Starbucks Is Expanding Against the Grain

by Jeff Reeves | December 1, 2011 12:24 pm

Starbucks SBUXStarbucks Corp. (NASDAQ:SBUX[1]) is the world’s largest coffee-shop operator and is no stranger to aggressive growth. In fact, one of the biggest knocks on the company in prior years was that it grew too fast — resulting in the closure of 600 Starbucks shops in the U.S. and 12,000 layoffs in 2008, followed by 300 more store closures and 7,000 layoffs about a year later.

But it appears Starbucks is back in growth mode. The company just announced plans to add 200 more drive-through stores across the U.K. in an expansion that will create 5,000 jobs. It currently owns just nine drive-through locations there, but some 700 other U.K. outlets.

Why would Starbucks fall in love with a European market when the rest of the world appears to be fleeing that region as fast as possible? Simple: If it doesn’t, it won’t find any way to grow significantly.

Packaged coffee sales, Starbucks-branded ice cream[2] at supermarkets and new specialty drinks can only do so much. For a company with more than $11 billion in revenue, there has to be more in the pipeline.

International growth appears to be the strategy for Starbucks, much as it is for other restaurant stocks like McDonald’s (NYSE:MCD[3]) and Yum! Brands (NYSE:YUM[4]) stores like Pizza Hut and Taco Bell.

Consider this: After the layoffs and store closures in recent years, Starbucks now gets more than 20% of its sales from outside the U.S. It has more than 6,000 international locations — a number that always is growing and soon could approach the 10,900 cafes in America. Last year, SBUX announced it will open more than 1,000 new outlets in China alone by 2015.

It’s ironic that Starbucks is relying so heavily on expansion after overly aggressive growth is what caused investors so much trouble previously. The stock went from a high of $38 per share to a little over $8 less than three years later in the wake of the financial crisis. That’s a gut-wrenching loss of nearly 80%.

Now shares are above $40 and hovering around a new all-time high.

Part of that growth, of course, was due to more than just expansion. Guru Howard Schultz returned to the helm of the company as CEO in 2008 and streamlined operations. The launch of its Via line of instant coffee[5] in 2009 also was a mammoth success and gave the company a revenue jolt.

But international expansion is a huge part of the Starbucks strategy. Investors should just hope the company has learned lessons from its previous mistakes and doesn’t bite off more than it can chew.

Jeff Reeves[6] is the editor of Write him at[7], follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.

  1. SBUX:
  2. Starbucks-branded ice cream:
  3. MCD:
  4. YUM:
  5. Via line of instant coffee:
  6. Jeff Reeves:

Source URL:
Short URL: