"I left a comedy club one day and walked to the end of the block and there on one corner was a Starbucks, and across the street from that Starbucks, in the same exact building as that Starbucks there was-a Starbucks. And that my friends, is how the universe ends." -- Comedian Lewis Black
There has been no shortage of Starbucks (SBUX 0.05%) jokes over the years as the company rose from a little-known coffee chain in the early 1990's to a staple of American urban culture in less than decade. Along the way, Starbucks has been a transformative force, not just in coffee, but in the entire food service industry, as it essentially defined the concept of affordable luxury.
Now a multinational giant worth over $60 billion, Starbucks may seem like a mature company, but last week management announced a five-year plan that makes it clear that the coffee chain still sees itself as an engine of growth and innovation. Among its bolder ambitions are nearly doubling revenue to $30 billion, vastly expanding its beer and wine offerings, and launching a more upscale chain of stores called Starbucks Reserve.
Reaching $30 billion in revenue in fiscal year 2019 would make Starbucks the highest grossing restaurant company in the world based on today's numbers. McDonald's, now the world's biggest brought in $28.1 billion on the top line last year, and analysts are now expecting revenue to fall this year and next due to its current challenges, giving Starbucks the opportunity to surpass it.
The coffee chain saw its top line grow just 11% last year, but hitting $30 billion would require a compound annual growth rate of about 13% over the next five years, requiring new revenue streams. Let's take a look at how management plans to achieve this.
1. Starbucks Reserve
Last week, Starbucks opened its first Starbucks Reserve Roastery and Tasting Room in Seattle. The company describes the 15,000 square-foot space as "an interactive coffee and dining space that redefines delivery of an immersive brand experience." The new roastery will support the expansion of super-premium small-batch Starbucks Reserve coffee to 1,500 locations worldwide, and the company expects to open at least 100 Starbucks Reserve dedicated stores in the U.S. CEO Howard Schultz referred to the new Roastery as the "Willy Wonka of coffee."
An image of the new Roastery. Source: Starbucks website.
The move seems like a smart one as it will not only tap into the growing ranks of coffee connoisseurs, but will also give it the opportunity to add stores without cannibalizing existing stores as the Reserve brand offers a different experience. Going more upscale here also seems like a win for the brand as it offers Starbucks a chance to strengthen its reputation as a destination and an affordable indulgence.
2. Starbucks Evenings
Continuing with the upscale theme, Starbucks plans to expands its Starbucks Evenings experience, which offers customers beer, wine, and hors d'oeuvres, to 20%-25% of stores in the U.S. by 2019. Starbucks began testing the new nighttime menu in 2010 , and decided to expand the program earlier this year. COO Troy Alstead explained, "This is a program that works. As we bring the evening program to stores, there's meaningful increase in sales during that time of the day." Providing more options to customers is also a benefit of the evening menu, and it will help Starbucks leverage its occupancy expenses by lifting sales at a lower-traffic time of day.
In addition, Starbucks plans to double its U.S food revenue to $4 billion over the next five years as food sales should get a boost from the rollout of the evenings program.
3. Enhancing mobile ordering
Starbucks, a pioneer in mobile payments, is now the world leader with 8 million loyalty members and 7 million weekly mobile transactions. The company is now taking it a step further by launching "Mobile Order & Pay," which will allow customers to order in advance on their smartphone and pick up their order when they come in the store, improving speed of service and enhancing customer experience and loyalty.
Improving speed of service is a key component to driving store traffic during Starbucks' busiest hours, and allowing mobile ordering should help. It will also pave the way for the company's launch of delivery of food and beverage delivery in select cities later this year, and provide a potential platform for Starbucks' launching a payment network with partner retailers.
4. International expansion
Though the above initiatives primarily focus on the U.S. market, the java-slinger hasn't forgotten about its opportunities abroad. The company plans to double its store count in China by 2019, to over 3,000 stores, and believes its acquisition of Starbucks Japan, its second biggest market, will allow it to open new stores and grow sales by selling packaged goods such as ground coffee through grocery stores. The Asia region has the highest profit margin of Starbucks' three regions, and the company also expects its operating profit in packaged goods, another high-margin segment, to double in the next five years.
Despite these bold initiatives, there's no guarantee that Starbucks will hit its goal of $30 billion in sales in five years, but it doesn't need to reach that to be successful. Its plans for expansion and innovation should build sales and profits, and, just as importantly, they demonstrate Starbucks' ability to stay ahead of the curve. At a P/E of 30, Starbucks may seem pricey, but its likelihood of doubling profits over the next five years more than justifies that valuation. I'd expect more good things after 2019 as well.
