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Summary

  • A plan to enter the tea market and offer more consumer food products in supermarkets will help SBUX avoid coffee shop saturation issues.
  • A plan to expand food offerings in their tea and coffee shops and to offer alcoholic beverages will help SBUX expand revenue during the quiet lunch and evening periods.
  • A continued use of social media will allow SBUX to use their world class marketing talents to connect, respond and communicate with customers.
  • A history of substantial dividend increases will reward SBUX shareholders as SBUX's initiatives unfold.

At Starbuck's (NASDAQ:SBUX) 2014 annual meeting, the company announced its goal to almost double its market capitalization to $100 billion and dominate the tea industry in a manner similar to the way it has dominated the coffee industry. This goal is substantially above SBUX's current market capitalization of $59 billion and a very long way from SBUX's $5 billion market capitalization in November 2008. Back in 2008, with a recession in the U.S. and around much of the world, Howard Schulz, the current CEO, rejoined SBUX on a day-to-day basis. SBUX then closed 600 stores after years of aggressive expansion and proceeded to lay off 12,000 employees. (Howard Schultz detailed in his 2011 book the mistakes SBUX had made in the later years leading up to 2008 and what steps SBUX needed to take to turn itself around.) In 2008, Wall Street analysts also stated with great certainty that McDonald's (NYSE:MCD) and Dunkin' Brands (NASDAQ:DNKN) were after SBUX in the coffee market and SBUX was in significant trouble. Well, as we know from SBUX's stock price today, the Wall Street analysts could not have been more wrong (as usual).

So, where is SBUX going in the future? Let's look briefly at several of the initiatives SBUX is taking to expand their business footprint and to lead SBUX to their goal of a $100 billion market capitalization for the company.

Teavana and Tazo Tea

In addition to continuing to pursue and dominate the coffee market, SBUX's most high profile goal is dominating the tea market. SBUX had long sold TAZO tea in supermarkets and in their coffee shops since their acquisition of the Tazo brand in 1999. SBUX's acquisition of Teavana Holdings in 2012, however, was their clearest indication of their determination to expand aggressively into the tea market. SBUX has since opened their first Teavana Fine Teas and Tea Bar in New York City. SBUX also cross sells Teavana teas in SBUX's coffee shops.

Evolution Fresh Juices and Evolution Harvest Snacks

Since 2008, SBUX has also aggressively entered the food market in their coffee shops and supermarkets. SBUX attempted to buy Kind Healthy Snacks but Kind turned down SBUX's offer. SBUX then acquired the Evolution fresh juice company in 2011, which specialized in cold-pressed juices. SBUX extended the Evolution Fresh brand to Evolution Harvest snack bars and freeze dried fruits. SBUX has since removed Naked Brand juices and Kind snack bars from their coffee shops and replaced third-party produced snacks with their own Evolution branded juices and snacks. Evolution products are also sold in grocery stores.

La Boulange Baked Goods

In 2012, SBUX acquired La Boulange, a company that makes authentic French pastries and breads from scratch using high quality, fresh ingredients. SBUX then proceeded to replace the pastries they previously sold with baked goods from recipes from La Boulange. SBUX's replacement of food with recipes from outside suppliers was part of their effort to create a more consistent food experience for their customers. In addition, SBUX, in an effort to attract customers during their typically quiet lunch period, offers La Boulange sandwiches. SBUX has even opened up a La Boulange concept store in Los Angeles, California.

Beer and Wine in the Evenings With an Evening Food Menu

In 2014, SBUX introduced beer and wine in some of their stores to attract customers during their usually quiet evening hours. In addition to wine and beer, SBUX created a "Starbucks Evenings Menu" offering savory food items.

Competitors and Risks

Starbucks has restaurant competitors such as McDonald's, Dunkin' Brands (DKDN), smaller regionalized coffee shops chains as well as individual regional coffee shops. More recently, a South Korean company named Caffé Bene, has grand and ambitious plans to expand across the U.S. and around the world. In the consumer product area, where SBUX sells packaged coffee and teas as well as some packaged snack foods, companies such as Nestle (OTCPK:NSRGY), S.J. Smucker (NYSE:SJM) and Mondelez International (NASDAQ:MDLZ) are competitors.

