile phones. The mobile app provides an incentive for customers to continue visiting and also makes it more convenient for customers to pay.

Additionally, the mobile payments allow the company to keep track of the spending habits of the customers that can be used to customize its offers, such as delivering relevant coupons in accordance with customers' spending patterns. If Starbucks continues to explore mobile capabilities, it will continue to grow its bottom line.

Concluding Remarks

With an already established reputation for offering a calm and comfortable atmosphere, strategically selected stores with immediacy to public transportation, and the potential to bring more customers to its stores, Starbucks is most likely to benefit from serving alcohol in the long-term.

Starbucks provides coffee and tea products and services that are in great demand around the world. Moreover, Goldman Sachs expects Starbucks to add nearly 10,000 locations over the next five years, bringing the total number of locations to 30,000. With the recent correction in stock price, the stock is now trading at a forward P/E ratio of 22.07. Given the future growth prospects, I believe that the company is positioned to deliver long-term value to shareholders.

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.

Source: Is Starbucks Positioned Well To Deliver Long-Term Value?