Overseas Discussion: Starbucks' Business Strategy

With over 31k stores in 82 markets, hosting over 100 million customers every week; SBUX is steadily fitting into everyday routine of customers around the world, increasing its preference as well as loyalty.

Starbucks Corporation (NASDAQ:SBUX)

Founded in 1971, Seattle-based Starbucks Corporation operates over 31k stores across the globe, making it one of the largest fast food restaurant chains in the world. The globally renowned coffee restaurant operator made its public market debut in the year 1992 with around 140 outlets.

Late last month, Starbucks reported fourth quarter and full-year results for the period ended 29 September 2019. In the US, the coffee seller had delivered a 6% comparable store sales growth in the fourth quarter. In China, it achieved comparable store sales growth of 5% in the fourth quarter.

Full Year Results

In FY 2019, the company delivered a global comparable store sales growth of 5% over the previous year, primarily propelled by a 3% increase in average ticket and a 1% increase in comparable transactions.

In Americas and the US, the comparable store sales went up by 5%, while international comparable store sales increased by 3%, and China comparable store sales grew by 4%.

Consolidated net revenues of the company grew 7% to USD 26.5 billion over the prior year. When adjusted for unfavourable impacts of approximately 2% from streamline-driven activities and 1% from foreign currency translation, consolidated net revenues growth was reported at 10% year on year.

Net earnings attributable to Starbucks was USD 3.6 billion in FY 2019 compared to USD 4.51 billion in the previous year, down by 20.4%. In the previous year (FY 2018), the company had recorded gain resulting from acquisition of joint venture of approx. USD 1.38 billion.

Starbucks delivered shareholders return in the tune of USD 12 billion through share repurchases and dividends. On a GAAP basis, the earnings per share decreased 10% over the prior year. And, on a non-GAAP basis, the earnings per share increased 17%, including a favourable income tax rate impact of 7%.

Business Model Innovation

Re-Segmentation

During Q4, the company undertook restructuring of the operating segment to provide a better view of the streaming efforts. Moreover, the company augmented its international segment through the alignment of China/Asia Pacific segment and Europe, Middle East, and Africa segment with the international segment.

SBUX would continue to provide supplemental information of the US and China businesses in the quarterly earnings release, which are considered as growth markets by the company. Based on the area of operations, the company re-aligned Siren Retail with the Americas & International segments. Previously, Siren Retail was reported under the corporate & other segment.

The company has also altered the classification on certain costs that include the reclassification of store occupancy costs as store operating expenses from cost of sales in the company-operated stores.

It was also cited that these changes had no impact on consolidated revenues, operating income and earnings per share.

Growth at Scale Agenda

In Earnings Call, President & Chief Executive Officer – Mr Kevin Johnson spoke about the strategies in place to complement such results. The company, which has implemented a Global Coffee Alliance with Nestle, focusing on collective strategy for growth, has seen the roll out of three new platforms in more than thirty new markets during one year into the alliance. These platforms include Starbucks by Dolce Gusto, Starbucks by Nespresso, and Starbucks Roast and Ground coffees. The alliance is now planning to have fifty markets up and running by the end of first half of 2020.

Meanwhile, SBUX made an entry into the Chinese ‘at-home and food service segments’ via the alliance, allowing customers to enjoy the products at home; the partnership has accelerated the global accessibility of the brand in key markets.

In addition, the company has delivered the initiatives of the alliance in record time and well before the schedule. It also launched a new category in North America with the introduction of Starbucks Creamer's.

In the US, the company is improving the in-store experience, providing relevant beverage innovation, and pushing digital relationships.

The company has witnessed the positive impact of these efforts, resulting in traffic growth across all dayparts, strong correlation between Starbucks partner engagement and customer connection.

The company continues to drive beverage innovation with the introduction of new products. It has an initiative powered by artificial intelligence to enhance personalisation engine, optimise store labour allocation, and drive inventory management.

In China, the company has delivered growth through store development, extended digital customer engagement, along with a category leading innovation.

The company has successfully opened six-hundred net new stores in the country, and total footprint reached over 4,000 mark. Concurrently, it is investing in innovative retail formats with Starbucks Now store in Beijing.

Backed by encouraging results, the company plans to open more Starbucks Now stores in China during the fiscal 2020, and its reward program in the country is witnessing a solid increase in the active member base.

FY 2020 Guidance

In FY 2020, the company is expecting to deliver global comparable store sales growth of 3% to 4% on a non-GAAP basis. An addition of approximately two thousand net new stores is expected on a global basis. Further, the company expects to deliver;

• Consolidated revenue growth of 6% to 8% in GAAP terms.
• Modest improvement in consolidated operating margin in non-GAAP terms.
• Consolidated operating income growth of 8% to 10% in non-GAAP terms.
• GAAP EPS in the range of USD 2.84 to USD 2.89
• Capital expenditures of approximately USD 1.8 billion, and GAAP interest expense of approximately USD 415 to USD 425 million.

On 13 November 2019, SBUX last traded at USD 83.94, up by 0.74% relative to the previous close.

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