SBUX also has to address "input" costs to their business. In particular, coffee bean, milk and sugar costs, the primary ingredients to many of their drinks, have to be managed efficiently. Periodically, coffee bean, milk and sugar prices rise to extreme levels and SBUX has to address such costs. SBUX addresses, in part, rising commodity costs in advance through SBUX's commodity hedging strategies. Even with hedging strategies, there are times where SBUX has to raise prices.

Additional risks for SBUX are market saturation and economic hardships in developed and non-developed markets. There are risks of shifting consumer tastes toward more healthy products and coffee culture being more of a fad in certain markets. SBUX could also be at risk by overextending itself from time to time with their many initiatives (as set forth above) and losing focus on their core competencies. We believe, however, that while SBUX faces many risks, ultimately only SBUX's management can hurt SBUX through failure to effectively anticipate and address current and anticipated economic, commodity and competitive risks.

SBUX is an iconic brand around the world. SBUX coffee shops provide their now famous "third place" experience to provide relief and certainty for their customers from a chaotic and unpredictable world. SBUX also has a reputation of trying to treat their employees in a manner significantly better than other food service workers by providing health insurance benefits and now a chance to finish their college degree in a cost-effective manner. Finally, SBUX is one of the leading corporations in the U.S. and the world to use social media to keep their customers connected to SBUX by: 1) informing customers of new products and innovations at SBUX and their affiliates; 2) allowing SBUX customers to provide comments to SBUX to improve the SBUX consumer "experience"; and 3) allowing SBUX to communicate with their passionate socially-aware customers about SBUX positions on important social and environmental issues in the world. We believe SBUX has developed a brand that attracts customers in an extraordinary way that is similar to the way that companies such as Nike (NYSE:NKE), Apple (NASDAQ:AAPL) and other affordable luxury brands attract customers.

Analysts View and Our View

Analysts continue to be impressed with SBUX's ability to deliver results and believe the future for the company remains very bright based on: 1) their strong execution of multiple initiatives in the U.S., 2) their excellent potential to become an international powerhouse, 3) their impressive loyalty programs and digital offerings, and 4) their long-term possibilities for growth in the consumer products market both in the U.S. and internationally where it's just getting started. Analysts conclude that SBUX's momentum will continue with significant opportunities existing globally as SBUX is at the beginning of a turning point where dramatic positive change will occur. Consensus analyst estimates for SBUX's September 2015 fiscal year are $3.17. At SBUX's current price, their forward price-to-earnings ratio is 24.8 based on next year's estimated earnings. In addition, SBUX has an excellent dividend growth history that is poised to continue.

Where do we stand on SBUX? We believe SBUX is firing on all cylinders with a great future ahead of it. We also believe that SBUX will reach their $100 billion market capitalization goal and will be in the same rarefied ranks as Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP). Assuming SBUX has the same number of shares outstanding (753 million) in the future as they have today, that would translate to a $132 stock price.

With all our confidence in SBUX, however, we would like to see the current price drop to the $57.00 to $66.50 price range (a price-to-earnings ratio ranging from 18 to 21 based on fiscal year 2015 projected earnings) before investors start a full position. Why wait? We believe SBUX's share price is a little ahead of itself. As a reference point, McDonald's with a $99 billion market capitalization, is trading at price-to-earnings ratio of 16 based on their projected earnings for 2015. We understand that SBUX is growing faster than MCD at this point. We believe, however, that SBUX's road to their $100 billion market capitalization goal will experience 15 to 25 percent share price drops along the way as the euphoria for SBUX's business plans and potential push the share price too far up too soon from time to time.

We believe SBUX's share price is a little ahead of itself right now (along with most of the stock market). If, however, you fear missing out on an excellent investment like SBUX, we suggest a "share-builder-type" stock purchase program where you purchase $250 to $1,000 of SBUX stock the first day of every month to average into a full position. We own shares of SBUX at the writing of this article as a long-term investment.

Source: The Road To A $100 Billion Market Capitalization For Starbucks