Wrap-Up Results
Starbucks Corp. (SBUX) fiscal first-quarter revenue advanced 16% to $3.44 bln, higher than consensus of 3.29 bln. Net income in the period ended 1 January rose 10% to $382 mln, or $0.50 a share, slightly ahead of market expectations of $0.49 a share. Sales at stores open at least 13 months rose 9% globally in the quarter, above consensus of a gain of 7.6%.
Starbucks narrowed its forecast for profit to a range of $1.78 to $1.82 a share for fiscal 2012, compared with a previous projection of $1.75 to $1.82, while consensus is at $1.83.
Starbucks operating margin narrowed to 16.2% in the first quarter from 17% a year earlier because of higher commodity costs. Hence, Starbucks has been forced to raise menu prices to help recoup higher raw-ingredient costs. However, it have locked in its coffee costs for 2012 and for half of 2013, therefore cost pressure should ease going forward (last years commodity cost wiped out more than $0.20 of EPS).
Starbucks is trying to draw in more customers by expanding beyond traditional coffee. Starbucks bought juice maker Evolution Fresh in November and earlier this year began selling so-called blonde coffee - a lighter blend compared with its signature dark roast. Further, Starbucks sought to increase sales with a low-calorie peppermint mocha that was new this year, along with Via instant coffee and single-serve capsules (K-Cups). In addition, the company also is expanding the number of stores where it sells beer and wine.
As Starbucks gets 'only' about 20% in revenue from international markets, the recent USD strength should be less of a problem (compared to McDonald's (MCD) with about 60% international sales). However, the relatively low international exposure also leaves ample room for growth (800 net new stores in 2012 vs. 323 in the prior 3 years combined).
India Fantasy
The most promising news came last week when Starbucks announced that it aims to open 50 outlets in India by year's end, through a 50-50 joint venture with Tata Global Beverages. In January 2011, Starbucks already signed a deal with Tata Coffee Ltd to source coffee beans in India. The deal could also lead to opening retail locations in the near future, particularly within Tata's existing hotel holdings across the country. New outlets could open in the next few months, now that the problem of acquiring real estate and local supply is being addressed.
Starbucks is not the first coffee chain in India but the market may be poised for rapid growth and could easily benefit from a new competitor. Well-established coffee shop chains, such as Cafe Coffee Day and Barista, enhanced their pan-India presence over the last three years. In 2010, Cafe Coffee Day and Barista had 970 and 200 stores, respectively, and they aim to continue expanding in the next few years.
Tea drinking culture
India is dominated by a tea drinking culture, coffee shop chains are helping to create a taste for coffee in the Indian market. This shows-up as an opportunity for coffee chains as well as retail sales. Specialist coffee shop chains outlets are growing at an increasing rate. In 2009 the number of outlets increase by 12% over 2008 and the growth rate accelerated to 21% in 2010. Coffee shops are becoming a popular outlet for increasingly affluent young adults to socialize. The on-trade channel has helped popularize coffee among the rapidly growing and increasingly prosperous young adult population of India.
As a result of these factors, food service volume of fresh coffee has grown by over 40% since 2005. To 2015, food service fresh coffee is expected to maintain this rapid volume growth.
India's coffee consumption pattern gives a clue to the potential that the market holds. The nation's per capita consumption of coffee is just 85 grams, compared to, 3.4 kilograms in Japan, 4.1 kilograms in the U.S and more than 5 in most European companies.
Retail opportunity instant coffee
In addition to the food service channel, Starbucks may be able to take advantage of a retail opportunity. Starbucks Via Ready Brew provides an entry in the rapidly growing instant coffee category that other multi-national cafes cannot match. Instant coffee is well on its way moving from a niche product in India to more mainstream.
Emphasizing the desire for convenience in retail products, fresh coffee retail volume has only grown by 19% from 2005-2010 (as opposed to the 42% gain in foodservice) while instant coffee has grown an impressive 66%. These same patterns are projected for the future with instant coffee volume growth rate accelerating to 87% from 2010 to 2015.
Increasing incomes are not only providing opportunity for a developing café culture in India, but are also helping to drive growth of nascent retail volume. Many purchasing decisions, especially in urban locations, are based on convenience. As such, instant coffee is finding a following among urban working consumers. While fresh coffee is a format which is becoming popular in South India, instant coffee is likely to continue to increase its appeal in North, West and East India.
Final Note
India is likely a key battleground in the near future for international on-trade coffee manufacturers. Starbucks move to enter the Indian market appears to be well-timed and bodes well for coffee consumption in a tea dominated market.
While Starbucks cafes face much competition, a sufficiently large portion of the population appears to be adopting a café culture to support the new players. The alliance with Tata will fuel the expansion.
According to John Culver, president of Starbucks China and Asia Pacific, Starbucks stores will be cobranded "Starbucks Coffee: A Tata Alliance".
Disclosure: I am long SBUX.
