Starbucks Corporation (SBUX)
Barclays Americas Select Franchise Conference Call
May 22, 2013 2:30 AM ET
Troy Alstead – CFO and Chief Administrative Officer
JoAnn DeGrande – VP, IR
Jeffrey Bernstein – Barclays
Good morning everyone. Thank you all for joining us this morning and I should say good evening to those in the States who are about to go to bed. Thank you for joining us for today at our Americas Select Conference here at Barclays. My name is Jeff Bernstein. I am the restaurant analyst from Barclays based at New York. I have the pleasure of kicking things off this morning introducing our next presenting company at the conference, Starbucks Corporation.
For those not familiar, it’s less possible they are what we believe is one of the leading global growth stories across, not just restaurants, but broader retail with an industry-leading US retail coffee platform and significant international growth opportunities led by China as one of the many courses outside of the US. And then developing consumer products segment which management believes will one day rival the worldwide retail platform.
So a pretty large opportunity from a consumer products standpoint. With that said, joining us today to share details on the story, we have Troy Alstead, who is the CFO and CAO and JoAnn DeGrande who is the Director of Investor Relations. Troy will kick it off with some prepared remarks, background on the story and towards the end if there is any extra time, we will open it up for Q&A. So hopefully people will join us from that component, but with that, it’s our pleasure to introduce Starbucks and Troy Alstead.
Thank you, Jeff. Thanks for joining me at this early hour everyone. I appreciate the chance to be here with you. I’ll spend some time with some prepared remarks and then as Jeff mentioned I look forward to taking whatever questions you might have at that point of time and Jeff introduced JoAnn DeGrande also she is here to help with any questions. She is our Vice President of Investor Relations and will help.
Now, by way of just brief background for those of you who I don’t know. I’ve been with Starbucks for more than twenty years now. I joined the company when it was a privately held small coffee company in Seattle, Washington.
The big aspiration of the company at that point in time was to consider opening coffee shops as far away as California, which at that point in time that seemed like a long stretch and the company, there was lot of skeptics about whether the concept will work in a warm weather environment.
So we’ve clearly come a long way in that span of time. Over my twenty years with the company, I’ve been in the finance functions really all over the world and then at few occasions have stepped out of finance into general management roles.
Many years ago, on an interim basis I ran our EMEA operations headquartered out of Amsterdam. I had Latin America reporting to me. I’ve been to Japan at different times and I’ve been the Chief Operating Officer of our business in China for a period of time.
So I’ve had the opportunity over that span of time in addition to my finance roles to really understand the business at quite some depth and I am looking forward to spending some time providing an overview of that before you, for those of you are little less familiar with the story.
We have over the forty years of the company of Starbucks over our history have built a portfolio of brands and recently have added into that portfolio of brands. But I would point out that the activities of the company, the brands and even some of the recent acquisitions we’ve done in that, many initiatives that we have going on in the company are all the way closely focused around the core of the coffee and tea experience.
The heritage of the company is in coffee and tea and all of our activities really circle very closely around coffee and tea and the experiences associated with the coffee house.
We are in 62 countries now globally. We have almost 19,000 stores around the world and what’s important and increasingly an important part of the company’s strategy beyond the expansion of our store base which is the originally the roots of the company is an increasing presence in channel development.
Channel development is the part of our business that really includes everything outside of the Starbucks store, food service, CPG, vending in places, anything that happens outside of that core Starbucks store experience is in our channel development business. I will come back to that shortly, but it’s a key critical strategy as we continue to grow around the world.
The roots of the company are in the coffee shops, the Starbucks store. It really is that store that has allowed us over time to introduce customers to our products to the experiences of Starbucks by that daily habit and ritual and the store is a key driver of revenue and profitability and great capital returns to the company.
The stores also play the critical role in creating a platform to introduce our products to customers and what we have learned over time as we’ve grown from being more than just that Starbucks store around the world to really being a global consumer brand in a category coffee and tea that people interact with.
