With fears about COVID-19 grounding flights, keeping Chinese consumers homebound, and halting goods coming out of China, investors may be worried about how Starbucks (SBUX 0.36%) can continue its growth efforts in that region. These fears may be or may not be unfounded, but Chinese sales are less likely to have an effect on the coffee giant's overall condition than doomsayers realize.
Starbucks' U.S. growth has remained phenomenal over the past few years. Customers are happy: That's what's been fueling the company's outstanding growth, and that's what will continue to boost its numbers and shareholder value long-term, despite any potential COVID-19 (the official name for what many call the coronavirus) headwinds. Need proof? Keep reading.
Image source: Starbucks.
Why the domestic numbers matter more
There can be no global expansion if there isn't strength back home. And if there is, even if there are hiccups globally, the company can remain strong to eventually push the borders again. Starbucks created a growth strategy that centers around customer experience, and this forms its foundation of stability.
Year-over-year comparable sales measure how well the company is retaining customers and extracting value from its current operations. The comp number is a combination of ticket growth, which measures the amount spent per customer, and transaction growth. In the first quarter of 2020, each measure contributed half the total growth, which is an excellent indication that the company is taking care of both objectives.
In the first quarter of 2020, U.S. revenue grew 9%, with comps contributing six points of that total and transaction growth contributing the rest. This was the third consecutive quarter of 3% transaction growth. This is how U.S. comps look over the past eight quarters:
| Metric | Q1 2020 | Q4 2019 | Q3 2019 | Q2 2019 | Q1 2019 | Q4 2018 | Q3 2018 | Q2 2018 |
|---|---|---|---|---|---|---|---|---|
| U.S. Comps | 6% | 4% | 7% | 4% | 4% | 4% | 1% | 2% |
Data source: Starbucks quarterly reports.
In other words, not only are comps staying strong, but they've been doing so at a mostly increasing rate.
For a comparison, Dunkin Brands Group U.S. comps were up 2.1% in the 2019 fourth quarter. Starbucks CEO Kevin Johnson noted, "For five consecutive quarters, our comp growth has outperformed the external indexes and benchmarks we track in the restaurant and QSR space."
What's working?
Johnson said about total comps: "It's is clear that our focus on the customer experience, beverage innovation, and digital customer relationships is working." And these three objectives were a theme mentioned several times in the first quarter company conference call. Let's take a look at how the company achieves this.
Customer experience: The key to the Starbucks approach is its focus on the customer, and the way the company makes it work is investing in its employees. Johnson noted: "It is no coincidence that following last September's Leadership Experience where we hosted 12,000 Starbucks field leaders and outlined a series of partner-focused initiatives and investments, our partners delivered one of the most successful US holiday seasons in the history of the Company."
Beverage innovation: CFO Pat Grismer said: "Beverage led our comp growth for a sixth consecutive quarter, driving approximately 5 points of comp sales growth with strength across all beverage categories." The company's cold brew and nitro brew on tap were recent, popular innovations, and both cold and hot seasonal beverages, such as Pumpkin Cream Cold Brew and Irish Cream Cold Brew, added to a well-rounded lineup. Product is fundamental, of course, and aggressive beverage innovation is an important element in attracting customers.
Digital customer relationships: Using digital means to connect with customers and provide personalization at scale is one way the company differentiates itself. In the first quarter, 1.4 million customers joined the Starbucks rewards program in the U.S., growing the total 16% year over year to 18.9 million. Mobile Order and Pay transactions increased by 17%.
How China factors in
China has been a huge growth market for Starbucks. In the first quarter of 2020, revenue increased by 15% with 3% comp growth. There was a 16% net increase in stores over 12 months.
Even with these remarkable numbers, China was only 10% of global revenue this quarter. And the growth is not done, with new stores contributing 80% of our revenue growth.
Starbucks hesitated to give guidance in the 2020 first quarterly report based on the uncertainty of the situation in China. But if the company's business is sustainable in the U.S. and continues to grow at its stellar rates, challenges in China, or anywhere else, won't hinder the company's overall growth.
How Starbucks can keep up the comps
Talking about the company's three-pronged approach to success, Johnson affirmed that "our industry-leading digital platform will further differentiate us from the competition over time." The company is dynamic in its operations, and these points will keep the customers coming:
- Continuing its "targeted investments" in beverage innovation and personalization.
- Developing its team members to provide the Starbucks experience.
- Building the loyal customer base of its reward program.
- Committing to social responsibility.
Sometimes a company can lose sight of the forest in the trees and pursue growth at the expense of quality. Starbucks made a detrimental decision to do that about two decades ago and suffered the consequences. Holding onto the factors that make its customers happy and focusing on comps will keep the core business of this top restaurant stock strong and allow for growth at the right pace.
