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What Makes Starbucks One of America's Best Companies

Seattle-based Starbucks (NASDAQ: SBUX  ) is much more than the ubiquitous cafe with the instantly recognizable mermaid logo.

From 1971 until the present, Starbucks has aimed to "share great coffee with our friends and help make the world a little better." Well-known Chief Executive Officer Howard Schultz joined the company in 1982, and decided to try to bring the romance of Italian coffee bars to American shores through Starbucks. That idea sowed a fast-growing seed; Starbucks now has about 17,000 cafes in 55 countries across the globe.

Starbucks' mission is a lofty one, venturing far beyond a cup of java: "To inspire and nurture the human spirit -- one person, one cup and one neighborhood at a time."

The case for Starbucks
Whether the American public is aware of it or not, Starbucks treats its myriad stakeholders very well, going far beyond where most quick-serve companies or other coffee companies are willing to go.

The retail industry is renowned for treating rank-and-file workers poorly, but Starbucks treats its partners very well. Fortune's annual 100 Best Companies to Work For ranked Starbucks at No. 94 this year, citing the fact that employees can receive benefits and stock rewards at just 20 hours per week, and that the company offers opportunities for advancement.

Starbucks does little traditional advertising; its own baristas often act as brand evangelists. Starbucks' Leadership Lab helps it prime its employees to achieve that end, and the fact that the company wishes its employees will connect with and delight customers helps make these essential stakeholders happy. If you've ever received a Starbucks cup with your name on it, or had your "usual" ready for you before you even made it through the door of your favorite Starbucks, you've experienced this firsthand. Starbucks ranked at No. 88 on Interbrand's list of 100 top brands for 2012.

The coffee giant has enriched long-term shareholders. Starbucks' five-year total return is 115.5%, and its compound annual revenue growth has been 7.1% over the past five years. Its median return-on-capital is 21.1%. Starbucks has a conservative balance sheet, with plenty of cash and negligible debt. It currently pays a dividend; its trailing annual yield was 1.30%.

Although Starbucks catches some flak from critics, compared to old-school coffee giants' traditional practices, it's a dream come true. It seeks ethically sourced coffee through its Coffee and Farmer Equity (C.A.F.E.) practices, helping farmers produce coffee in people- and planet-friendly ways. Of the 428 million pounds it bought in fiscal 2011, 86% came from C.A.F.E. practices-approved suppliers. It also buys organic and fair-trade coffee, and seeks to pay fair prices for its coffee through its programs.

Rising competition in gourmet coffee from everyone from McDonald's to Green Mountain Coffee Roasters to mom-and-pop shops is an ever-present risk. Howard Schultz is a pretty richly compensated CEO, and while many shareholders may not mind because of his performance, strict corporate governance proponents may balk. Schultz has also frequently spoken out on economic and political issues during the last several years, which may turn off some customers. Meanwhile, Starbucks slid to No. 94 from number 73 in Fortune's 100 Best Companies to Work For list this year.

Risks to consider
Macroeconomic conditions in America and abroad present major risk; "affordable luxuries" could become less affordable. Rising costs for crucial ingredients like coffee and dairy can hurt its bottom line. For example, the Farm Bill's expiration, pushed to later this year, could result in a disastrous spike in dairy prices that could hit Starbucks hard. Meanwhile, Starbucks has long provided health care benefits to its employees, but recent changes in health care laws could result in more participants and bite its profits when they go into effect in 2014.

Starbucks has acquired concepts like Evolution Fresh juices and Teavana's mall-based stores recently; these purchases veer away from coffee concentration. Shareholders should hope these acquisitions create growth due to healthy consumption trends, but they could hinder profitability or fail in the marketplace.

Partners come first
In Schultz's book Onward, he said: "As I saw it, Starbucks had three primary constituencies: partners, customers, and shareholders, in that order, which is not to say that investors are third in order of importance. But to achieve long-term value for shareholders, a company must, in my view, first create value for its employees as well as its customers." Starbucks' leadership should also be viewed as one that's ready and willing to evolve with changing times.

Click here to read about the rest of The 25 Best Companies in America.


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5/27/2016 4:00 PM
SBUX $55.15 Down -0.14 -0.25%
Starbucks CAPS Rating: ****