Has Starbucks Given Up on Coffee?

Even though their share prices have fallen over 11% and 7% year-to-date, respectively, Starbucks (NASDAQ: SBUX  ) and Dunkin' Brands Group (NASDAQ: DNKN  ) both continue to increase their revenues quarterly as their recently released earnings reports show.

In recent months, Starbucks' partnership with Keurig Green Mountain (NASDAQ: GMCR  ) has proven to be a big asset for Starbucks, while Dunkin' Brands Group's Dunkin' Donuts and its coffee continue to play a bigger part within a company that also owns over 7,300 Baskin-Robbins locations.

While companies like Dunkin' Brands Group are optimistic on accelerating store growth through coffee sales, Starbucks appears to be moving away from coffee based on some of its recent expansion plans.

Has Starbucks really given up on coffee?

Credit: Starbucks

Recent earnings from Starbucks and Dunkin' Brands Group
Both Starbucks and Dunkin' Brands Group recognize the growth potential in their respective brands.

During Starbucks' conference call, management mentioned that even though the company has over 20,000 stores in 64 countries, including over 11,500 in the U.S., Starbucks still accounts for a very small share of total coffee occasions in several markets, and North America is one of these markets.

Dunkin' Brands Group reiterated its bold long-term plan to nearly double its U.S. footprint in terms of Dunkin' Donuts locations, going from 7,746 locations to over 15,000. The table below shows each company's respective earnings summaries in terms of revenue, net income, and U.S. comp-sales growth.

 

Revenue Growth %

Net Income

Growth %

U.S. Comp Sales

Growth % (2014)

U.S. Comp Sales

Growth % (2013)

Starbucks 

 

+9.1%

+9.4%

+6%

+6%

Dunkin Brands Group 

+6.2%

-3.5%

+1.2%

+1.7%

Credit: Starbucks and Dunkin Brands Group earnings. U.S. Comp Sales Growth compares most recent quarter with the same quarter for each company a year ago.

Even though Starbucks has a much larger store count in the U.S. than Dunkin' Donuts does, Starbucks is still growing much faster in the three categories shown above. What's more interesting is how U.S. comp-sales growth has declined for Dunkin' Brands Group on a year-over-year basis. This may hint that there isn't much support for twice as many Dunkin' Donuts locations in the U.S.

One of the other big takeaways during Starbucks' conference call was that CEO Howard Schultz stated that the most significant outcome of the quarter was the fact that the company delivered strong and balanced revenue and profit growth across all reportable segments. The company known for coffee is now expanding into several other categories.

Credit: Dunkin' Brands Group

However, is Starbucks giving up on coffee?
Year-to-date, Starbucks has been rolling out several new programs.

The company is no longer testing its Evenings program, which includes alcohol sales. It recently announced that it is moving forward with a roll-out program that will bring alcohol sales to thousands of existing stores.

Breakfast expansion is well under way as Starbucks has continued to improve on its sandwiches to compete in the breakfast wars. Its La Boulange bakery line has put Starbucks on the map to not only compete with Dunkin' Donuts but also with other well-established quick-serve restaurants known for their breakfast menus.

Food currently represents one-third of U.S. transactions for Starbucks, while 30 million U.S. transactions each week still don't include food.

Starbucks' two key subsidiaries -- Teavana and Evolution Fresh -- are becoming more of a focus for the company. During the conference call, Starbucks recognized the $90 billion global category of tea. Currently tea represents just 9% of U.S. Starbucks sales.

Starbucks opened its third Teavana Fine Teas & Tea Bar shop recently.

This summer, Starbucks plans to introduce its carbonated beverage, Fizzio, to compete in the soda wars. This comes despite consumer trends that point to declines in global soda volume sales and overall interest.

Starbucks likely recognizes that diversification equals long-term success
Despite Starbucks' ambitious plans to move into new industry segments, coffee is still its bread and butter.

Even though coffee prices recently hit a 26-month high, Starbucks is well-positioned to take advantage of the higher prices. While Starbucks has prices locked in through nearly half of 2015, higher prices may hurt margins for competitors like Dunkin' Donuts, which admitted during its conference call that its franchisees are just now starting to buy coffee for 2015.

Additionally, Starbucks doesn't rely on coffee as much as its competitors do. Chief Financial Officer Scott Maw stated recently that coffee makes up less than 10% of Starbucks' total operating costs. There is a good chance that this percentage will fall further as Starbucks continues to diversify its portfolio.

Credit: Starbucks

Lastly, Starbucks recently amended its existing five-year agreement with Keurig Green Mountain. The updated terms allows Keurig Green Mountain to expand Starbucks' K-Cup offerings. Both companies have sold nearly 2 billion Starbucks K-Cup packs through the end of last year.

The fact that Keurig Green Mountain sold a record 5.1 million Keurig system brewers last quarter as net sales rose 4% to $1.4 billion also benefits Starbucks in the long term. The ability to be one of the top brands used in the Keurig system gives Starbucks a bigger footprint without necessarily building new store locations.

Bottom line
The foundation that Starbucks has built up over the years around its coffee core, which includes its rewards program and partnerships with companies like Keurig Green Mountain, has given the company the flexibility to venture into new market segments.

It isn't that Starbucks has given up on coffee. Instead, Starbucks has secured its future in regard to coffee despite rising coffee prices and increasing competition. Unlike many other companies in the restaurant industry, Starbucks recognizes other areas of growth and currently has the freedom to make big moves into these new areas.

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  • Report this Comment On May 13, 2014, at 12:37 PM, swagv wrote:

    Starbucks gave up on coffee a decade ago when they started their Entertainment division, etc. They'll probably try, fail, and come around yet again.

  • Report this Comment On May 14, 2014, at 5:59 PM, mikecart1 wrote:

    swagv,

    That is a good point. Thanks for the comment.

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