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3 Reasons Starbucks' Growth Isn't Over

By Justin Cardwell – Sep 19, 2019 at 5:57PM

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One of the largest coffee chains in the world doesn't plan on slowing down anytime soon.

Shares of Starbucks (SBUX 1.61%) have risen 41% in 2019, continuing its 27 years of growth from the day the company went public in 1992. After such a strong 2019 so far, investors are asking questions regarding the value and growth of Starbucks, and if it can continue. Looking specifically at store comps, new store openings, and potential growth areas, I believe Starbucks has room to grow in both geographic reach and saturation.

Man holding onto growth

IMAGE SOURCE: GETTY IMAGES

A strategic focus

Focusing on customers, rewards memberships totaled 17.2 million members at the end of the third quarter, up 14% year-over-year. Converting one-time visits to return customers is very important to the new CEO, Kevin Johnson. Johnson is capitalizing on the membership program and email communication to inform consumers of new products, deals, events, and new store openings.

Separating new growth from existing stores is important -- especially when looking at a company with chains that are growing quickly -- and is referred to as comparable store sales or "comps". This comparison allows us to see how well existing stores are performing without muddying the waters with new store performance. At the end of the third quarter, Starbucks presented comparable store sales of 6%, which is great news and is something we will keep an eye on with each quarter.

Starbucks Total Number of Stores Globally

Data source: Starbucks. Chart by author.

Starbucks has opened 2,000 stores in 2019 as planned. Of the stores opened thus far, 600 were in the Americas, 1,100 in China and the Asia Pacific (CAP), and 300 licensed stores in Europe, The Middle East, and Africa (EMEA). There are two types of stores operated under the Starbucks brand, company-operated and licensed stores.

Of the approximate 30,000 stores in operation, 52% are company-operated and 48% are licensed. This is an important factor to investors as the company operated stores generate an average of $1.28 million per year while licensed stores generate $189 thousand. There are risks and costs involved with each store type, however, Starbucks is strategically allocating between the two based on the geographic location of each store.

Massive opportunity

Store openings in China are a large part of the company's growth strategy. Coffee consumption in the U.S. maintains an average of 363 cups per capita while China is averaging 3 cups. China's acceptance of premium coffee may not reach 363 cups annually, however, Starbucks sells premium tea as well. With a population of 1.392 billion people in 2018, you can see why this is an important market to reach.

Competition for the Chinese consumer is fierce between Starbucks, Luckin Coffee, and Coca-Cola's Costa Coffee. Starbucks has been in China for 20 years operating over 3,400 stores currently and doesn't seem overly concerned with the competition. As there is more influence for consumers to convert to coffee, a rising tide will lift all boats. Further, the competition is selling coffee of varying levels of quality – Starbucks is selling premium.

Cash is king

A controversial deal was struck between Nestle and Starbucks at the end of 2018, giving Nestle the rights to sell Starbucks packaged coffee products in supermarkets, restaurants, and elsewhere under the Starbucks brand. Nestle paid Starbucks $7.15 billion for the deal.

Starbucks agreed to a similar deal with Kraft, however, it accused Kraft of mismanaging the brand and breaching the contract. Starbucks was forced to pay Kraft over $2.7 billion at the end of the contract arrangement in 2011. As Nestle will be in the same shoes as Kraft in concern to only caring about sales and not brand management, there is a risk that Starbucks may end up in the same scenario with Nestle as it did with Kraft. The positive from this deal is that Starbucks can fully concentrate on high-profit margin segments of the business, using the money toward investments with high grossing returns. 

Going forward, it will be important to keep an eye on the growth in China, comparable store sales, membership growth, and competition. The five-year average forward price to earnings for Starbucks is 28 times, and the company is currently trading at 31 times earnings. Trading at a premium shouldn't concern investors in the long term as the company is bolstering efforts to expand in high grossing areas such as China and the United States. Starbucks is in a rare position within its place in the market and has an ability to continue the growth story, continuing to increase value to shareholders.

Justin Cardwell owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool owns shares of Luckin Coffee Inc. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$85.62 (1.61%) $1.36
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$56.65 (%)
The Kraft Heinz Company Stock Quote
The Kraft Heinz Company
KHC
$33.96 (1.83%) $0.61
Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
LKNC.Y
$16.24 (-1.58%) $0.26

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