The Keys to Starbucks' Future

Starbucks is serving coffee, expanding its food selection, selling booze, and trying to make tea an American beverage -- can it hold it all together?

May 4, 2014 at 1:00PM

I admit that juggling a bag of coffee, a muffin, and a bottle of wine isn't as impressive as juggling three running chainsaws. But while the chainsaw guy is working for tips, the coffee-muffin-wine man is making about $15 billion in revenue. Maybe it's time for companies like Dunkin' Brands (NASDAQ:DNKN) to stop gawking at the flashy chainsaws and learn a thing or two from Mr. Starbucks (NASDAQ:SBUX).

Of course, the more things that go up in the air, the more things a man can drop. Starbucks is moving into a busy year, opening new locations, expanding its selection at others, and branching out into new concepts all at the same time. A misstep would be a serious hit to the pocketbook, but it looks like things are going as smoothly as possible. Here's a rundown of what Starbucks has in store and why investors should be excited about the possibilities.

Starbucks takes on the world
Starbucks already has over 20,000 locations around the globe, but it's still aiming to open 1,500 more in fiscal 2014. That's an indication of the broad plan that the company has in mind for its future. That growth is going to be predicated on the success of its new businesses, and all of them are looking like winners.

Starbucks' acquisition and expansion of Teavana is the most exciting business that the company is currently managing. With the exception of water, tea is the most consumed beverage in the world. It's a $90 billion global market and it's ripe for picking in the U.S. Americans mostly consume their tea iced, as a general rule -- hot tea is something that almost no company is focusing on and something that Starbucks should be able to break into.

To support that, Starbucks is bringing tea into its coffee shops, exposing more customers to the Teavana range. It's also brought its La Boulange baked goods into 8,500 locations, and Starbucks has already seen strong results. In its last earnings call, the company said that "food was the single largest incremental driver of comp growth in the second quarter" and that market growth after the launch of La Boulange was consistently higher.

Fighting off the competition
There's no shortage of competition in the coffee and tea world, but the biggest retail competitor is Dunkin' Donuts. While Dunkin' had a rollicking 2013, 2014 sales have been unimpressive. A big part of the brand's first-quarter weakness came from the impacts of bad weather. Dunkin' pointed out that its business is concentrated heavily in the Northeast, which got hit hardest by bad weather. It also relies largely on early morning sales, and travel disruptions may have hit it harder than a more spread-out company.

Starbucks' push for alcohol is actually trying to solve that morning reliance problem before it becomes a problem. By adding booze, Starbucks is hoping to pull in evening customers, who wouldn't be coming in to get coffee and a muffin. The company's big hope is that wine will bring in customers who want food as well, pushing average ticket prices even higher.

Dunkin' Donuts' size and geography puts it in an awkward position and makes Starbucks an even stronger competitor. On top of that, Starbucks is already solving the problems that Dunkin' is just now recognizing. Dunkin' may have a regional impact on Starbucks' business, but there's nothing for the company at large to worry about.

The bottom line
Starbucks is straying into what, for most companies, is a dangerous place -- splitting your focus among so many new products and locations can end up having a damaging effect on your core business. However, Starbucks has a history of successful expansion, launching new locations and adding a host of menu items without missing a beat.

These new opportunities for Starbucks are going to lead the company into the next phase of its life. I'm especially excited about the possibility of making tea a bigger deal for Americans, and the revenue implications of that possibility. Starbucks is set up for a big 2014, and success this year is going to have an impact for the next decade.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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