Will Tea-Bars Hinder Starbucks' Rise?

| About: Starbucks Corporation (SBUX)
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"When you walk in, you see a shrine to tea." (Howard Schultz, CEO SBUX)

On October 24, Starbucks (NASDAQ:SBUX) inaugurated its "Teavana Tea-Bar" line at the flagship site on Madison Avenue in Manhattan, half-way between the Met (Metropolitan) and Guggenheim museums, a block east of Fifth Avenue and one of the lovelier sections of Central Park. Location is everything and this location (they call it "Museum mile," now) is perfect for the product SBUX has debuted, a sensation in blond-wood, expensive pastries and loose leaf tea satori. The blend of profit, pricey Asian chic and atmosphere is easy to satirize but the question is whether the venture will boost or hamper the wondrous emergence of SBUX as one of the most profitable brands and concepts in the markets. I believe that Tea-Bars gradually will gain traction and expand the customer base a bit. In part, however, SBUX is competing with itself here and what will carry the day is the discretionary income of their patrons.

SBUX acquired Atlanta-based Teavana and its hundreds of sites in December 2012. Like its recent partnership with Whole Foods Market (WFM), another great, fast-growing (and debt-free) health food company, the venture and recent launch is part of SBUX's work to keep growing at the cutting edge of health and social consciousness.

The downside is that for a couple of years, the Tea-Bar concept may blur the primary identity of SBUX as a chic and socially aware nexus for strong coffee, Wifi and a mood of sensitivity to everything our culture bids us celebrate in primitive places, peoples and products. The clichés in coverage have arrived hot and heavy: "coffee is fast, tea is slow," etc. Worldwide there are twice as many tea drinkers as coffee but it's not clear that this matters as much as possible static over the brand and whether the new focus will complement rather than blur the main product. SBUX has lots of coffees: it has wrapped itself thickly in the tailored-to-taste idea and it has paid well.

The main point about SBUX is its superb profitability: with revenues 27 x debts and cash flow alone more than 4 x debts, SBUX is at a level few companies can match. With ROE 27.9 and 11.7% growth, it sets a standard of excellence as a cash producer. Its five-year price chart is one of the most impressive features of the markets: it is up 33% in six months, 90% in a year, nearly 200% in three years and about 750% in five years. Studying the chart is instant satori for investors. The question is whether Schultz and Co can blend their Tea-Bar Zen into the liquidity that pays the bills and leaves some for extras. With 1000 tea-bars planned and 18k stores named after Captain Ahab's first mate already selling coffees and snacks, my view is that SBUX continues to be aligned with cultural trends. Though its growth is unlikely to match the past, it should continue to climb impressively.

SBUX has 2.1 million followers on Google and its new venture features walls of loose tea, canisters of brightly colored herbs and phials of exotic-colored herbal essences that have the look of a tidy lab suitable for museum display. One can tweet an eGift card to a fortunate associate, get a pumpkin or chocolate chai latte and order protein-packed parfaits while helping native indigenous people who still lack potable water.

America's about coffee but the elite, and those who want to be perceived as part of the sensitive and primal-oriented elite, yearn for the "softness" and "Zen-like" eastern ambiance of Tea. When Schultz says, the Teavana initiative "romances the theater of tea with a visual experience," he talks the talk of chic consumerist spirituality. The titanic revenues of SBUX should help muscle its way to a tastefully blissful share of the world's $90 billion tea market.

The Western Hemisphere are mostly about coffee but this does not mean that SBUX's Tea-Bars will live or die by expansion into Asia and Africa. Rather, there surer bet is an expansion of a taste for stylish teas among their core audience in North America and Europe.

Investors and trend-watchers must realize that SBUX is selling style, lifestyle, a sense of cultural awareness and unstated superiority in the way it presents its pricey products. From the star-crowned, flowing-haired mermaid of its famous new-age logo to the many charitable activities by which it funnels some of its immense profits to the third world, SBUX has a distinct and sheltered place among those who sell or force us to buy change one must believe in. It is all about partnering, combating "climate change," wind farms and being green with envy of the simple, down-home affordability and superior taste of pink and orange Dunkin' Donuts (NASDAQ:DNKN) who brought out "Vanilla Chai" coffee years before big SBUX discovered the term and made its own version of the Tazo - tea treat.

Still, SBUX has Vanilla Frappacino's and like all their drinks a barista can customize it for you and make you feel as if you matter as a person and not just a consumer. It has lots of sodium, cholesterol and 45% of the saturated fat your body needs in a day but it's pretty. The entire vast line-up is like this: a factory of boutique-like moments presented with a bit of personal touch. The management have great insight into postmodern culture.

Through its canny social positioning, SBUX is a de facto branch of the EPA and UNESCO and as safe from hassles as a giant company can be in a hyper-regulatory era: more power to them. America is changing and for the top 10%, culturally diverse teas that hint at nirvana will become an established mark of social status. Chinese officials may rail against high prices ($4.42 for a latte) but SBUX prices are not modest in America either: $14.95 for some salads at the chi-chi Tea-Bars. But as a Chinese customer said (previous link), they go for the brand and the "touch of class" and so it is here. When the lower 90% are not having coffee at home, they will head to DNKN, a Honey Dew Donuts or similar site. Those who feel elite will be at SBUX. The elite will be at places whose names we don't know and that are not franchises.

Savvy CEO Schultz should make the most of the great location on Madison Avenue. Low-key celebrity visits and brochures about the great Eastern art collection at the Met should be in display cases. The art of tea and of psychological escape from what this country has become in the new age should combine in a profitable synergy.

Investors might want to wait a bit for a lower entry point to SBUX: the indices have had a great run and need a breather. The lower line of the long-term S&P up-channel is in the 1670-80 area. Many events or simply the structural weakness of the economy might bring the index down to the 1700 area briefly. However, many who have waited for this market to significantly correct mostly have waited in vain and had to chase. Since SBUX is a great company well-positioned at the nexus of numerous cultural trends and with an innovative driver to reinforce the flair of its identity, it's worth owning. Even if it bases for a year, it is aligned with the culture and brilliantly run. 3Q earnings are a short-term issue. Do your own study but from here it looks like a buy on any meaningful pullback.

Disclosure: I am long DNKN, WFM. 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.