In part two of our interview with Starbucks (NASDAQ:SBUX) CEO Jim Donald, The Motley Fool's Rick Munarriz and Mac Greer talk to the Starbucks CEO about licensed locations, cannibalization, competition, booze, and socially responsible investing.
Rick Munarriz : Starbucks has now licensed a number of stores in bookstores, airports, and other locations. We recently heard several stories about poor service, particularly in some of these franchise stores. What measures are in place to ensure quality at licensed locations as opposed to company-owned locations?
Jim Donald: We look at a licensed store like we do a company-owned store. We have the same service metrics that we put in place for our licensing stores. I want to be clear, too, that you understand that none of these licensing stores are franchisees. They are partnerships with [companies] such as Target (NYSE:TGT), Safeway (NYSE:SWY), and Host Marriott, but we have the same kind of infrastructure that supports them in regards to supervising ... training, and immersing them into our culture.
While you say that there have been a lot of stories on service in the licensed stores that haven't been favorable, I can give you hundreds of stories on licensing that are favorable. But some of those same issues we have, both favorable and unfavorable, at company-owned [stores], and each time we get one, we react to it right away.
RM: What is the level of Starbucks' corporate involvement with these licensed stores, and how does that compare with the Starbucks-owned and -operated stores?
JD: Well, we have a head of U.S. stores -- company-owned. His name is Jim Allen. In that infrastructure is another individual who runs the licensing stores completely separately from the company-owned [stores], so we dedicate a full staff of people to work with that joint-venture partner such as Albertson's (NYSE:ABS) or Safeway that I mentioned. We work hand-in-hand with their senior management to make sure that the store growth is where it should be, that the sales are flowing, that the profits are flowing, and the service is as expected.
RM: At what point -- in the U.S. at least, I know you had mentioned that you were looking at 10,000 and now possibly 15,000 units -- do you think that expansion will start to cannibalize sales?
JD: That is an interesting question. I couldn't tell you the point when we reach that, if ever, but I can tell you that what is driving this is customers and partners telling us that there are more locations available. I just had a meeting in Seattle with over 2,000 partners and I said, hey, if we are not in your neighborhood and you think we should be, send me an email. I can't tell you how many emails I got. That surprised me, that there are so many more opportunities out there that we didn't even know existed.
Mac Greer: Let's talk about those opportunities. How does Starbucks evaluate the potential of a market? Is it one store per X number of people, or do you just look at heavily trafficked locations? How does that process work?
JD: Well, if you look at what the QSR industry does -- that is, quick-serve restaurants -- they actually look at a headcount-per-store ratio. We don't do that. If we did, we wouldn't have almost 400 stores in the Washington state area. What we look at is the financial metrics of a store and how well it is doing to see [whether] there could be another store that we could put within X miles of that location that wouldn't cannibalize it. We look at where the growth is coming from. We look at if there are other coffee houses there. We look at the going-home side of the street, the going-to-work side of the street. All these things. [There are] many components that make up where we want to put a store.
MG: Jim, we know that Starbucks is constantly opening new stores, but I am curious -- how many locations has Starbucks had to close?
JD: We have closed a few, but it is very few and far between. Usually, Mac, when we close a store, it is usually a relocation; we are going to take a store that is not a drive-thru and maybe make it a drive-thru.
MG: Let's talk a little more about the drive-thru locations and your plans to extend those store hours. How much later will those stores be open, and what are your plans for the more drive-thru locations?
JD: Well, two questions. First of all, the plans for drive-thru locations. We have said [they will be] 30 to 40% of our new stores going forward. We have over 850 in North America that will be drive-thrus.
The store hours are an interesting component of our business. We have extended store hours because partners have told us there is business potential out there and customers have requested this. It is not something that we are taking a broad-scale approach to in every store in the U.S. or North America. We are doing it on what our partners and customers tell us is an as-needed basis. For example, the store in my neighborhood, University Village, recently went 24 hours. The reason is that our college students in that store said [they] need a place to go to study after midnight and before six. Well, I was in that store two weeks ago at three in the morning, and it was almost full of students drinking coffee with their laptops flipped open.
MG: So those hours will vary market to market, then?
JD: Market to market. It is up to the individual regions that run those areas to make those decisions.
MG: And Jim, who do you see as your primary competitor?
JD: Well, Mac ... let's just talk the U.S. We pour about 7% of the coffee consumed, so you could say that everybody that is pouring coffee is a competitor, but we like to think that in the specialty-coffee segment, which is where we would like to see all that coffee shipped over, competitors are by regions. They are independents, and they can be large chains that are getting into that business.
MG: And talking a little about the stock, Starbucks has a solid reputation for being a socially responsible company, and yet recently Pax World Funds decided to exclude shares of Starbucks from its socially responsible mutual fund. How do you feel about that?
JD: Well, I didn't get a chance, unfortunately, to talk to Pax, but I think they had in their mission statement or their by-laws a policy that says [that] regardless of how socially responsible their investments are, if a company gets into the liqueur business, they would have to pull out. We respect their decision. I will say also that we are very excited about partnering with Jim Beam [a division of Fortune Brands (NYSE:FO)] because, like us, they are socially responsible as well.
MG: Thanks, Jim.
JD: Thank you, guys. I appreciate it.
Longtime Fool contributor Rick Munarriz is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Mac Greer is producer of The Motley Fool Radio Show . The Fool has a disclosure policy .
