A Peek at Starbucks in 2014

There are about 315 million people in the U.S. these days, and for every 25,000 or so, there's a Starbucks (NASDAQ: SBUX  ) . The company has been on a solid tear through 2013, with the stock up 51% year to date based largely on a 26% increase in annual earnings per share. The fourth quarter offered more of the same -- revenue up 13%, comparable-store sales up 7%, and earnings per share up 37%. I don't want to say that the success was expected, but it wasn't a huge surprise.

So let's leave the past behind us and instead focus on what Starbucks is going to do over the next year. What does the Starbucks of 2014 look like?


Source: Starbucks.

Two things that will keep Starbucks ticking
A store for every 25,000 Americans leaves only a few stones unturned. That means each location needs to be doing more with what it has instead of forcing the company to grow geographically in the United States. That's No. 1. No. 2 is that outside the U.S., the business needs to keep on pushing. While Starbucks has some international penetration -- to the tune of 5,253 stores -- it still has a lot of foreign potential.

In short, Starbucks needs to get more people through more doors. The company's balance sheet is strong, so I'm not worried about overspending. In fact, it would be nice to see it drop more cash on a bigger dividend. While the payout was increased 24% in this most recent announcement, it's still lower than it could be. Starbucks is consistently generating a healthy pile of cash.

Starbucks' U.S. opportunity
To get more out of the American locations, Starbucks is doing three main things. First, it's increasing the value of its food, giving customers a new way to spend money while simultaneously increasing its competitiveness. Second, it's offering new drink options to get coffee eschewers through the door. Finally, it's branching out beyond the Starbucks concept into Teavana, its recently acquired tea line.

Food was the company's biggest single driver of comparable-sales growth in the fourth quarter. Over the next year, customers should expect to see more from La Boulange, the bakery brand that Starbucks added last year. Right now, the bakery is only in about a quarter of Starbucks' U.S. locations. That's set to double next year, with La Boulange rolled out across the entire company-owned network -- about half of the total locations.

Right now, the bakery is just churning out baked goods in the traditional sense, but next year things are going to change. Starbucks wants to take some of the lunch market from competitors like Panera. To do that, La Boulange is going to start producing lunch items. The idea is being tested in San Francisco, and Starbucks has been happy with the results.

Starbucks on the global stage
Beyond our borders, Starbucks has a very different opportunity. The company just opened its 1,000th store in China, meaning that it only has one location per 1.4 million people there. Those locations helped the Asia-Pacific segment put up an 8% increase in comparable sales. It also managed a 37% operating margin, easily besting the U.S. segment's margin. This is a profitable and fast-growing region, and the company is planning to add 750 new stores in China next year.

In Europe and the Middle East, the situation is less shining but still good. Starbucks is planning to add about 150 new stores to the 2,000 it has right now. The company is taking a different tack in the segment, adding more licensed and franchise stores. The shift is part of the company's plan to get more out of Europe and the Middle East, where rents are higher and local knowledge is more important to a store's success.

Starbucks looks good
Overall, Starbucks looks like it's well set up for a strong 2014. As I said, I'd love to see the dividend keep marching up, and management has hinted that that's the plan. However, if getting less back in dividends means the company can more easily acquire businesses like La Boulange and Teavana, then I'm happy to see it reinvesting.

A global portfolio
To get the most out of the growth that countries like China and Japan offer to businesses, investors need to look beyond our borders. Having a geographically balanced portfolio is as important as having sector diversity. Luckily, investing in the international scene doesn't have to mean buying companies you've never heard of. The Motley Fool's analysts have pulled together a report on three great American businesses that are all set to pop overseas. "3 American Companies Set to Dominate the World" details these excellent businesses, and gives potential investors all the info they'll need. Readers can click here to get a free copy of this in-depth analysis.