In so many places in their lives in a coffee shop, in your home in the morning, at a hotel, in the office, on your way to work, at a restaurant, the core products offerings that we have are such a integral part of peoples’ lives that the stores give us the chance to introduce what Starbucks is about to the customer and then leverage that outside of the store into other channels down the grocery aisle, in restaurants, on airplanes, anywhere and everywhere someone may want to look for a cup of coffee.
We have a chance increasingly over time to be a part of that experience. The store also provides the opportunity to provide that engagement and increasingly we are leveraging and deepening that customer interaction with the Barista into the digital channels.
We’ll come back to that shortly. But our loyalty, our digital presence, social media, all have allowed us to really fuel and expand our relationship with the customer very powerfully, very effectively for us.
The history of the company is deeply rooted in ethical sourcing of our coffee and our community involvement. By definition, a coffee shop, anybody’s but certainly Starbucks is a part of community.
It’s part of neighborhood and then what has happened organically, over our long 40 year history is that our stores have often become that launching pad for our store partners. And so we call our employees are partners in our company to be deeply engaged in our community.
As a company, we have a target of having a million hours, million services hours into our local communities by 2015 and we are well on a path to that kind of level of community involvement, volunteer activity in our communities that ranges from all kinds of areas of cleaning up parks to working with food banks, working with shelters around the world and wherever communities we operate.
Our coffee and the quality of our coffee and our engagement with the farming communities are also always been critically important to us. We’ve had longstanding relationships with organizations such as conservation of national, such as fair trade and many others all around ensuring high quality coffee and the sustainability of coffee. And the health and sustainability and responsibility that we hold to our farming communities around the world. It’s just part of our responsibility; we take it very seriously and are extremely active in around the world.
And environmental sustainability it has always been a core pillar and platform of the company. As an example, all new stores, Starbucks stores that are built are LEED certified. One of many areas where we believe we can have a critical impact as we continue to grow from here.
Now, in addition to that, the commitment to our communities and to our growing regions around the world, we are also deeply committed to provide a healthy and growing financial returns to our shareholders. And through really a balanced combination of driving top-line growth and delivering margin expansion and earnings growth faster than driving the top-line.
We had a sustainable target as many of you know of driving revenue growth greater than 10%. We’ve delivered against that for a number of years and expect to deliver against that 10 plus percent revenue growth again this current fiscal year. And at the same time, driving improvements in margins. We expect about 100 basis points of operating margin expansion in this current fiscal year.
That combination of the strong growth in the top-line and margin expansion has allowed us to consistently deliver earnings growth in the 15% to 20% range which has been our long-term target and where we sustainably and consistently for a number of years delivered our earnings per share targets for the current fiscal year and our fiscal year ends at the end of September in a range of $2.12 to $2.18, that’s compared to last year’s $1.79, that’s growth of 18% to 22% EPS growth.
So, very much at the top end of our target range is where we expect to deliver earnings growth in this current fiscal year.
Now let me walk you through each of our four operating units around the world briefly and give you some highlights on each of them. Certainly with the Americas, clearly our largest business unit we have the core of which is our US business. This region is the engine of growth and profitability in the company. It’s still dominates our overall revenue mix in the company.
It’s a almost $10 billion business a year ago and in this current fiscal year, the Americas will be well over a $10 billion business for us. High profit and as large as the Americas is and as large as the US business is for us. We continue to drive revenue growth through new store additions, profitable, steady, sustainable growth of new stores across the US in this whole region and increasing its focus on driving same-store sales.
We’ll come back to volumes per store here shortly, but average unit volumes in the US today are at an all-time high of $1.2 million per store per year and that’s growing while we are also elevating margins through revenue growth, but also through heavy focus on the efficiency of our operations through applying lean principles within our stores, labor deployments, waste management, all the many activities that as we continue to grow.
We continue to seek out a multitude of initiatives that allow us to lever a very mature business into increasing levels of profitability. Beyond just the core US business which is a big dominant part of this Americas region we have been in Canada for a long time. We have about a 1000 stores in Canada and are increasingly recognizing that we have a much bigger opportunity in Canada than we perhaps have exploited even though over the last five to ten years.
So with the new management in Canada over the past year, we really re-architecting and developing our growth plans for that part of the Americas region and believe we have a tremendous opportunity for additional store growth, revenue growth and increased profitability out of Canada.
