SWOT Analysis: Starbucks Corp.

Iason Dalavagas | January 11, 2016

Business prospects at Starbucks Corp. (SBUX) are bright. The company finished fiscal 2015 (ended
September 27th) with strong results. Sales during the fourth quarter jumped 18% from a year earlier,
driven by strong same-store sales growth, along with ongoing store expansion. The top-line advance is
driving good profitability, despite elevated expenses related to ongoing expansion efforts and costs
related to enhancing the restaurant outfit’s already stellar digital and mobile platforms. However,
competition remains fierce, as traditional competitors, as well as new entrants to the industry, continue to
make headway. Nevertheless, the stock price has been rising at a fairly consistent rate over the past few
years.
The question investors should ask is whether the company will be able to keep the good times rolling, and
continue to post good earnings and boost the share price. Another question is whether the stock is a good
long-term play. We will address these issues by performing an easy-to-follow SWOT analysis of the
company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.
The Business
Starbucks is one of the premier roasters, marketers, and retailers of specialty coffee in the world. The
company purchases and roasts high-quality coffees that it sells, along with teas, other beverages, and a
variety of fresh food items. It also sells its coffees and teas through licensed stores, grocery, and
foodservice accounts. Aside from the Starbucks Coffee brand, the company also sells goods and services
under the following labels: Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La
Boulange, andEthos. As of September 27, 2015, the company operated 23,043 stores in 68 countries,
with 53% of the total being company-operated units. Starbucks believes in global responsibility, and tries
to ethically source high-quality coffee, while reducing its environmental impact, and contributes positively
to the communities in which it does business. It employed 238,000 people worldwide at the end of fiscal
2015. The company was formed in 1985 and is based in Seattle, Washington. Its stock trades on the
NASDAQ exchange.
The company has four reportable operating segments: Americas, which includes the U.S., Canada, and
Latin America (69% of 2015 revenues); China/Asia Pacific (13%); Europe, Middle East, and Africa (6%);
and Channel Development (9%). A non-reportable segment, All Other Segments, which includes some of
the aforementioned brands and some developing businesses, account for the remaining 3% of
revenues.
Strengths
Strong Brand: Starbucks is a well-recognized brand throughout much of the world, and likely the most
recognizable brand in the coffeehouse business. The Starbucks logo is easily identifiable, and attracts
both new and repeat customers. Stores are typically in the most prime locations around the globe, with
high traffic and visibility. As we mentioned above, the company has a wide geographic presence, with
locations in 68 countries. Its strong market position, diversified products, and brand recognition has
allowed the company to have a leg up on most competitors, and has given it the opportunity to further
expand its business.
Starbucks Experience: Not only does the company offer premium, high-quality coffees, but it also
provides the customer with the “Starbucks Experience”. This includes excellent customer service, clean
and well-maintained stores that offer a comfortable setting, good music, a warm atmosphere, and free
wireless Internet access in the U.S. and certain international markets. These factors have built a high
degree of customer loyalty, which has helped to drive same-store sales and earnings over the years. The
company also has an extensive customer loyalty program, in which consumers can earn loyalty points
with each purchase that can be redeemed for free products. Its new Mobile Order and Pay program,
allows customers to place orders in advance for pick-up at certain participating locations in the U.S., has
been a hit with younger consumers who don’t want to wait on line. This technology has been boosting
sales nicely, as it also suggests food and beverage combinations to enrolled customers.
Weaknesses
Dependence on the Americas Segment: As we mentioned above, 69% of total revenues were generated
in the Americas region, primarily in the United States. While growth in the U.S. has been strong of late,
there is a risk to the business when the American economy begins to slow. Since Starbucks is dependent
on consumer discretionary spending, its results are sensitive to changes in macroeconomic conditions. As
a result, when the U.S. economy does inevitably begin to slow, softer results on the home front may not
be able to be offset by gains in other geographic regions. The company will likely continue to expand and
diversify its business in order to help alleviate some of these concerns.
