Starbucks' Worldwide Growth

David Gardner: Speaking of where you came from, Jim Donald, can you give us a little bit about your background, your business background, prior to Starbucks (Nasdaq: SBUX  ) ?

Jim Donald: David, I have been in the supermarket business since the time I was 16 until the time I was 48. That has been it. There has been nothing other than the supermarket business for about 33 years.

David Gardner: And your most recent position prior to joining Starbucks?

Jim Donald: I was the chairman and CEO of a supermarket chain in the northeast called Pathmark (Nasdaq: PTMK  ) supermarkets.

David Gardner: Congratulations. Can you, for a sec, Jim, compare and contrast Pathmark and what you learned there with Starbucks?

Jim Donald: That is a great question. I think that if you compare and you contrast, there is obviously difference in the contrasting piece being that in a supermarket, you might have 33-to-35,000 items to work with and around. But the comparison is all about people, David. At the end of the day, whether you are leading a group of people to run a supermarket chain or the best coffee company, you are as successful as they are.

David Gardner: ... Those of us who are inveterate Starbucks customers notice some testing and learning going on in some of your stores from time to time. Jim, I want to ask you about a couple of testings that I have seen recently. One of them is a test with hot food, an experiment with hot food in some of your locations.

Jim Donald: We have currently a test in the Seattle area with 80 stores testing hot breakfast sandwiches and hot lunch sandwiches. What we are finding, and we are not ready to roll this out just yet, is that there is a definite connection with the consumer when she comes in or he comes in the morning to pick up their coffee, that we are able to complement that with a quality breakfast sandwich or lunch sandwich.

David Gardner: And can you give a typical example and perhaps describe your favorite since you are in that neck of the woods?

Jim Donald: Well, my favorite is the egg and bacon muffin that is heated up. Not necessarily the best thing to be eating in the morning, but I can't seem to stop.

David Gardner: This is interesting. When I hear you mention that, of course I think of the egg and bacon McMuffin, and a lot of us who are business observers are aware that McDonald's (NYSE: MCD  ) over the years has always served a lot of coffee but recently has talked about more gourmet coffee and maybe trying to compete with you a little bit. Sounds like you are willing to compete with McDonald's on its home territory a little bit.

Jim Donald: Well, we have read that McDonald's is going into a premium cup of coffee, to serve a premium cup of coffee, and we are in that business. We are in the premium bean segment, and we think that the more the consumer gets educated on premium coffee, the more (that) bodes well for all of us that are serving that type of coffee. We watch it closely, but at the end of the day, we think that it helps educate the customer on what really a great cup of coffee is all about.

David Gardner: Whenever you are talking to The Motley Fool, you know you are talking to investors, so I have to ask the investor question here, which is from the standpoint of profits and the profitability of an extra cup of coffee versus let's say an egg and bacon muffin: Do egg and bacon muffins show the same ... profitability, worse or better, than a good premium cup of Starbucks coffee?

Jim Donald: No, the sandwiches and the lunch in general have a lower profit margin, but they are also not something that is handcrafted, and so you kind of pick up on both ends of that, but it is a lower margin item.

David Gardner: Another experiment going on in Starbucks stores, and many more of us have seen this across the nation, is allowing your customers to burn their own CDs in some stores. Jim, could you describe whether that has been a success and how you measure success?

Jim Donald: We have an initial rollout of 45 stores with CD burning. So far, it has been pretty good. I have got to tell you, we are pleased with the results. We are finding that we have become a destination for music based upon our connection with Hear Music since the late '90s, and when we are able to enhance the consumers' trip into Starbucks, such as burning a CD of their choice, we are finding that they keep coming back.

David Gardner: What are a few more new twists that maybe we can expect to see at our local Starbucks in the next year or two?

Jim Donald: Well, we just launched Chantico, which is a cocoa-based and steamed milk beverage that some consumers are saying, "Hey, this is taking the place of my dessert." So we are seeing a lot of that business come in. We have a very robust pipeline of products that in terms of the research and development that will be launching over the next probably 18 months, but I can't give away any trade secrets.

David Gardner:(Laughs.) ... Part of the growth story has been and remains this possibility, Jim Donald, of international sales, and you have been expanding internationally, in particular; pick it up there. In particular, I want to ask you about your European stores thinking maybe of France and Germany. We have had a few Motley Fool readers seriously question whether Starbucks can really prosper in these cultures, at least in the way that we are used to seeing it prosper here.

Jim Donald: David, I tell you, we are very pleased with Europe right now. Just late November, we actually bought our partner out, Karstotquo, in Germany, that we now own all the stores in Germany. We are seeing a very strong brand acceptance throughout Europe. We just opened our 10th store in Paris and celebrated our first-year anniversary, and we are very pleased with the acceptance and how well that that brand has been recognized, both by visiting Americans as well as Parisians.

David Gardner: Without giving away any trade secrets or nonpublic information, Jim, what is your rough growth expectation for, let's say, Germany over the next five to 10 years? What is the growth there going to look like?

Jim Donald: Well, we don't comment necessarily on country-by-country. We have stated that our next three- to five-year goals are 20% top-line growth and 20-25% EPS growth.

David Gardner: Thank you very much. Jim, there are occasionally criticisms. Maybe you have noticed them from Americans who say this company is taking over the world in a bad way. I am sick of seeing them. Sometimes people will picket in let's say Boulder, Colorado. Sometimes you will get picketed here and there. Some people don't like Starbucks. What do you say to those people?

Jim Donald: Well, we...speak to the individuals when questioned, but what we try to share with everybody is our whole corporate social responsibility commitment and how we work with all the communities in every neighborhood that we are in and how we give back not only to our farmers in the countries of origins, but for the not-for-profits in the communities that we operate in. We actually think that we improve communities by going in and making our mark. That is actually a program, and helping not only employ people from that community but supporting some of the activities that go on.

Catch up on the entire interview:

David Gardner is co-founder of The Motley Fool and is the advisor of Motley Fool Rule Breakers. The Motley Fool isinvestors writing for investors.


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