And then, Latin America for us is newer, but high growth, high margin, it’s a part of the world we are very excited about. Today the biggest part of Latin America for us is Mexico, which we operate through a fully licensed partnership, very profitable and a good healthy marketplace for us.
And then newer in opportunities such as Brazil where we have perhaps only 50 stores today, but see the opportunity overtime to grow with the great economics, a very large business in Brazil and through the rest of Latin America.
Europe, Middle East and Africa have been a much tougher part of the world for us. The biggest part of that world is here in the UK. Much of our challenges in this part of the world, frankly are of our own doing that digs back many, many years ago, where we had a flawed strategy and chased some real estate nascent decisions that we should not have made here.
The focus of the past two years with the team here in the UK and in our European headquarters has been to really restructure and reposition our business in Europe. And that restructuring has included closing stores that were unprofitable that frankly we should not have opened in the first place many years ago.
It has included re-licensing parts of the region. For example, Ireland used to be a company-operated market for Starbucks. We’ve never able to make money in Ireland; it’s not large enough for us to be able to deploy our capital and our infrastructure into driving that marketplace forward.
A year ago, we sold that to a licensee and now it’s profitable for them and it’s profitable for us. It’s a reflection of our strategy of being much more thoughtful about where we deploy the company-owned capital to get the returns we need and to be effective and be able to leverage our infrastructure in the right and appropriate ways.
Even within the UK, we’ve done some licensing of some stores at some venues where it’s more sensible because somebody else who is far more capable to operate in that location operate in that location.
And I don’t like the strategy we have applied historically in the US, but have not approached it quite right here over the years. So we are in the process of working our view through that. We’ve done a great deal of cost restructuring both in the G&A organization here in the UK and in Europe in our supply chain, we historically had a very unwieldy, high cost ineffective distribution system in the UK.
We spent about a year-and-a-half, almost two years turning that upside down and re-initiating that and a consolidated distribution model which is already much more effective and by itself we expect to add about 200 basis points to gross margins over the next two years.
And then, beyond the cost work, significant consumer facing initiatives, really learning from the success we’ve had in the US dating back to 2008 and 2009 when we really drove a significant improvement in our US business, we focused on things like customer satisfaction and stores, cleanliness of stores. How the customers measure our service levels.
We’ve remodeled the stores. Freshened up the stores. We have more of those to do. We’ve begun to introduce our loyalty program into the UK and in the sub-markets on the continent.
All of these initiatives are newer here in the US. We are optimistic that each of them over time will be able to help us move this region in the right direction. With all that said, we are beginning to see the early signs of improvements here. We have long ways to go. We think it will be several years of a progression forward.
But I wouldn’t anticipate every year including 2013 and then each year forward for us to improve margin slowly into the double-digits here in Europe with an ultimate target somewhere in the mid to upper teens.
Now, we have confidence in that path, even though it will take some time, because we have pockets of our business here in the UK and countries around Europe, they are equally high cost structured. They are already operating at that kind of margin level. We know we have a model that can work effectively. We just have to reposition the business to get to that place.
I would contrast that with China Asia-Pacific which is our fastest growing geographic region anywhere in the world and also the highest margin geographic region we have anywhere in the world with margins sustainably above 30% and with the growth we are driving all across the region but really dominated by China, driving revenue growth of greater than 20% fairly consistently.
Our oldest market and our largest market today in this region is Japan, which is a highly profitable, fairly stable, moderately growing and sustainably steadily growing business for us, both in terms of store count, but also the other channels outside of the Starbucks store.
Rapidly growing in China, which the before long will become our second largest market anywhere in the world. A powerful unit economics and we’ve got a long runway we believe it’s a very profitable, high capital return and growth to navigate in China.
All the way to some of our newer markets, such as India, which we just opened a few months back and Vietnam, which we just opened a month or two ago, tremendous growth opportunities and a very healthy economic model across its regions. We are very excited about.
Now, the core of all those geographies, before I move outside of the Starbucks store are the economics of the store. We will open about 1300 new stores globally this year, split relatively evenly between the Americas and China Asia-Pacific with very few stores in Europe and our European growth will be predominantly licensed as we go forward.
