On March 16, Starbucks (SBUX 0.32%) announced that CEO Kevin Johnson would step down on April 4 and be replaced with former CEO Howard Schultz on an interim basis. Plans call for a permanent CEO to take the reins by the fall.
The startling news leaves a lot of questions as to which direction Starbucks will go from here. Management is a key part of any business, so not knowing the future of Starbucks' top brass is a risk that investors should take into consideration. On top of that uncertainty, pressure from unionization, inflation, and the need to reduce waste are factors that impact Starbucks on an environmental, social, and governance (ESG) front.
Despite these risks, it appears that Starbucks has plenty of growth opportunities ahead of it. Here are three easy ways that Starbucks can grow its business, and why the stock may be worth considering now.
Image source: Getty Images.
Lean into grab-and-go
The data has spoken -- Starbucks customers love the rewards program and grab-and-go ordering. So much so, that Starbucks now has more active rewards members than McDonald's or Chipotle.
In its Q1 fiscal 2022 report, Starbucks reported 26.4 million 90-day active users. Rewards Members contributed 53% of revenue. 70% of revenue came from mobile ordering and drive-through. That is a clear sign that Starbucks' grab-and-go strategy is working, which is great news for the business.
Starbucks got its roots creating cozy coffee house vibes with fast internet. But today, local coffee houses, teahouses, and cafes are sprouting up all over the place. Especially in metropolitan areas with so much coffee saturation, it's hard for Starbucks to gain an edge over these local coffee houses. But the numbers say it doesn't have to.
Rather, Starbucks could lean into grab-and-go ordering. And in many ways, it already has. Since the onset of the pandemic, Starbucks has discussed closing stores that lacked drive-throughs and leaning into the grab-and-go concept. It has even rolled out Starbucks pickup stores that focus solely on mobile ordering. There are currently 42 Starbucks Pickup stores in the U.S., 16 of which are in California, Texas, and New York. This way, Starbucks can operate stores with less square footage.
Starbucks could do well to build the majority of new stores with little more than a countertop for pickup and a drive-through. If over 70% of customers are already ordering that way, and the number is sure to only go up from here, then building stores that cater specifically to that customer base could be a good idea.
Double-lane drive-throughs
If you've ever been to a Chick-fil-A in a big city, chances are you've seen the efficiency clinic that Chick-Fil-A puts on with its double-lane drive-throughs. With a simple menu and employees coming out and taking orders and payments early, Chick-Fil-A is known to routinely serve over 100 customers per hour during peak times -- an incredible accomplishment. And that's with a much weaker mobile ordering platform than Starbucks.
Can you imagine what Starbucks could do with a double-lane drive-through -- one lane for mobile orders and pickup and one without? Think about it -- customers who have already mobile ordered and paid just need to pick up their drinks. You don't need an ordering station or a payment station for that. Just a pickup station or a person who brings out the order would be fine too.
Meanwhile, the non-mobile ordering lane would probably be longer. Customers would probably grow tired of that process and just sign up for Starbucks Rewards and mobile ordering to save the trouble, which would be great for Starbucks because those are higher-quality customers. It's a snowball effect that could result in more sales, shorter lines, and more Rewards Members.
Incorporating double-lane drive-throughs could be a win for the customer and a win for Starbucks. As a frequent Starbucks customer living in Houston, I can tell you that there's usually a 10-car-plus line during peak hours and a full parking lot, leaving a customer few options but to wait. I see customers pull away all the time or just slow down, and then speed off. A lot of money is being left on the table. And Starbucks would do well to capture it.
Dividend Aristocrat by 2035
Starbucks is an underrated dividend stock because not only does it routinely raise its dividend, but the dividend doesn't use too much of its free cash flow or earnings. That leaves room to retain earnings and buy back its own stock.
Starbucks began paying a dividend in 2010. To its credit, it has raised that dividend every year from 2011 to 2021. If it keeps that streak going, Starbucks could become a Dividend Aristocrat by 2035. A Dividend Aristocrat is a member of the S&P 500 that has paid and raised its dividend for at least 25 consecutive years.
Starbucks is guiding for a payout ratio of around 50%, which is healthy. In October, it announced a goal to pay $20 billion in dividends and share repurchases over the next three years, which would be fiscal 2022 through fiscal 2024.
Given that Starbucks has set an aggressive three-year plan that supports the dividend and share repurchases, it would seem unlikely that the company's interim CEO or whoever takes the torch this fall would alter this strategy. However, investors would be wise to keep the importance of the dividend in mind. If Starbucks' new CEO pursues a more aggressive expansion strategy, it could leave less cash to support future dividend raises. If the strategy is more conservative in nature, it could mean larger dividend raises at the expense of slower growth.
Either way, I would guess that Starbucks does, in fact, become a Dividend Aristocrat by 2035 given the mature stage Starbucks' business is in right now and is expected to be headed over the next few decades, as well as existing management's commitment to supporting higher payouts.
Paying a stable and growing dividend makes Starbucks a legitimate source of passive income. It currently has a yield of 2.3%, which is the same yield as classic dividend stocks like Procter & Gamble or Johnson & Johnson. Yet Starbucks arguably has better growth potential than those companies.
Starbucks is a great buy now
Being the CEO of any company the size of Starbucks is no easy task. Normally, this uncertainty would be a red flag for a company. But with Starbucks, it's really more like a yellow flag if anything.
Starbucks has a lot of "layups" that are waiting to be taken. The tactics discussed are simple and relatively easy to execute for a company with the prowess of Starbucks. It isn't groundbreaking to suggest that Starbucks could build smaller stores that only do take-out orders. Or incorporate double-lane drive-throughs. However, these ideas could provide the catalyst needed for decades of growth.
Starbucks is already doing a lot of things well, such as releasing new food and drink items and seeing more customers combine food or bakery items with their drinks. The company has grown its Rewards Members faster than anyone could have expected and is recognizing the importance of grab-and-go ordering and drive-throughs.
In sum, Starbucks has a lot of strengths in place to ensure its success doesn't depend on having an all-star CEO.