Slow Expansion in Europe: As we mentioned earlier, the Europe, Middle East, and Africa segment only
contributed 6% to revenues in fiscal 2015. This may be a bit surprising to some, as European customers
in particular have comparable wealth to those in North America, and the continent has a wide subset of
the population with high levels of disposable income. Sales to China/Asia Pacific are more than double
that of Europe. Part of the problem may be the coffee culture in Europe. Coffee drinkers in Italy or France,
for example, may not take Starbucks seriously as a seller of coffee, just as they may not take American
wines as seriously as French or Italian wines. The American cultural habit of sitting in a Starbucks may
also not be as appealing to a European who wants to sit at a nice, local coffee shop. The negative image
of a large American corporation selling coffee has likely turned some Europeans away.
Opportunities
International Expansion: While we just mentioned the difficulties of growing the business in Europe, this
also presents an opportunity. While the American market is mature, and becomes increasingly saturated,
causing cannibalization in some markets here, Europe offers a large, fairly untapped market with a big
percentage of consumers who have good disposable income. Management will need to try other options
to grow in this prosperous continent. The company can also continue to expand into emerging markets,
as rising incomes there should fuel demand for premium coffee. It can leverage its size, experience, and
financial strength to immediately gain new market share in several countries that don’t already have
Starbucks. It is already growing rapidly in China and Japan, and it could expand in other Asian countries
as well. Management wants to double its store count in the China/Asia region over the next 5 years, to
around 10,000. Expansion plans could include new beverage and/or food concepts, as the company
continues to be active on the acquisition front.
Consumer Packaged Goods: Starbucks has been branching out from its retail operations in order to boost
profitability. Consumer packaged goods, including coffee beans and branded single-serve coffee pods
used by home-brewing machines, including K-Cup portion packs used in the popular Green
Mountain (GMCR)Keurig machines, offer an exciting opportunity. Starbucks is already the number one
premium coffee brand in the K-Cup category, and it hopes to further expand its market share in the
coming quarters. Packaged coffee, teas, and ready-to-drink products can leverage the Starbucks brand to
add business.
Threats
Competition: The specialty coffee business remains highly competitive with respect to price, quality,
service, and convenience. In the U.S., large companies in the quick-service restaurant sector have been
increasing efforts to sell high-quality specialty coffee beverages. McDonald’s (MCD – Free McDonald’s
Stock Report) has been making a big push into the coffee business in recent quarters, and this could
become a big challenge for SBUX. Another major competitor is Dunkin’ Brands Group (DNKN), which
has been in the coffee business for a long time. This company has long had a strong presence in the
eastern portion of the U.S, and is expanding in the western part of the country. Starbucks also has
competition from smaller, local, mom-and-pop specialty coffee shops around the globe that may offer a
more intimate setting. The market for packaged coffee, tea, single-serve packs, and ready-to-drink
beverages has been heating up, as well.
Coffee Price Volatility: Starbucks, along with its major competitors, typically uses more expensive Arabica
beans rather than the cheaper Robusta beans used in supermarket brands and instant coffee. The prices
of these beans are typically very volatile. While management generally locks in prices using contracts, it
still can lose money if prices don’t move as anticipated. Since the beverage category, primarily coffee,
made up 58% of Starbucks’ 2015 revenues, even small, unfavorable changes in coffee prices can have a
big impact on results.
Conclusion
Starbucks continues to lead the way in the specialty coffee business. The company finished fiscal 2015
with strong results, driven by impressive same-store sales growth in both the U.S. and abroad. Aside from
its core coffee products, the company has been seeing good results from newer products,
like Teavanateas. We also think its Mobile Order and Pay initiative will support growth. While costs remain
elevated, owing to ongoing expansion plans and investments in leading-edge technologies, particularly for
its mobile payment/digital platform, we still look for good earnings gains in the coming quarters, driven by
robust demand and higher food sales.
For these reasons, we think the stock is attractive for many investors, particularly those who are more risk
averse, given that the shares have a high Safety rank and strong Financial Strength score. While the
stock is up roughly 40% compared to a year ago, we believe it still has room to grow. We also think the
equity should appeal to longer-term accounts, thanks to the possibility of significant growth in emerging
markets, most notably China. Subscribers interested in learning more about Starbucks should check out
our full-page report in The Value Line Investment Survey.