Globally, about half of our stores roughly are company-operated and the other half are licensed. And I would anticipate over time that split of ownership, while very moderately based on region and geography and venue to being reasonably in that 50:50 split as we go forward.
Now for most of our history, the Starbuck store was really what defines our company. It was – that the early parts of the business long before, we really realized there was much of an opportunity. And for most of our history, our aspiration really was around that Starbucks store.
It was about being a premium operator of coffee shops all around the world. And in our history, usually when we spoke about what the opportunity was at some point in time, it was always centered around how many stores we might have. What has happened to us over time is that the customer has pulled us out of the store into other parts of their life.
And that’s opened up for us opportunities to drive consumption at home to look for opportunities where people consumer the coffee anywhere and that has led to our opportunity to take our various products and categories, leverage them into other form factors and pursue increasing market share outside of the Starbucks store. All of that activity is what falls into our channel development business. Channel development is a relatively newer strategy for us.
We have been in some of the CPG channels for a number of years, but really only in the last three to four years have we begun to concentrate on developing a deep capability in this space and real strategic direction to at some point in time drive channel development.
Our business outside of the store, closer to the size ultimately think of what our store business can represent for us over the very long-term. It’s a high margin business for us. Margins in the mid 20s now.
It will add about 100 basis points to 150 basis points of margin improvement this year largely aided by commodity costs which have been easy and progress this margin structure we believe closer to the upper 20s and at some point in time in the not too distant future of closer to 30%.
It is the business that is predominantly driving things like at home consumption with single serve, or large and more mature packaged coffee business and also large in the mature food service business.
Most of these numbers today are concentrated in the Americas and largely concentrated in the US. Over time and it’s beginning now, the real opportunity is to begin to mature these channels progressively into other regions around the world.
Our strategy generally is to build out the brand and the consumer awareness as a whole proposition of Starbucks using the Starbucks store first and then once we reach some tipping point and that brand awareness and that understanding of what Starbucks is all about, then we begin to stretch and leverage that into the channels outside of the Starbucks store.
For example, we’ve been in China for 13 or 14 years now since the late 90s. We are just getting closer to the point where we believe that marketplace is ready for us to really begin to pursue product launches and opportunities outside of the Starbucks store using things such as our ready to drink beverages as an example.
Now, historically, most of our growth has been organic and I would fully anticipate that we will always be predominantly a organically growing company. But we have recently added in some tuck-in, relatively small acquisitions which are really about leveraging some opportunities much more meaningfully than we felt we could really achieve organically.
One example of that is La Boulange, a small acquisition that we did in San Francisco which deepens our capabilities around food. Food is approximately 19% of the sales mix of Starbucks store globally, it’s also about 19% in the US with a range of low teens in some markets to upper 20s, even north of 30% share of that store sales in some markets around the world.
And with that said, food has always been the category where we have disappointed our customers the most and where we’ve had the most opportunity to drive more volumes both as an attachment to an existing transaction and also ultimately as we convince the customers that we have a more appealing food program, we believe food can be a more meaningful traffic driver for us, particularly in the US, around those afternoon dayparts.
We know that food is a more meaningful decision factor for a customer in the afternoon which is a slower kind of our business in the US than it is in the morning. A tremendous opportunity for us to innovate and elevate that food program.
La Boulange, in the very early days of our testing is elevating that both in terms of how customers rate our food program, but also how much they are buying and that’s we are seeing some very early signs here.
All the way to tea on the other side, which we believe can be a meaningful contributor to incremental growth in the years ahead. The original name of Starbucks was Starbucks Coffee Tea and Spices.
Tea has been the core of our business for more than 40 years. It’s the second most consumed beverage in the world, only second to water and yet in Starbucks it’s kind of these low single-digit share of our overall sales.
It has never been a focus of ours and nor have we ever put the kind of energy into that or had the capabilities in tea that we’ve historically provided within coffee. We are excited about the acquisition of Teavana which allows us both to rollout the contemporary tea house first in the US and more meaningfully around the world ultimately.
But also then to bring those capabilities around tea back into the Starbucks stores, we really use tea as a complementary beverage to that experience within Starbucks with innovation around beverages, day part kinds of innovations food pairings and ways that we’ve never approached historically. That is all beginning now and over the next one and two and three years, we would anticipate tea being a unique driver of revenue and profitability in the company.
The umbrella overall of that for us has been a very powerful movement into all things digital and that ranges everywhere from paid digital advertising to the mobile app which is the fastest growing mobile for payments in the US all the way to the Starbucks card which has been around for 10 years in our business as a transaction tool, but more recently has become the tool by which our loyalty program sits on top of.
About a third of our transactions are now prepaid, a third of our transactions of $13 billion revenue company are prepaid by virtue of the Starbucks card in either the physical card format or the mobile app and that’s increasingly giving us not only a connection and engagement to the customer but also a sustainability, a stickiness to that transaction that we believe has allowed us to have more stability.
What has been particularly in the US a bit of a choppy environment evidenced by I think another – others in the space out there. Ours has been a much more stable kind of revenue and comp growth driven by many things but we also believe heavily contributed by our loyalty program and the fact that people have the money loaded on their card. They are much less likely to pass by a Starbucks store if they are preloaded with the money on the card.
Social media, unpaid for us it has been a very authentic way for us to reach our customers. Starbucks has never been a big advertising company. But social media and peoples’ ability to really engage with their friends around their experiences at Starbucks allows us to reach them in a very authentic, more genuine ways that resonates with our demographic very powerfully.
Now we have the fortune of having a business that is very high cash flow on a routine basis that allowed us with cash from operations to fund all the appropriate investments back into the business, new stores, and renovations, investments in manufacturing and systems and technology over time.
And it’s also allowed us to increasingly to then return cash to shareholders. We initiated a dividend about three years ago. We are committed to growing the dividend both as earnings growth and also the payout ratio we payout today at about between a 35% to 40% target ratio. I would fully anticipate overtime elevating that. We believe we have a cash flow that enables us to payout a higher ratio than that.
We’ve been a moderate repurchaser of our shares. I would expect us to continue to be a moderate repurchaser of shares as time progresses. Our targets as I hit a few of them earlier for fiscal 2013, are very consistent with our long-term targets and all the investments we’ve made and that I described in our business into those next layers of growth drivers in food, in tea, the loyalty program, what we can do with mobile payments.
All of that together, we believe gives us the ability to be confident in driving 10% or greater revenue growth sustainably for about it’s brought forward in our planning as we can see driven by comp store sales in that mid single-digit range both in the US, our biggest market and also globally.
And then, through the margin expansion driving earnings growth consistently in that 15% to 20% range. Again, this current year being closer to the top end of that range is what we expect. And then we are heavily focused on return on capital as a company.
We’ve progressed return on capital into the low 20s and on a pace of improving ROIC every year to reach above 25% here within the next couple of years and we sustainably believe we have an opportunity to sustain that and grow that further.
With that, I will pause in my prepared remarks and Jeff we’d love to open up to whatever questions we might have.
Great. Thank you. So I would love to open it up to any questions in the room otherwise I have questions of my own, but…
So, food as I mentioned earlier, today it’s about 19% of the sales mix of the company, almost 20%. So it’s greater than $2 billion category for us today. But with that, we have a range as I mentioned around the world, even if I just look at Starbucks stores, if I use that as the benchmark from low teens in some places to markets that are performing better on their food execution of 25% to 30% or higher.
So we believe we have an opportunity overtime to progress that 19%, at least ten points higher into the upper 20s and somewhere and that’s not an explicit target as much as we believe that’s the opportunity of what we can do with food, we comment that both from what we’ve seen in selective markets around the world and also what we hear from our customers.
Today in the US, for example, and this is reasonably true globally, but if I just focus on the US for a moment, two-thirds of our transactions don’t have any food item on them. So, one-third of the people who buy a beverage also attach some food item to it, two-thirds of the transactions in our stores have no food on them.
And of those two-thirds when we spend a lot of time understanding that customer, those people we’ve already acquired them, that are walking in the door, their wallets open they want to give us money, they want to be in Starbucks and yet, and many of them want food.
