Is Starbucks Overcomplicating the Business?

Once again, Starbucks (Nasdaq: SBUX  ) steps out of its comfort zone. It seems the world's largest coffee retailer is bent on getting its siren-branded products into every market it can. In an attempt to tap into the $8 billion energy-drink market, Starbucks revealed a new product line of energized beverages made from natural juice and green coffee extracts. Sounds great, but is the java giant running in too many directions at once? Let's take a closer look at how innovative products play into Starbucks' long-term strategy.

Drink to your wealth
The perky concoctions hit stores next month and will be called Starbucks Refreshers. The move to energy drinks is a natural fit for Starbucks. Energy beverages are the fastest-growing category within the consumer-packaged goods segment, which means the coffee chain would be stupid not to make a play for the space.

The company has moved into other new categories recently as well, including the $3.4 billion cold-crafted juice market. Its foray into juicier territory came last November when Starbucks bought Evolution Fresh, a premium juice company. Just four months after acquiring the juicer for a cool $30 million, Starbucks opened the first Evolution Fresh store in Bellevue, Wash. In addition to made-to-order juices, the new format stores offer nutritious wraps, salads, and soups.

If this were any other company I'd be worried that jumping into health foods may distract from the core business. Yet because it's Starbucks we are talking about, I'm confident in the company's ability to expertly execute new product launches and store openings.

Products from the company's new Evolution Fresh retail chain will also be sold in grocery stores and traditional Starbucks locations nationwide. This type of smart distribution will help the company increase revenue in consumer-product goods.

Stiff competition
Bringing fresh juices, wholesome foods, and energy cocktails into the Starbucks family puts the company on the fast track to becoming a leader in the $50 billion health and wellness sector. However, moving into new markets also means new competition for the coffee retailer. Starbucks will have to contend with Monster Beverage (Nasdaq: MNST  ) for share of the alternative-soda market. That's no easy task, considering the beverage company currently claims 36% of the markets total sales volume. Still, if anyone can break Monster's momentum in the space, it's Starbucks. The brewer's coffee drinkers are unflaggingly loyal to the SBUX brand and will likely follow the company into these new market segments.

Meanwhile, Starbucks' entry as a health-food brand with Evolution Fresh could spell trouble for Jamba Juice (Nasdaq: JMBA  ) . The fresh juice and smoothie chain was just starting to reverse years of revenue decline, after new product offerings helped Jamba boost margins and even stave off competition from fast-food heavyweight McDonald's (NYSE: MCD  ) . In 2010 analysts worried that Mickey D's push into smoothies could threaten Jamba's market share. So far that hasn't happened.

However, the McCafe concept does challenge Starbucks by offering specialty coffees, including frozen Frappes and real-fruit smoothies at a fraction of the cost. Nevertheless, Starbucks' new Evolution Fresh products fulfill more of a lifestyle choice than a convenience factor. Another advantage for Starbucks is the fact that it owns the Evolution Fresh retail stores. As my Foolish colleague Austin Smith pointed out, Jamba Juice mainly runs on a franchised model, which tends to be less profitable than corporate-run locations.

I'll take that to go
Clearly the odds are tipped in Starbucks' favor. Widening its circle to include businesses outside of coffee will undoubtedly strengthen Starbucks' position as one of the world's leading brands. I hate to be redundant, but I expect shares of Starbucks only to get more expensive as time goes on, which is why Starbucks is one of my favorite CAPScall plays to date.

While the stock isn't cheap, I think this growth story is just getting started. The company's venture into India puts another market in play for the international coffee house. Given Starbucks' potential for record earnings growth, I'm betting the stock soars to new highs in the year ahead. Starbucks isn't alone in its ability to dominate new markets. However, choosing the right stocks can be challenging. That's why I want to introduce you to the Motley Fool's free report, titled: "3 American Companies Set to Dominate the World." To get your free version while the report is still available, simply click here -- it's free.   

Foolish contributor Tamara Rutter does not own shares of any companies mentioned in this column. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing ideas. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, Monster Beverage, and McDonald's. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy.
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  • Report this Comment On March 30, 2012, at 3:12 PM, gibbstom13 wrote:

    there's a huge difference between brand over-extension and complementary horizontal growth. i think you're confusing the former with the latter

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