With over 22,000 locations in 67 countries, Starbucks (SBUX 0.53%) is one of the most recognizable brands in the world. Thanks in part to an excellent fiscal third-quarter report in July, Starbucks stock has climbed more than 50% so far in 2015, trouncing the broader market in the process.
But what gives the coffee giant its edge? According to our contributors, Starbucks benefits from a unique combination of product innovation, scale, and mobile technology:
Andres Cardenal (product innovation): Starbucks has a unique ability to stay on the right side of consumer demand and constantly bring successful new drinks and foods to the market. This is a major plus for investors, as it allows the company to diversify its clientele and generate growing sales at the store level. Importantly, sales growth via product innovation tends to have a positive impact on profit margins, so Starbucks makes both growing sales and increasing earnings per each dollar of sales.
The company has made a series of key acquisitions over the past several years, including Evolution Fresh in 2011 for $30 million, La Boulange for $100 million in 2012, and Teavana for $600 million, also in 2012. Management is leveraging those deals to broaden the company's food and drinks offerings, and this strategy is paying off in spades.
S'mores Frappuccino, a new limited-time offering, became the highest-selling Frappuccino ever last quarter. Driven by Teavana branded shaken iced teas, tea beverage sales in the U.S. increased 10% year over year. According to management, Starbucks' expanded breakfast sandwich platform delivered 30% net revenue growth for the third quarter in 2015.
Starbucks announced a 7% increase in global comparable sales last quarter. Even in a highly saturated region such as the Americas, comparable revenue grew 8%. This is quite an exceptional performance in the industry, and Starbucks' commitment to product innovation is arguably one of the main reasons behind it.
Tim Green (scale and density): A Lewis Black comedy album from more than a decade ago included a bit about the end of the universe. It focused on Houston, where two Starbucks coffeehouses were located across the street from each other. This seemingly ludicrous observation is, surprisingly, a competitive advantage for the company. While restaurant chains will generally avoid building stores too close to each other in an effort to avoid having one store cannibalize another's sales, Starbucks doesn't have this problem, and the company routinely builds stores so densely in cities that multiple coffeehouses could be within easy walking distance.
The reason this approach works, in my opinion, is that people generally don't want to wait for coffee. When the alternative to going to Starbucks is making coffee at home or at the office, the company's stores need to be extremely close to be competitive. I wouldn't drive 10 minutes to a Starbucks for coffee if I could just make it myself, for example, but I would reconsider if a Starbucks was within walking distance. Coffee is often an impulse buy, and Starbucks needs to be close by to capture that sale.
The density of Starbucks stores in cities makes it difficult for a competitor to gain any kind of foothold. A new coffeehouse is often competing not just with one Starbucks but with potentially dozens of Starbucks stores in the area. This approach wouldn't work if people didn't like Starbucks coffee, of course, and being innovative in terms of menu items is also important. But the sheer scale and density of Starbucks stores gives the company a major competitive advantage.
Steve Symington (mobile innovation): Despite its massive scale, Starbucks also boasts an incredible ability to seamlessly execute on new technology initiatives. As of last week, that includes the national rollout of Starbucks' Mobile Order & Pay app for both iOS and Android devices at more than 7,400 company-owned locations.
Credit: Starbucks
For perspective on how quickly this was accomplished, note Starbucks only began testing the Mobile Order & Pay functionality in 150 Portland, Oregon stores this past December. Then it grew to 650 locations in the Pacific Northwest this past March, and expanded to just over 4,000 company-owned stores at the end of last quarter.
When all was said and done, Starbucks chief digital officer Adam Brotman called it "the fastest technology application rollout we have ever done," while at the same time noting the app was well-received by both customers and store partners. To be sure, mobile payments already represented 20% of all in-store transactions in the U.S. last quarter, with around two-thirds coming from Mobile Order & Pay -- and that was before the Android version of the app was introduced.
For customers, Mobile Order and Pay enables smooth ordering of often-confusing customized orders, while also effectively reducing time spent waiting in line. For Starbucks, this improved experience should boost both customer traffic and operational efficiency. In the end, with Mobile Order & Pay available nationwide -- and with plans to introduce the feature in select UK and Canada stores in October -- you can bet the positive effects of Starbucks' mobile innovation will only grow from here.