But they historically have not bought our food for one of two reasons, it either hasn’t met their quality expectations. We are looking heavily to address that. Or it hasn’t been appropriate to the day part to whatever, wherever they are at.
So our food program historically was mostly morning bakery kinds of items. We’ve in the last few years heavily innovated against the mid day, dayparts in the US for example. Heavily innovated against food that’s more appropriate that snack occasion in the afternoon.
And what we are finding is as we give people things that are of higher quality and match with the occasion, fits the time of day, matches the beverage pairing that they have that they buy more food, perhaps not a surprise and so that leads us also to believe that we’ve got a tremendous opportunity to grow food faster in the years ahead than we do our core business.
So, I believe that our business can grow again from about 19% of sales mix to the upper 20s overtime, given the kind of pathway we can see and that is why we are still growing the overall business. So that will be a fairly rapid growth in the overall size of food during that period of time.
Could you please just give us an update on the economics of the newly opened stores in China and the strength of the Chinese consumer that you are seeing right now?
Yes, our stores in China are approximately annual unit volumes of about $800,000, if I benchmark it in the dollars. Now, by the way that’s about twice the volume that they were just a handful of years ago. Our volumes in China are I think growing quite rapidly both as we’ve opened up new stores at higher volumes as the awareness of the brand has grown and also by very powerful strong comp growth in those stores over the last two years.
So AUVs today of about $800, 0000 in China. Store profitability, four wall profitability in the mid to upper 20s. So a few points higher than our benchmark gold standard US business in terms of store economics. Sales-to-investment ratio, that’s a key ratio that we measure quite frequently.
The first year sales of a new store compared to the cost to build that, the capital cost of that store, that 2 to 1 or a little bit greater than that in the US. It’s about close to 3 to 1 in most of our new stores in China. So, very good healthy unit economics as we continue to grow in that marketplace.
I would also point out that, as we have historically as many as did opened up in the Tier-1 cities in China, in the last handful of years we begun to expand more meaningfully into Tier-2 and Tier-3 and are seeing very comparable economics in those cities as we deal in the Tier-1 cities. We have about 850 stores I think today on Mainland, China.
We have targeted 1500 stores by 2015. We are well on our pace to get to that benchmark and that’s just a weigh point. We actually have quite confidently have thousands of stores of opportunity in China. It’s a very good healthy economy. Now the Chinese consumer, I think there is no question that the rapid pace of that Chinese consumer had slowed a bit. Everyone else has seen it.
To be honest with you, I think Starbucks was a bit insulated from that for the last couple of years. We know our friends at Yum and others were experiencing that a little bit more quickly than we were. I would suggest by virtue of us being a bit smaller in that marketplace and in premium aspirational brand that was just growing in China that we were perhaps a little inflated from that impact.
But in the last quarter or two, we think around the edges we are seeing just a little bit of a slowing in the trajectory of growth. We still have very strong things for sales growth in China. Our new stores are still opening up with a great economics, but you can see the consumer has just slowed up a little bit and I think that’s we are watching it very closely, but that’s what it looks like to us.
Can you talk a bit about changing consumer coffee consumption patterns and how that is affecting you? I mean, obviously Nespresso has been very successful in Europe. I’ll be honest, sort of I was still I am the Starbucks customer, we’ve got an Nespresso machine in the office and I use that more than going out.
I mean, how do you see that sort of consumption pattern unfold into the years ahead? And following up on China, I mean, China is obviously not a coffee drinking nation consumption of per capita is significantly lower. If I look at players like Nestle with very strong coffee franchises, they have actually tried to localize content quite significantly in China. So how you see that unfolding as well?
Yeah, let me speak to the last part first if I can, China, when we first entered China 15 years ago had this contemporary coffee house that Starbucks represents and cost here and other really exists in a kind of meaningful way shape or form other than a few, probably independent little startups in coffee cafes here and there.
As we’ve grown rapidly, as others have grown rapidly in China, there is a dramatic change in, particularly that younger generation adopting coffee as a beverage and adopting the whole coffee as lifestyle quite dramatically.
