Starbucks Corporation (SBUX) is up 200% over the last 5 years … that’s pretty darn impressive growth for company that sells coffee.
However, year to date, Starbucks stock is off roughly 9%. These two numbers tell an interesting story of the ups and downs of this pioneering company and its current state.
SBUX has always been a significant growth story. Its expansion from a local Seattle coffee shop to over 22,000 stores around the world in the last decade and a half is quite a compelling story.
But at some point, the world becomes saturated. That’s why Starbucks has been so successful adapting its stores to deliver more than just coffee to its customers. Quality food, accessories, even music have made stores more than a quick stop on many customers’ daily routine.
But SBUX stock has hit a couple headwinds in recent quarters, even as same-store sales — the lifeblood of a retail business — continue to rise.
First, the global slowdown has hurt sales in overseas markets. Also, weak growth has been exacerbated by the fact that the U.S. dollar is strong, which means sales, once converted back to dollars, make its global franchise more of a drag than a tailwind.
SBUX Stock and the ‘Third Wave’ of Coffee
Second, the new ‘Third Wave’ of coffee is starting to hit and that means a new level of competition for Starbucks. This new wave has doubled down on the more esoteric aspects of the coffee experience. Now, you just don’t drink a Sumatra Mandheling coffee from Malaysia. You buy those beans from a single estate. And you don’t hot brew it; you cold brew it.
Cold brew has been around for a long time, but the Japanese were the ones who made it cool, with massively intricate cold brew machines.
Basically, you soak ground coffee in cold water for up to 24 hours and then heat the elixir (or drink it cold) to serve. The concept is, pouring hot water on ground coffee releases the coffee, but it also releases the bean’s acid. Cold brewing gets all of the coffee flavor without engaging the acid.
While this sounds like a very niche market, it isn’t as niche as you would believe. Plus, the margins on this are high.
If SBUX doesn’t have enough to deal with, competition from this sector has a real shot at eating into its upscale business.
That’s why SBUX has launched its new Nitro Cold Brew line just this week. Starbucks cold brew will have a limited release in a handful of big U.S. cities, but will eventually rollout across the stores in the U.S. and abroad. To one up the cold brew crowd, SBUX is also adding nitrogen to its brew to add a new depth to the experience.
Considering the way summer has descended on much of the country, iced coffees are in high demand, and the new Nitro line is built to slake the thirst of those growing numbers of iced customers.
Essentially, if you’re looking for a solid company with a history and reputation for being opportunistic and creative, SBUX is a very good choice. And given its current price, it’s a rare opportunity to pick it up at a discount.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
