Starbucks: Sluggish International Growth

I just came back from a week-long trip in Europe where I spent four days in Vienna and three days in Sofia (Bulgaria). I was surprised to find very few Starbucks (SBUX) shops in Vienna.

Despite traveling extensively around the city I counted only two. Both are primarily frequented by — you guessed it — tourists. I’ve been told SBUX has closed down a number of stores over the years. After visiting London in August and seeing a SBUX on every corner, I figured the firm had spread the decaying American capitalism evenly around the world. Remember, Britain is a nation that drinks tea - or so we’ve been told.

The only explanation I could find was that Austrians look at coffee as an experience. Since they pay a couple euros for a tiny little bitty cup of coffee, they figure they may as well enjoy it by spending an hour drinking it. In America we drink the same amount in a sip. Maybe Austrians want their coffee brought to them. Though I have to confess, service in Europe rivals service I receive in the local Post Office on the day before Christmas.

Austria is a country with only eight million people and SBUX’s failure there will not necessarily derail its global growth strategy. But the SBUX failure in Austria — a western European country where coffee consumption is deeply ingrained in the culture — makes me pause. Maybe growth from over-caffeinating the rest of the world is not a slam dunk as everyone perceives.

SBUX, along with other high quality companies with strong competitive advantages and an impressive growth track record, have traded at a premium to the market (higher Price to Earnings ratio). There were actually two premiums: one for quality and another for consistent high growth. eBay (EBAY), Whole Foods (WFMI), Wal-Mart (WMT), General Electric (GE) and many more come to mind here. Most of which are in different stages of seeing their growth premium deflated.

When it comes to SUBX, the quality is undoubtedly still there. But the growth premium has been deflating as its expansion has slowed. With 15,000 stores worldwide SBUX is not exactly a spring chicken anymore, and its growth going forward will be lower than it was in the past.

If Austria is any guide the company’s ability to grow internationally is less certain. I may buy SBUX in the future once the growth premium is gone and the stock trades with appropriate margin of safety (in my book Active Value Investing I discuss how to figure out how much margin of safety you should require for a stock), but I’ll not pay a premium for (past) growth or its visibility.

P.S. I did not see a single SBUX in Sofia, but paid a visit to a Dunkin Donuts that shared space with KFC (YUM) which in Bulgaria is still called Kentucky Fried Chicken.

Disclosure: No position in SBUX

Comments

[tsunamirrs:]

I don't agree with you at all. Austria and Bulgaria are not good examples to decide about failure of international expansion. Why don't you go to China, Turkey, Middle East. See how they are expanding. Growth is in emerging markets, not in Europe. I travel a lot too by the way...

2008 Apr 01 10:59 AM

[Bribytes:]

I agree with tsunamirrs. Austria, in particular, has a deeply engrained coffee culture and a superior product to most of the world. Viennese coffee actually tastes as good as it smells, unlike much of the brew we're exposed to. Starbucks, while having shown incredible growth, is wise to stay out of Vienna and concentrate on areas without such a firm grip on the science of coffee.

2008 Apr 01 11:21 AM

[ThaiGuy:]

This is about the lamest financial column I've read in a long, long time. Other than discussing his personal wanderings around town, there is zero analysis. There is also no discussion of Starbuck's growth strategy in the areas mentioned. Starbucks approaches each international venue individually, taking into account cultural, political and economic realities of each county. There is no cookie-cutter approach that fits both Austria vs Argentina, for example. They tend to move slowly into new areas, see what works, then accelerate their efforts. To broadly proclaim "sluggish international growth" based on seeing 2 Vienna locations is idiotic beyond the pale. SBUX success overseas has been impressive, and over the past 12 months has shown greater revenue growth than US stores. The company has reached barely 20 percent of the potential it sees internationally, so stay tuned for large ramp-ups in this sector.

2008 Apr 01 11:37 AM

[scribbler:]

In terms of central Europe at least, the article may be right, at least for now. I live in Prague, where the first starbucks has just opened and the 2nd one is slated to open later this year. The locals are openly disdainful of both the quality and the prices, and for good reason. It will take a lot to get anyone besides tourists to go to Starbucks. You can get an excellent espresso/capuccino for 2 bucks here (even with the deflated dollar). Why pay four or five?

There is a chain of Starbucks knock-offs called coffee heaven that have been around for years, but again, they're mainly frequented by tourists as well. By local standards they're obscenely expensive. As starbucks is.

2008 Apr 02 05:51 AM

[Seeking the...:]

Why all the negative articles on Seeking Alpha about SBUX? I note the authors always disclose "no position" in SBUX, but what about website itself. Who owns/runs this site? Any position in SBUX? Or better yet, any position in SBUX competitors?

2008 Apr 03 03:56 PM