30 Jul Caffé Bitte – Starbucks
Having just returned from Europe Silvia & I can tell you that we frequented Starbucks quite regularly. Many of you may think might think ugh, why Starbucks, given that it “crashed & burned” in Australia and that we like our espresso brewed coffee from our local coffee shop, rather than the chain store variety. Makes me think how far we have come from when I used to turn up at work to have my cup of International Roast !! Sometimes however the best companies are right before our eyes. Starbucks is one company that is held within the Magellan Global Fund.
Unfortunately in Europe we found that the average French & German Cafes didn’t exactly make coffee to our requirements and we could get (well I could with a double shot) a coffee that was at least passable in a Starbucks. On top of this clean shops, free Wi-Fi & toilet facilities are a traveller’s boon. You know exactly what to expect when you enter a Starbucks shop anywhere in the world – just like a McDonalds experience.
What makes Starbucks however a high quality business beyond its scale and locational advantages, is that it positioned itself as a “third place”. It is not work nor home but somewhere else that you can hang out, have access to Wi-Fi, the “barista” (well someone who makes your coffee) knows your coffee order, there is consistent product and service provided in a convenient location. That positioning almost as a place of refuge from the outside world has resonated with the consumer particularly, in mega-cities where public space is scarce. It is a big part of the reason why Starbucks serves over 100m people each week. We found that every Starbucks store that we went into was well patronized in France, Germany & Denmark & that many people were sitting there sipping coffee & punching things out on their IPad or Laptop.
Another reason why the company is resilient is that coffee is habitual and addictive. Starbucks has been clever by inserting themselves via convenience and consistency into people’s daily lives which gives them considerable competitive advantages over their peers. However, Starbucks is not just a quality business, it is also a growth story which is taking place in 3 ways.
- Growth in the US – Even though many investors see the US business as mature, there remains material store expansion opportunities particularly in the middle and south of the country, where they are significant under-penetrated. Also Starbucks memberships are still growing at double digits in the US. This is important because Starbucks members spend twice as much as the average consumer. Starbucks also recently introduced a food menu, which is similar to what McDonald’s did with their breakfast menu in Australia. It gives the customer a reason to visit stores multiple times per day & also doubles the average bill (i.e. think of a coffee plus a muffin) which utilises the store footprint better. Finally, the company has implemented mobile “order and pay” that has improved store throughput because customers can order ahead of time. Both of these developments, the food menu and mobile pay, has delivered material operational efficiencies to Starbuck’s US stores – this has seen Starbucks just report 7% increase year on year in comparable store sales –which is a great result. Added to this Starbucks has just announced in the US a further partnership with Uber Eats & that it will take an equity stake in Brightloom, a restaurant technology company previously called Eatsa. As part of the deal, Brightloom will license Starbucks’ mobile and loyalty technology to use in its existing platform. With this upgraded platform, Brightloom aims to offer restaurant brands an all-in-one option for mobile, payments, order management, loyalty, and other functions.
- Channel development – Starbucks has partnered with companies like PepsiCo and Keurig to produce packaged coffee drinks. This area is growing at double digit rates however, the recent Nestle deal was a significant win. In May 2018, Nestle bought exclusive rights to distribute Starbucks coffee globally outside Starbucks stores for ~$7.15B USD. This as an opportunistic deal considering that per capita consumption of coffee is growing globally and Nestle is the largest supplier of retail coffee products worldwide (think about the strength of their Nespresso business). While Starbucks packaged coffee / pod business has been very successful in the US, it doesn’t have a large international presence. Nestle by comparison has a very strong international distribution system with a presence in 190 countries and it also owns Nespresso, the most popular home coffee system. Under the alliance Nestle will sell Starbucks packaged coffee through its operations, which offers a significant global expansion opportunity to Starbucks. We saw this also throughout Europe where you were able to buy pre-packaged Starbucks drinks in supermarkets & 7 Elevens.
- China – represents an enormous store opportunity. Over the past twenty years, Starbucks has built a very strong brand in China. If you simply focus on demographics alone, the Chinese middle class is expected to double over the next four years from ~300m to ~600m people. Putting that into context, that is adding the entirety of the US population to China’s middle class within a few years. Furthermore, the average Chinese citizen consumes less than one cup of coffee per year versus +300 cups per year in the US.
Starbucks currently has one store per 500K people in China. If you just look at the middle class alone and assume that not everyone in China can afford a premium coffee product, there is one store per 100K people. Compare this to the US where there is only one store per 20K people! Even if there is no increase in urbanisation or wealth effect in China, there is the opportunity for Starbucks to support > 15% growth p.a. in their store network. And with the huge growth expected in the middle class, the ratio of one Starbucks store per 100K people will be the same in ten years’ time despite 15% growth in store rollout. So the rising middle class will likely drive coffee consumption growth and future demand for Starbucks. Also store economics are very favourable in China too. Starbucks enjoys a ~85% pre-tax cash return on every store that they open within the first year!
And you might ask yourself, do the Chinese even drink coffee? Well membership engagement in the China is double that of the US and Chinese members are actively using mobile order and pay. Over 60% of orders take place on Alipay or WeChat so it is a very strong business for Starbucks.
So we can see that whilst Australia represented a very poor place for Starbucks and other coffee chains, internationally there is still a large acceptance of their product offering through their “Bricks & Clicks’ model.
Please note that these are my own general personal thoughts (Richie Parsons) and do not necessarily represent those of my licencee LWP Financial Pty Ltd T/As Blueprint Advisor Group, nor do they represent any form of personal financial advice.