Please ensure Javascript is enabled for purposes of website accessibility

The Well-Placed Aggression of Starbucks Corporation

By Asit Sharma – Dec 6, 2015 at 4:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Starbucks CFO Scott Maw explains how and why the coffee giant is able to keep increasing its performance, even at its overwhelming size.

"Starbucks day" Image by flickr user rekre89 under Creative Commons license.

When a company reaches massive scale, how does it continue to expand? Search for the answer to this question in a finance textbook, and you'll probably find guidance that seems, well, academic -- an admonition to lift organic sales growth, or to supplement primary revenue with acquisitions.

But at the point where an ambitious multinational finally dominates its industry across the inhabited continents, simply maintaining market share can be a mountainous task -- as the Coca-Cola Company (KO 0.29%) can attest.

At the Morgan Stanley Global Consumer & Retail Brokers Conference held on Nov. 18, Starbucks Corporation (SBUX 2.77%) CFO Scott Maw offered a compelling explanation of how his organization has approached this problem:

I think it's really important to remind you we are playing the long game. We are a $20 billion company with an average ticket size of $5. We are growing the top line at 10% and the bottom line at, at least, 15%. And if you are going to do that on our great big network, we are going to have to think strategically and frankly aggressively about the types of investments that we make and the types of things that we drive from an innovation standpoint. 

Maw alludes to a process which other companies of comparable size should strive to replicate. The coffee retailer doesn't struggle with questions such as "How will we expand our sales?" or "If we invest $X million (or billion), will our top line increase?" 

That's because Starbucks has "aggressively" -- or, more accurately, relentlessly -- executed on several simultaneous revenue-generating priorities, with the idea that each area will eventually be ripe for profitable reinvestment.

This leaves the company in a position to roughly project what additional invested dollars will yield in terms of revenue, which is quite a different feat from detailing how many millions can be saved from a round of cost-cutting. This process happens within, as Maw reminds us, a corporation boasting $20 billion in annual turnover.

The clearest illustration I can cite is the company's digital ecosystem. At the conference, Maw described how at the end of fiscal 2104, quarterly comparable sales had drifted down to the 5% level -- the red zone of the company's 23 quarter global "comps" streak of at least 5% year-over-year growth.  

So management began to reinvest "earnestly" in its digital business and certain employee initiatives in January of this year. By the last quarter of the fiscal year (ended Sept. 27), the company had raised both its global and U.S. quarterly comps to 8%.

Starbucks did this by investing more in systems it had already pushed its capabilities to build. Especially in the U.S., the "My Starbucks" rewards program, enhanced with the 2015 launch of "Mobile Order & Pay," provides a direct point of frequent interaction with customers. You can think of Starbucks' wired -- both technologically and in terms of coffee consumption -- customers, as an army of purchasers, waiting to be directed by headquarters through incentives and marketing messages.

Is this analogy a bit hyperbolic? Indeed, channeling funds, technology, time, and management resources to build the "My Starbucks" mobile app system has led to a deep well of potential revenue enhancement, tapping into fervid customer demand.

Consider that since the completion of the Mobile Order & Pay U.S. launch in September, Starbucks is experiencing a run rate of 5 million transactions per month, a number that CEO Howard Schultz recently disclosed to be growing "by the hour."

 Well-placed, finely tuned aggression

A slide from CFO Scott Maw's Nov. 18 presentation, titled "Playing the Long Game: Uniquely Positioned at the Intersection of Physical and Digital."

When you sift through the various iterations of the company's priorities and investments over the past few years (which remain unchanged in the near term, helpfully laid out in the preceding graphic), Starbucks' approach to growth appears to be a three-stage process:

1. Identify true drivers of revenue, and by extension, earnings momentum.

2. Be quick to commit capital to these drivers, and execute energetically.

3. Once a return on investment is proven, make reinvestment a priority.

These steps may seem like the type of process every great company follows or should follow. But as a corporation evolves to global scale, identifying what I've called "true drivers of revenue," and not simply red herrings, becomes exceptionally difficult. And risking profits to keep pouring money in these priorities, especially when setbacks occur, also proves a high hurdle that many management teams are unable or unwilling to clear.

Starbucks' management team somehow stays above the muddle and enlarges the company's "great big network" with zeal. It does so using a clear-headed, thoughtful, approach, but one that's also underlined by fine-tuned, purposeful aggression.

Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. The Motley Fool recommends Coca-Cola. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.