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Starbucks Gives Shopify an Early Birthday Present

Online retail continues to shine for SHOP stock during the pandemic

Starbucks (NASDAQ:SBUX) announced June 10 that it is closing 400 stores in the U.S. and Canada as part of its plan to transition to “convenience-led formats” that reflect changes in the way consumers are shopping during the novel coronavirus pandemic. For Shopify (NYSE:SHOP), this is a significant win. If you own SHOP stock, you can expect more gains in the months and years ahead. 

shopify stock
Source: Jirapong Manustrong / Shutterstock.com

A story appeared in Bloomberg Businessweek recently that illustrates the power of online retail. 

According to the June 9 article, Kraft Heinz (NASDAQ:KHC) opened an online store in the U.K. to get some of its consumer staples to people unable to buy from traditional grocery stores due to supply chain issues. It was the company’s first online store in its 151-year history. So successful was the store that Heinz added more products. 

A Win for Shopify

Who supplied the e-commerce store? Why, Shopify, of course.

“Shopify’s scale has meant an entire industry has sprung up around the company – smaller tech companies selling tools and templates that enhance a shopper’s experience. One, for example, has developed an app that automatically converts prices into the local currency of the person browsing, increasing the chance of a purchase,” Bloomberg reported.  

“Shopify, in turn, has visibility across all its merchants on what’s trending and which themes and apps lead to sales – a treasure trove of data that helps small businesses boost their online odds.”

Some might question whether online retail continues to capture market share once a vaccine has been found, and the world can congregate en masse again. I don’t. The writing was on the wall long before Covid-19.

In 2015, online retail worldwide accounted for 7.4% of global retail sales. In 2020, it’s expected to be 16.1%, perhaps even more given the phenomenal push that’s been happening during the pandemic. By 2023, estimates suggest e-commerce will have a 22% market share. 

While it’s true that a lot can happen between now and then to slow e-commerce revenue growth, it’s equally valid that the growth could be much higher than projected. I have my suspicions it will be the latter. 

And so does Starbucks.

Starbucks Sees the Writing on the Wall

The best thing about Starbucks’ rewards program from a corporate intelligence standpoint is that it’s provided the company with lots of data points, both before and during Covid-19.

“While Starbucks locations have long served as a ‘third place’ where people could meet and relax, customers in recent years have been placing more and more orders for takeout, perhaps due to the company’s recent focus on mobile ordering. The company estimates that 80 percent of its orders at company-owned stores in the U.S. are to-go,” reported Slate contributor Aaron Mak. 

Not only have the needs of Starbucks customers changed in recent years, but the so-called “third place” environment of its stores has diminished as its real estate became quasi-offices for business people and students.

Why pay for square footage when you can generate similar revenue from a much smaller footprint?

I can remember living in Vancouver (Starbucks’ second home) in the mid-1990s and there were two locations across an intersection from each other. Today, given the changing buying patterns of its customers, one of those locations could be eliminated and a much smaller pickup store opened in its place nearby. 

By reducing the number of stores with seating, it will create a scarcity mentality, much like apparel retailers have utilized over the years to create pent-up demand. Perhaps the Starbucks sit-down locations will become special again? I can’t say, but what I do know is that it is paying for a lot of real estate it doesn’t need. 

How This Translates to SHOP Stock

If I’m a retailer such as Lululemon (NASDAQ:LULU), I’m watching what’s happening at Starbucks with a close eye. Currently, LULU has 491 brick-and-mortar locations. In 2019, they generated 62.9% of its $4.0 billion in total revenue

Meanwhile, its e-commerce revenue accounted for 28.6% of sales, growing by 35% year over year, to $1.1 billion. But more importantly, it generated 38.8% of its segmented income from operations.

Sure, omnichannel retail still matters, but if I’m Lululemon, do I want to sacrifice its specialness just to open a few hundred more stores? I don’t think so. 

The same thought should be going through the heads of retailers of all sizes at this point. Scarcity sells. Even when it comes to real estate, less is better will become the new mantra.

If you own Shopify stock, this possibility ought to please you.

Early on in this article, I mentioned Shopify’s scale. That scale has become attractive to companies of all sizes, not just the mom-and-pop shops upon which Shopify built its reputation. 

Will it be dominating e-commerce in 20 years? I think Starbucks’ latest move confirms it. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/starbucks-gives-shopify-shop-stock-an-early-birthday-present/.

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