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  • Report this Comment On February 02, 2014, at 11:47 PM, undjan wrote:

    Companies that try to increase their profits by pressuring me to buy more product don't keep my business for long. A few months ago, I experienced this at my local Starbucks. I was in the drivethrough and the kid taking my order kept arguing with me to try to get me to buy more. That was irritating, but I figured it was just an overly zealous kid. Then I went to another Starbucks a few days later. The line was backed up and didn't move very fast. When I got up to the window, I discovered why. The woman at the window was trying to upsell people as they picked up their orders. When I went back to my local Starbucks several days later, this time, a young woman told me that it was "shocking" that I was only ordering a frappacino and a breakfast sandwich, then went into listing the other products they had and telling me how 'yummy' (and other adjectives one would use when talking to a child) they would be with my sandwich or later. I was furious. After going through the drivethrough and picking up my order (which I really had no appetite for by this time), I parked my car and went inside to talk to the manager. He seemed to be understanding and claimed that he didn't know that his staff was pressuring people to buy more -- he said he thought they were just "goofing around" and promised to put a stop to it. The next time I went through the drivethrough, the young man taking orders said "welcome to Starbucks" and then started going through a list of everything they had to offer, using the same type of language the young woman had used before (about things being "yum-yum," "ooey-gooey," etc.). I wanted to throw up. When he finally stopped talking, I told him I'd changed my mind and went through the drivethrough without purchasing anything.

    I was tempted just to let it go and simply stop going to Starbucks. Afterall, it's technically a luxury product line (at least, it's priced that way!). But I did hate to give up my frapps, and so I wrote an email to Starbucks customer service telling them how annoying this form of upselling was and that, in my opinion, it was going to lose them more business in the long run.

    I got a nice email back apologizing for the way I'd been treated, saying that this was not their policy (which I didn't really believe since I'd experienced pretty much the same treatment at two Starbucks that were quite a distance from each other), and giving me a couple of $5 vouchers to give them another try. They said they would contact my local Starbucks and tell them that this was not acceptable treatment of customers.

    It took me a while to use one of those vouchers, but when I did, I was pleasantly surprised. As in the days prior to the upselling, the staff was upbeat, welcoming, and made me feel like they were glad I'd stopped by (instead of making me feel like I was just a mark to get the most out of as possible as I had felt when they were upselling aggressively).

    So I tried the second voucher several days later. Again, the results were good.

    When I decided to go to Starbucks the third time, I was in a hurry. I ordered a vente frappacino. The girl taking the order asked if I wanted anything else. I said no thank you. Just the frappacino. And then she started arguing with me, trying to get me to buy more. She even lectured me about breakfast being the most important meal of the day. I'm a 65-year-old grandmother who really doesn't take kindly to being lectured like this by a 20-year-old kid.

    At any rate, she seemed quite pleased with herself because when she had finished delivering her lecture about breakfast to me, she said, "So, which of our yummy, scrumptuous breakfast sandwiches do you want to go along with your frappacino?"

    I decided not to say anything because I was so furious by this time, I could have said about anything.l I was on my way to a meeting and needed to focus on it, not be arguing with a minimum-wage kid about whether I should eat a breakfast sandwich.

    And so, without a word, I drove forward. I had to wait in line behind two cars ahead of me. I had my window down and could hear the young woman delivering orders trying to get people to buy more at the window.

    When I got up to the window, I told her I'd changed my mind. I didn't want the frappacino and I certainly didn't want any more of their upselling.

    I had already decided that was the end of Starbucks for me, but after a few days, I decided to write to Starbucks about this once again. They never wrote back. In the meantime, I started talking to people around town about Starbuck's upselling tactics and also "googling" this subject. It was then that I discovered that 1) this is standard practice for them and 2) I'm not the only one who has gotten fed up with this and refuses to purchase any of their products or go to their outlets.

    You don't cover this in your article, but I think it would be interesting to find out how this "sales" method is affecting Starbucks. I know they aren't the only ones who encourage their franchises to try to get more bucks from existing customers because their customer base doesn't have the potential to grow. (The American Veterinary Association is recommending that its members do this too.) But people aren't THAT stupid to put up with this forever, especially for a product that isn't essential to their lives. Thanks.

  • Report this Comment On February 05, 2014, at 3:15 PM, TMFRedRam wrote:

    Thank you for reading and for the insightful comment.

    This got me thinking about up-selling and I'll be posting a new article touching on the topic soon. For what it's worth, when I was at Starbucks we up-sold in a very mild way. Usually we asked if the customer would like food, but there was no persuasion that went on if they said no.

    I'll keep an eye out for aggressive selling behavior next time I'm in a Starbucks.

    Cheers,

    Andrew

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