With U.S. store growth almost static, Starbucks wants more sales from areas that once received peripheral attention, such as new products, more foreign stores and Seattle's Best Coffee.
Starbucks is once again looking to grow, but this time will be different.
The coffee juggernaut is not aiming for seven new stores a day, a clip it reached three years ago after setting a goal of 30,000 stores worldwide. That dream died a year later and just over halfway there with sales and profits sliding before other retailers really felt the recession. The Seattle company has since closed nearly 900 stores and eliminated more than 34,000 jobs.
The new, slimmed-down Starbucks wants to expand in areas that historically took a back seat to its explosive U.S. growth and that can be tapped with less upfront investment. The new focus is on:
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• Expanding the number of foreign stores, which Starbucks often opens with business partners who share the cost and risk.
• Introducing new Starbucks products like Via instant coffee in grocery and convenience stores all over the world.
• Reinvigorating Seattle’s Best Coffee, a secondary brand that for years was an afterthought.
“We clearly hit a wall and didn’t do very well in the 2007/2008 time period,” Chief Financial Officer Troy Alstead said in a March interview after Starbucks’ annual meeting. “From here forward, when we grow Via, Seattle’s Best Coffee and consumer products, there’s less investment for each dollar of revenue.”
Although foreign stores gave Starbucks cachet, including 19 Facebook pages outside the U.S., they represent just a third of its 16,600 locations worldwide. Sales of bottled Frappuccino and other grocery items are a scant 8 percent of total revenue. And Seattle’s Best Coffee has been such a tiny player that it does not even report sales separately, although officials say it will soon.
Some wonder why Starbucks did not push those businesses in the past.
Investment research firm Morningstar raised its fair-value estimate for Starbucks $4 to $24 a share after seeing the new strategy.
“I’m surprised it wasn’t ramped up in earlier years,” said Morningstar analyst R.J. Hottovy. “Product innovations and international expansion not only make the business potentially more profitable, but defend them against competition.”
Starbucks’ foreign stores are not as profitable as those in the U.S., which could be one reason why it leaned on the lucrative U.S. market for so long.
Being stretched thin, with 5,500 foreign stores in 51 countries, eats up some of the money Starbucks saves by having business partners run more than half those stores. The chain still must oversee its far-flung locations and find ways to get them coffee, mugs and black sesame green tea Frappuccinos in the case of China, which CEO Howard Schultz has said will become Starbucks’ biggest foreign market.
Right now, the largest are the United Kingdom, Canada and Japan.
“There’s tremendous opportunity to go much deeper in our existing markets,” said John Culver, Starbucks’ president of international operations. “We have a very small share of the global coffee market, in the low single digits.”
The chain plans to add 100 new stores in the U.S. and 200 internationally this fiscal year, which ends in September.
For the most part, it will add stores in countries where it already has them, an efficient way to boost sales. Notable exceptions are markets such as India, which Starbucks has salivated over for years, and Vietnam, which Schultz recently said the company has its eye on.
Foreign stores present challenges, but they also create synergies, like the advent of green tea lattes in Japan that later made their way to the U.S. and other markets.
Culver wants to form new connections between international stores and Starbucks’ packaged products, such as bottled Frappuccino and the instant coffee Via.
The possibility of debuting in a country with packaged goods and following later with cafes, something Starbucks has never done before, is suddenly on the table.
“We’re thinking of markets in a holistic manner,” Culver said. “We want to provide a consistent experience for customers across all channels.”
Products are appearing in new countries almost monthly, a much faster pace than in the past.
Via arrived in the U.K. and Japan this spring, about the time a canned espresso drink called Doubleshot landed in the U.K., Hong Kong and as a test in Germany. And Discoveries, a popular chilled drink in Japanese and Korean convenience stores, recently appeared in the U.K. and test markets in Germany.
The new items are a boon to Darcy Willson-Rymer, the head of Starbucks’ stores in the U.K. and Ireland.
Besides allowing his almost 700 stores to draw on products developed off his budget, they are pretty nice for his family as well, which he said recently downed 15 cups of the new Discoveries drinks in a single weekend.
Willson-Rymer turned around Starbucks’ U.K. business during the past 18 months, in part by cutting costs and by finding uniquely local ways to please customers.
In addition to time-tested marmite and cheese paninis, U.K. menus now include a frothy drink called the flat white that was popular at independent cafes, and all espresso is now Fair Trade, a certification that carries a lot of weight in Europe.
The result: Almost a year of monthly boosts to same-store sales, an all-important gauge of retail health. “We were at 5 percent in the second quarter, and more people are coming into stores,” Willson-Rymer said. Starbucks’ overall same-store sales were 7 percent that quarter — its most recent — higher than they had been in four years.
Pumping up SBC
A third leg of Starbucks’ new growth strategy features Seattle’s Best Coffee, a chain of 129 cafes that it bought in 2003 and promptly ignored. Early last year, it had 550 locations, mostly in Borders bookstores.
Now Starbucks has put high-powered executive Michelle Gass at the wheel, and she expects Seattle’s Best Coffee to be sold in 30,000 locations by fall, more than half of them Subway and Burger King fast-food restaurants and AMC Entertainment movie theaters.
It’s a way to keep other fast-food chains from creating their own coffee programs like McDonald’s did, said Morningstar’s Hottovy. “At the same time, they don’t run the risk of impairing the Starbucks brand by partnering with a quick-serve restaurant.”
Starbucks turned McDonald’s away several years ago when it was starting to create an espresso program.
Seattle’s Best also recently added a vice president of franchise business development, and last week debuted a new logo.
It has become one of Starbucks’ billion-dollar hopefuls. After arriving in 1996, Gass helped propel Frappuccinos to $1 billion a year in sales (they eventually reached $2 billion), and now Starbucks says Seattle’s Best Coffee and Via instant coffee can get there, too.
Investors like the new plan. Annual capital spending will be half the $1 billion Starbucks once spent, and some of that extra cash is going toward a dividend, announced in March.
Shares now trade above $25 for the first time in more than two years.
“They were growing their store base extremely aggressively and were getting away with it,” said Dan Geiman, an analyst at McAdams Wright Ragen. “Now they’ve retrenched and found better opportunities elsewhere.”
Melissa Allison: 206-464-3312