Starbucks Corporation (NASDAQ:SBUX) has come a long way from its 1992 initial public offering and market capitalization of $250 million. Now more than two decades after its IPO, Starbucks by that same measurement is worth $85 billion.
From 165 stores to over 24,000 stores, SBUX has led the way in food and beverages, and SBUX stock holders have enjoyed a return leaning up against 20,000%.
What Howard Schultz has built is a force to be reckoned with both at home and abroad. Currently, no one else has the lethal combination of scale, branding and technological savvy to compete at the same level.
All the while, SBUX has engendered goodwill with the community, managing to uphold a high standard of ethics.
SBUX’s Future Is Abroad
China, specifically. Starbucks China’s CEO, Belinda Wong, has stated, “In China in the coming five years we are definitely adding 10,000 plus new jobs every year. We open 500 stores a year and our goal is by 2021 … to have 5,000 stores.”
That means there is at least one store opening every day somewhere in China.
And against the following economic backdrop, there will be plenty of demand with ever-increasing purchasing power. And by 2022, around 75% of China’s urban population will be considered middle class. That’s some 550 million people! GDP Growth is forecast at 6%-7% through 2020, and the consumer economy will grow to $6.5 trillion by the end of the decade.
At the time of the announcement there were approximately 2,500 stores in China. SBUX intends to infill in the first and second tier cities (Beijing, Guangzhou, Shenzhen, Shanghai) while simultaneously pursuing higher end and a more curated experience in Reserve bars.
Further integrating into local Chinese life, SBUX added a social gifting feature on WeChat from Tencent Holdings Ltd (OTCMKTS:TCEHY), China’s leading mobile social communications service, earlier this year, a show of creativity and good business sense in that market.
This gifting feature allows SBUX to leverage Wechat’s 846 million global monthly active user accounts (as of Q3 of 2016), allowing customers to gift a frappacino with a few taps.
Per Capita
Right now, Starbucks stores per capita in the U.S. hovers around 41 (based on 319 million and 13,327 stores). Let’s do something drastic. Let’s cut that per capita figure in half to 20 and apply that to a conservative 1.3 billion population. How many theoretical Starbucks stores does that get us to? 26,000.
At half the U.S. penetration, SBUX still has room for another 20,000 stores … in China alone.
There’s still a long way to go. Lots of expansion opportunities based on conservative assumptions. And this is in a market with best in class ROIs.
China boasts great unit economics: For company-owned stores, we are looking at 30% year-one cash profit (29% in the U.S. and 28% in Japan) and 64% return on investment (61% in the U.S., and 55% in Japan). ROI here is defined as total pre-tax cash profit divided by total store investment.
A Digital Future
A discussion of the future for any company cannot avoid mention of technology. Here, SBUX takes the cake when pitted against retailers and food & beverage companies alike.
Starbucks offers the largest mobile ecosystem of any retailer in the world — 13.3 million Starbucks Rewards members and 8 million mobile paying customers (one out of three use Mobile Order & Pay). That’s a lot of engaged users, and the number keeps growing.
When it comes to anticipating customers’ wants and needs and making checkout easy, SBUX is king. Last year, it unveiled a new ordering system, called My Starbucks Barista, powered by artificial intelligence (AI). This upgrade will let customers place orders via voice command or messaging interface. They will continue in this vein to out-digitize competitors, while increasing the stickiness of customers.
Bottom Line on SBUX Stock
Time and time again, SBUX demonstrates its commitment to innovation from digital technology to tea beverages (this concept hasn’t taken off in the way management has hoped but the future is promising with a massive global tea market without a dominant player) to food to new store concepts.
As the company continues to tweak concepts and leverage its global supply chain, it will become harder and harder for competitors to catch up. The divide in footprint and growth will become increasingly wide.
Twenty years from now, you’ll look back with regret if you didn’t own it “back in the day.”
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
