Starbucks’ financial year-end is October, and while we do not obsess over short-term results, they do provide us with the opportunity to assess the progress of the company. Read more about why we bought Starbucks.
The Starbucks Brand
The Starbucks brand is the fastest growing brand in the food sector of the world’s Top 100 Global Brands over the last five years. From 2012 to 2016, the value of the Starbucks brand increased at a CAGR of 26% over five years.
Starbucks Brand Value (2006-2016)
The company is focused on increasing brand value over time. Starbucks has the stated objective to “maintain Starbucks standing as one of the most recognised and respected brands in the world.”
However, the brand value did hit an all-time low in 2009 at the height of the financial crisis and Howard Schultz, the Starbucks founder, had to return as CEO of the company in 2008 and close stores.
Continued store expansion
Since the recession of 2009, Starbucks brand value increased. Starbucks has continued increasing the number of stores in both developed and developing markets. Developed markets currently dominate earnings and as of the Year Ending October 2016 the Americas delivered 69% of revenue. China/Asia Pacific (CAP) provided 14% of revenue, EMEA (5%), Channel Development (9%) and All Other Segments (3%).
Starbucks serves 91 million customers per week through 25 000 stores in 75 countries.
China is a key growth market for Starbucks, where a new store is opened every day, a cadence that is like to continue for years to come.
The customer’s experience of Starbucks will define how they value the Starbucks brand. The Starbucks experience relies on 1. quality coffee, tea and related products, 2. complementary food and snack offerings, 3. superior customer service, 4. delivered in clean and well-maintained stores that reflect the personalities of the communities in which they operate
Starbucks’ objective is to create a memorable and differentiated experience for customers, the “third place” between home and work.
Premium Roastery Brand
After stepping down as CEO in April 2017, Howard Schultz (Starbucks Founder & long-time Chief Executive) will focus on developing the Starbucks ultra-premium brand (Starbucks Reserve) and build a number of iconic Roasteries around the world. The first Roastery was opened in Seattle in 2014. It is a 20 000 square foot premium coffee and food experience.
Starbucks will open a new Roastery in the old Milan post office building at the end of 2018. In 1983 the Milan coffee culture so inspired Howard Schultz that he decided to create a variation of the experience it in the US. This Roastery will be larger than the Seattle store.
There is also a 30 000 square foot Roastery is planned for Nanjing Road in Shanghai in China in December 2017. Nanjing Road is China’s busiest and most iconic shopping street. Starbucks intends to open 20 – 30 ultra premium Roasteries around the world at additional iconic locations.
Roughly 1000 Starbucks Reserve stores, a new class of store bringing elements of the premium Roastery experience to millions of people, will support the ultra premium Roasteries.
This insight implies that Starbucks, like many other premium brands, can satisfy humanity’s insatiable desires for more premium experiences.
While beverages (74% of revenue) dominate Starbucks retail locations menu, Starbucks is extending the selection to include quality food and snacks. Starbucks has also extended the beverage menu with the introduction of premium tea with the Teavana brand.
Starbucks is a good example of a company that respects its people as well as profit. It has provided stock options, comprehensive health insurance, free college tuition and looks to make a social impact as well as a profit.
Technology & Innovation
Starbucks has created a mobile ecosystem including ordering, loyalty, rewards and content. Social gifting on “WeChat”, the dominant chat a platform in China, is being piloted in China and early signs are encouraging. Starbucks is committed to making more use of technology to enhance the Starbucks experience, and the new CEO Kevin R. Johnson is a seasoned technology executive. Starbucks understands the importance of being relevant in store and on the mobile device.
Starbucks is a leader in mobile ordering; claiming 25% of orders are placed outside stores in North America. “Order-ahead” traffic will grow rapidly.
Starbucks has been challenged by the rapid uptake in mobile ordering which has resulted in some stores being overwhelmed. Multiple new stations will be created in stores to speed the pick-up experience.
Impact of key initiatives
While we make no prediction regarding the impact of these initiatives, Starbucks has identified a number of markets and strategies that have the potential to enhance the brand over time and grow the number of customers and spend per customers.
Long-term investor return, however, does not depend on rapid customer growth. Maintaining the current customer base and increasing efficiencies through technology innovation creates the potential for greater profitability.
At AXIAM, we buy shares in companies, regardless of their geography, that have great brands that are known, loved and used by people around the world daily. We will continue to watch Starbucks to validate the brands continued relevance and look for ideal buying opportunities when prices decline. Sign up to our newsletter or follow us on Twitter to learn more about investment in the best global brands or contact our fund management team to invest.