When Howard Schultz bought Starbucks (SBUX +1.53%) with the dream of turning the company into a European-style coffeehouse that served as a "third place" after home and work for customers, he could not possibly have foreseen its growth. The company went from a single location in 1987, where it didn't even sell cups of coffee, just roasted beans, to a slow-growing chain, to a global brand.
Starbucks has grown from its original Seattle location to over 30,000 stores across more than 80 markets. That growth story is not slowing down anytime soon, which is one of the reasons to buy the company's stock and hold onto it forever.
Starbucks has been adding about a store a day in China. Image source: Getty Images.
1. Still adding U.S. stores
Starbucks may have reached near-saturation levels of stores in its home market, but it's still selectively growing. The chain has over 15,000 stores in its home market (about half of its total) but it's still adding locations where it makes sense. Generally, that means expanding in cities where its current store base can't handle its potential customer base and adding new locations in growing communities.
2. Growing in China
Not every U.S. company has been able to crack the Chinese market. Starbucks has successfully figured out how to operate in the very-populous (and growing economically) country and is opening roughly a store a day there with plans to do the same for the next few years.
3. It's continuing to innovate
In addition to its Roasteries, where it tests new product ideas, Starbucks also has its Tryer Center, an innovative pretend store on the ground floor of its Seattle headquarters. In the Tryer Center, the company uses workers who actually work in its stores to develop new ideas. This could mean new products or new ways to operate more efficiently.
4. Sales and transactions are up
"In the U.S., we posted comp sales growth of 6% in Q4, including comp transaction growth of 3%. That's a two-year sales comp of 10% for Q4, a sequential improvement over our very strong results in Q3 and our best performance in the U.S. in over two years," said CEO Kevin Johnson in during the company's fourth-quarter earnings call.
5. Employees are engaging customers more with help from technology
The company has also been working on expanding its artificial intelligence capabilities.
"Over this past year, we have been dialing up our in-house capabilities and investments in AI with an initiative we call Deep Brew," Johnson said. "Deep Brew will increasingly power our personalization engine, optimize store labor allocations and drive inventory management in our stores."
These tech initiatives are freeing up workers' time to engage with customers. That has been paying off, according to the CEO:
Throughout fiscal '19 in the U.S., we invested in our partners by allocating additional store labor, increasing store-level training and simplifying in-store tasks often with new technology. ... These investments in our partners collectively elevated customer connections as evidenced by an all-time high-end customer connection scores in Q4, and we will build on this momentum with incremental partner investments in fiscal year '20.
6. Cold is key
Starbucks has been a pioneer when it comes to iced coffee. The company has brought innovation to a product that previously was only a limited part of the coffee business. Johnson said:
We also continue to invest in beverage innovation, and I'm pleased to say that beverages contributed 5 points of our U.S. comp sales growth in the fourth quarter led by the strength of our cold beverage platform. We completed our rollout of Nitro Cold Brew across company-operated stores in the U.S. this summer and introduced new cold pumpkin beverage offering, the Pumpkin Cream Cold Brew, and we're very encouraged by its reception.
7. Digital is growing
With 17.6 million members of its digital rewards program, Starbucks has built an audience it can leverage. The company can communicate with members offering them time-specific deals designed to drive traffic at slower times of the day.
"This is an important growth driver because we know from experience that when customers join Starbucks Rewards, their spend level with Starbucks increases meaningfully," the CEO noted.
8. The company understands LTOs
Starbucks has mastered the limited-time-offer (LTO). The company uses products like Pumpkin Spice Latte to drive store traffic by putting the item on sale for only a limited time. The chain does these LTOs with seasonal favorites that people look forward to and new products that may be around for just a few days.
9. New formats keep coming
Not every location requires a traditional Starbucks cafe. The company has been aggressive in developing new formats to best serve specific audiences. Johnson said:
As we expand our store footprint, we have also been investing in innovative retail formats including our Starbucks Now store in Beijing that opened in July, a unique express retail experience that seamlessly integrates physical and digital touchpoints to enhance the mobile order and pay and the Starbucks Delivers customer experience.
10. Digital is growing in China, too
Leveraging what the company has learned in the U.S., Starbucks has made its digital membership program a key part of its expansion in China.
"At the end of Q4, active members reached 10 million, up 45% over the prior year," Johnson said. "To support this growth, we up-leveled our Tmall flagship store in September to offer our Starbucks Rewards members exclusive products and a tailor-made gift experience."
11. The Global Coffee Alliance
Starbucks has partnered with Nestle to expand its offering in retail stores around the world. That has been a rousing success, according to Johnson:
Just one year after announcing this alliance with Nestle, we have launched three new coffee platforms in over 30 new markets. Starbucks by Nespresso, Starbucks by Dolce Gusto and Starbucks Roast & Ground coffees. ... In addition to the coffee platforms, we also launched a new product category, Starbucks Creamers in North America in Q4. We entered China's at-home and foodservice segments through the Alliance allowing Chinese consumers to enjoy some of their favorite Starbucks coffees in the comfort of their home.
An answer to every question
Starbucks has become an integral part of peoples' lives, and the company has not rested on its laurels. The chain continues to innovate both in how its stores operate and in creating new food and beverages.
There's no reason to think Starbucks won't continue to be a market leader for decades to come. That makes it a logical restaurant stock for you to buy and hold for the foreseeable future.
