A few weeks ago, I argued that Starbucks (SBUX 0.65%) has decades of growth ahead. While the java giant has become nearly ubiquitous in some parts of the U.S., in the future it could be many times its current size.
Starbucks held its biannual investor day on Dec. 4, and executives provided more detail on some of the company's opportunities for the next five years. The key takeaway was that Starbucks has numerous major growth levers that add up to enormous long-term growth potential.
Growing the store footprint
Adding new stores is still Starbucks' most important growth lever in the near term. Starbucks ended fiscal 2014 with more than 21,000 cafes worldwide. It expects that total to reach 30,000 by the end of fiscal 2019.
Starbucks plans to add nearly 9,000 stores to its global footprint in the next five years. Photo: The Motley Fool.
Well over half of the new stores will open outside the U.S., with the China-Asia Pacific region being the biggest growth driver. Starbucks operates more than 4,600 stores in the region, and it plans to double that number in the next half-decade.
That said, there is still plenty of room for domestic expansion. Chief Strategy Officer Matthew Ryan pointed out that Starbucks has vastly more cafes per capita in Seattle than in other cities, including large markets such as New York and Boston. This suggests Starbucks could add many locations across the U.S. before fully saturating the market.
In addition to adding regular locations, Starbucks also plans to open more than 100 "Starbucks Reserve" cafes, featuring super-premium small-batch coffees. To support these stores, the company recently opened the first "Starbucks Reserve Roastery and Tasting Room" in Seattle, where customers can watch the process of roasting Starbucks Reserve coffee.
Boosting sales in existing cafes
Another major growth opportunity is increasing sales within Starbucks' existing cafes. One way to do that is by adding new drinks to attract more customers. For example, Starbucks began selling Teavana-branded tea beverages in its stores this year. Tea sales quickly jumped from 8% to 10% of Starbucks U.S. retail sales.
A more significant growth opportunity is food sales. Starbucks hopes to double U.S. food revenue in the next five years. For the morning, the company has improved the quality of its bakery items thanks to its acquisition of La Boulange bakery. Recently, it has been making a big push behind breakfast sandwiches.
Starbucks sees big potential to boost its sales of lunch items. Photo: The Motley Fool.
Starbucks is also investing in better lunch options. This is a big opportunity, as Starbucks currently does 46% of its sales in the morning, compared to an average of 15% for the U.S. quick-service restaurant industry. It is not as busy as most restaurants at lunchtime, so Starbucks will target people who want to grab something quickly.
Additionally, Starbucks is finally ready to roll out its "Starbucks Evenings" program more widely, after running pilots in multiple cities for the past few years. By 2019, Starbucks plans to sell beer, wine, and small plates after 4 p.m. in 20%-25% of its U.S. stores. It has estimated the incremental sales opportunity at more than $1 billion.
Lastly, Starbucks' "Mobile Order & Pay" functionality -- which recently launched in Portland, Ore., ahead of a nationwide rollout in 2015 -- will enable the company to dramatically boost store productivity. Reducing the amount of time needed to ring up up orders will free baristas to spend more time making drinks. That will get lines moving faster, ultimately leading to higher sales.
Starbucks also plans to introduce delivery in some markets in late 2015. In some large office buildings, Starbucks will offer "green apron delivery," in which Starbucks baristas will work in dedicated prep areas in the building and personally deliver drinks to customers.
Contracted delivery will probably be more common, though. Starbucks will work with third-party delivery services that will pick up orders from existing Starbucks cafes. Both delivery options will be tied into the Starbucks app's Mobile Order & Pay functionality.
Growing beyond Starbucks cafes
Another set of growth opportunities comes from diversifying beyond Starbucks cafes. Teavana represents one potentially enormous growth driver. The global tea market is even bigger than the coffee market, so the sky is the limit for this business.
Teavana represents a big long-term growth opportunity for Starbucks. Photo: The Motley Fool.
In the past, Teavana stores have focused on selling loose-leaf tea, but Starbucks is adding "tea bars" that offer a variety of innovative tea-based beverages. Starbucks CEO Howard Schultz has a clear vision to turn Teavana into the Starbucks of tea. If it can create a hit new product like the Frappuccino, Teavana will be well on the way to achieving that goal.
Another big growth driver is Starbucks' foray into consumer packaged goods. At Starbucks' 2012 investor day, Jeff Hansberry -- then the president of Starbucks Channel Development and Emerging Brands -- outlined a goal of growing that segment to eventually rival the retail store business in size and profitability.
Starbucks focused on more modest goals for the CPG business this time around. This can probably be attributed to the fact that its growth rate has slowed dramatically in the past two years. There are still pockets of strong growth, though: Starbucks' K-Cup sales rose 34% in fiscal 2014.
Starbucks K-Cup sales soared 34% in fiscal 2014. Photo: The Motley Fool.
In total, Starbucks plans to boost sales in its channel development segment by 60% over the next five years. The biggest opportunities are outside the U.S., particularly in ready-to-drink coffee.
Starbucks executives noted that the U.S. represents just 15% of the global packaged coffee market and 10% of the global ready-to-drink coffee market. Yet Starbucks gets 83% of its consumer packaged goods system sales in the U.S. (For comparison, the U.S. only represents 60% of Starbucks retail system sales.)
So many ways to grow
Starbucks expects to grow annual revenue from less than $16.5 billion last year to $30 billion by 2019. This growth will be powered by a multitude of billion-dollar and multibillion-dollar opportunities. These include new domestic stores, new international stores, increased food sales, the broader rollout of Starbucks Evenings, productivity gains from Mobile Order & Pay and delivery, expanding Teavana, and improving international CPG sales.
From a shareholder perspective, this is great news. Since Starbucks has numerous different ways to grow, investors can rest easy knowing that even if one or two growth initiatives don't live up to expectations, there are plenty of ways for the coffee slinger to pick up the slack.
