Starbucks Corporation (NASDAQ:SBUX) is in the news. It has announced expansion plans all the way in Malaysia as it implements a price increase in the US. It is also expanding its food offerings while trying to appease the health conscious by putting up calorie information on its menu boards. Investors may be wondering where all this is heading.
The answer is quite simple; the company is generating more earnings power. When a stock trades with a P/E ratio of 33, it is not easy to keep up the pace of earnings growth. So, Starbucks Corporation (NASDAQ:SBUX) is planning ahead to keep its growth trajectory strong. Let us dissect some its recent moves.
Expansion in Asia
The rising middle class population, improving economic conditions and low coffee consumption levels in Asia are attracting Starbucks like a magnet. It is sensing a huge opportunity in tapping these markets.
Given that the company has adequate means and resources to explore these opportunities, there is nothing to stop it from getting things in motion. Since 2010, Starbucks Corporation (NASDAQ:SBUX) has generated around 33% more sales from the China and Asia-Pacific markets and is poised for more growth over the coming years.
The population of middle class residents in China is roughly equal to the entire population of the US at over 300 million. Now, Starbucks has built over 11,100 cafes in the US and was still able to derive comps growth of 7% in its second quarter. It generated around $10.5 billion in revenue from its 7,000 company owned stores in 2012 according to Bloomberg data. So, even if it builds half the number of US stores in China we are talking about billions of dollars of sales opportunity.
Starbucks intends to evolve China as its second largest market after the US by end of next year, and will have around 1,500 stores in the country by 2015. Now if we add India to this equation, where the chain arrived only last year and has just 12 stores, the prospects become bizarre.
And the growth opportunities go beyond China and India. By the end of this year, Starbucks Corporation (NASDAQ:SBUX) will have 1,000 stores in Japan and 500 in Korea. In South-east Asia, it is looking to add 100 more stores in Indonesia, Philippines, and Malaysia each.
If ever Starbucks needs a role model for orchestrating its Asia expansion, there is one company that fits the bill and that is Yum! Brands, Inc. (NYSE:YUM). The company’s success story in China is almost legendary in the food world. China accounted for around 51% of Yum!’s total sales in 2012, while the US produced around half of it.
Even after 4,250 KFCs and 850 Pizza Huts, Yum! is contemplating adding another 700 more KFCs in the country this year. What makes it work for Yum! is its ability to offer just the right balance of signature items and local dishes to keep its customers happy. It has applied a similar formula in India and is looking to have 500 restaurants there by 2015. Leveraging this experience it is fast adding new markets like Mongolia, and Myanmar is next on the cards.
Price increase in the US
Starbucks Corporation (NASDAQ:SBUX) has hiked its average prices by 1% in the US for brewed coffee, tea, lattes, and espresso drinks. This is the first hike in about 18 to 24 months and will affect less than one-third of beverage offerings. Although the hike is small and selective, given that we are talking about the core US operations, this translates into big dollars for the company.
This comes at a time where coffee prices are falling and the company is likely to save around half of its 2012 coffee costs of $1.4 billion. Although Starbucks has sited rising costs of rents, utilities, and other inputs like milk and sugar for the increase, most of the incremental dollars are likely to flow into the bottom-line.
Starbucks has been pushing price increases strategically over the past 20 years or so without denting its popularity. So, as far as investors are concerned, this looks like a good opportunity for getting some extra earnings momentum.
However, there is one factor that warrants a mention, and that is Dunkin Donuts, the flagship chain of Dunkin Brands Group Inc (NASDAQ:DNKN). Dunkin Donuts, which is often known as the poor man’s Starbucks Corporation (NASDAQ:SBUX), has recently made it clear that, with beverages accounting for 57% of its sales, it is going to focus more on coffee.
The chain is going through a makeover phase and has started offering more Starbucks Corporation (NASDAQ:SBUX)-like ambiance. It has also undertaken a big domestic expansion plan where it will increase its store count to 15,000 over the next two decades. So, Dunkin is likely to be more of a threat to Starbucks than it has been in the past. Starbucks will need to factor this in all its present and future pricing decisions.
Increasing food offerings
Food is not just a big opportunity for Starbucks Corporation (NASDAQ:SBUX), it is also its strategy to defend its market share from the likes of McDonald’s Corporation (NYSE:MCD) and Burger King Worldwide Inc (NYSE:BKW), who are rapidly increasing their coffee and other beverage offerings.
The company has recently introduced new salad and sandwich items and pre-packed lunch boxes that are becoming quite popular. It will be introducing new pastries from its recently acquired La Boulange bakery.
Currently, food accounts for 19% of sales mix and one-third of all transactions, and Starbucks is aiming to push this up to around half. This will be quite an opportunity as it will improve the company’s penetration in afternoon and evening day times. It can also divert customers from fast food joints like Yum!, McDonald’s Corporation (NYSE:MCD) and Burger King Worldwide Inc (NYSE:BKW).
Last word
All of Starbucks Corporation (NASDAQ:SBUX)’ strategic initiatives, from its global expansion to price increase to expanding its food menu, tell the story of excellent growth potential. The company justifies its premium valuation through its bright future prospects and investors would continue to see upsides with this stock.
The article What Is This Coffee Giant up to Now? originally appeared on Fool.com and is written by Eshna De.
Eshna De has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks Corporation (NASDAQ:SBUX). Eshna is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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