Starbucks SBUX Frappucinos Could Heat Up Summer Profits (MCD, BKC, YUM)

by Jeff Reeves | April 29, 2010 6:18 am

Seattle coffee icon Starbucks (SBUX[1]) has been on the resurgence in 2010 after consumers fled during the Great Recession. In order to keep the profits percolating, SBUX stock is looking to roll out a fresh new menu of Frappucinos and iced coffee for the hot summer months.

Growth is crucial for SBUX stock now after it has weathered the worst of the economic downturn. Notable achievements over the past few months include:

But despite these strides, SBUX stock is still down about 33% from its 2006 peak at about $40 a share. And the coffee marketplace has become increasingly crowded in the intervening years, so returning to its lofty perch as the coffee queen is no easy task.

For instance, McDonald’s (MCD[3]) has seen runaway success with its gourmet McCafe offerings at a lower price point – so much so that other fast-food joints like Burger King (BKC[4]) getting into the premium coffee game. In a few months, Burger King will begin partnering with Starbucks on a coffee line.[5] That’s to say nothing of privately held Dunkin’ Donuts and its Coolata iced coffees and a host of others.

Menu reinventions are nothing new for restaurant stocks looking for a quick boost to profits. Burger King is rolling out a brunch menu[6] in test markets right now as a way to try and tap into early morning sales via mimosas and fancy breakfast cibatta sandwiches. And with Ronald McDonald facing a layoff[7] amid childhood obesity finger-pointing, MCD stock has made a concerted effort to go healthy in the last year or so with oatmeal for breakfast and apple slices in its Happy Meals. And if you want a true menu about-face, look at how Yum! Brands (YUM[8]) reinvented Taco Bell in India with potato and paneer burritos, among other offerings.[9]

So SBUX is probably due to reinvent its trademark Frappuccino — a drink created by Starbucks 15 years ago by mixing a frappe and a cappuccino. Experts estimate the drinks make up 20% of sales at SBUX locations.

Starbucks thinks it can increase that share even more by offering customization of Frappucinos for customers, including soy milk or an extra shot of espresso. There are also interesting new flavor combinations including the weird and exotic. Though it sounds a bit odd, many Asia markets now sell a Red Bean Frappuccino and Black Sesame Frappuccinos are being introduced in China this summer.

Then there’s the out-of-store changes for the summer. These SBUX offerings include  bottled Vanilla Frappuccino Light, a drink you can buy in your local convenience store instead of making a trip to your local Starbucks. Or two Frappuccino-flavored ice creams: Starbucks Vanilla Bean Frappuccino and Starbucks Strawberries and Crème Frappuccino, both of which will be available in national grocery chains this summer.

This is an ambitious seasonal focus for Starbucks, but the real question for investors is whether this summer menu will work. Starbucks just released higher-than-expected earnings last week and is clearly hoping to keep things up with summer drink sales. Its $217.3 million in profits, or 28 EPS on revenue of $2.13 billion for its fiscal second quarter of 2010, could just be the starting point of another big run for shares if the summer goes well.

But if its Frappucinos fall flat, SBUX could find investor confidence melting like a scoop of coffee-flavored ice cream left out in the hot summer sun.

As of this writing, Jeff Reeves did not own positions in any of the stocks mentioned here.

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  1. SBUX:
  2. dividend to SBUX stock owners.:
  3. MCD:
  4. BKC:
  5. Burger King will begin partnering with Starbucks on a coffee line.:
  6. . Burger King is rolling out a brunch menu:
  7. Ronald McDonald facing a layoff:
  8. YUM:
  9. potato and paneer burritos, among other offerings.:
  10. Tell us what you think here.:
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