So coffee consumption per capita is tiny, but in the bigger cities and particularly among the younger generation that aspirational generation in China, it is actually growing rapidly and again we are certainly a part of that and many others are in China today.
Interestingly, when people first started in China to experience the Starbucks brand years ago, it wasn’t so much coming in because of the coffee – coming in because of the experience or what they’ve again seen in their travels and what they have seen in movies that they would see Starbucks or something similar.
That’s often what brings people in and the social aspect of what a coffee house is all about and then the coffee habit and the innovative beverages we can provide to them become something that develops later on. And that’s how we’ve seen that in our several years now in China.
That’s how we’ve seen that progress and continuing to grow. Now there is – to the coffee market and consumption overall, there is two very large, very significant changing consumer patterns happening. One has been a twenty year change from lower end coffee to super premium coffee heavily in the US.
But really around the world driven by many coffee players, certainly Nestle and Starbucks and Costa and many others have pulled people from what used to be in many markets around the world and I would just say particularly in the US really low quality poor coffee to something better usually defined by premium coffee. That’s been one change and that trend continues.
The newer change of course is to all things single served that’s more advanced in many markets in Europe. It has been a relatively newer change in overall consumption in the US of course where people have been rapidly shifting.
I think in all parts of their life it’s much more than coffee I think it’s about there is move into convenience and simplicity and speed that has led people to change their consumption from brewing 10 and 12 cups at a time to wanting the convenience to single serve.
Keurig in the US has done a fantastic job getting their low pressure brewed machines placed in peoples’ homes. Nespresso in Europe has driven the more high pressure Espresso based single serves. But all that dynamic is we believe a freight train that will continue to roll.
The US moved from probably 0% consumption in single serves, five or six or eight years ago to 25% and rapidly growing now of consumption in single service. And we anticipate there is no reason that the US marketplace over a handful of years ahead of us can’t progress to single served consumption like Germany or like so other markets. In Europe, that’s more advanced.
We would fully anticipate that trend to continue. That has more strategic implications on Starbucks and others where we are navigating and balancing a very big mature, highly profitable packaged coffee business with continued leadership in the single serve, where we can be a part of other people’s equipment platforms.
I will point out one element of our strategy which is Starbucks has no intent to be an equipment company that we strongly believe our equities, our capabilities what we can really do is around coffee.
The brand of our coffee, the innovation of the coffee, the variety of coffee, choices that we can provide to people and tea and other forms of single serve. Our interest is to partner with others who are the equipment platforms, which leads us to our provisional partnership with – leads us to our partnership with the Green Mountain. And overtime, we’ll explore more of these as those opportunities develop around the world.
On the store?
We have never seen any impact between at home consumption and store consumption. So, both in terms of all the transactional data and what consumers say, they tend to be other than probably some movement around the ages, it tends to be very distinct consumption habits of people.
So, people don’t trade, particularly the American consumer, they don’t trade their at home consumption even as they get higher quality and more convenient with that store experience. What we have found that’s very encouraging is, with the advent of single serve, people consume more coffee as it’s easier to drink coffee, they drink more coffee and we don’t know how far that continues by the way, but that’s been an interesting trend and a very valuable one for us in the last handful of years.
It’s much as we love our historical high margin, packaged coffee business. Revenue per serving and margin dollars per serving are dramatically higher of course in single serve. So the economics are very powerful and we are very excited about that move as time goes on.
Hi, can you maybe expand a little bit on the tea platform that you are building with the Teavana acquisition and how you are integrating that?
Yes, I will. The acquisition of Teavana is really a three-fold proposition for us. Two high priority and one a little further down the road and I’ll explain to them. The first opportunity with Teavana is for us to continue to rollout the standalone Teavana store concept. Not exactly as it exists today.
The Teavana store for those of you familiar with it in the US is predominantly a mall-based mercantile, very little beverage presence at all. Largely, dry tea, a great selection of wonderful teas and merchandises. That’s a very effective great unit economics model. We’ll continue to add Teavana stores in the appropriate locations that are consistent with the previous generation.
But what we are heavily working on together with the Teavana team that we’ve acquired is to bring to bear what Starbucks does so well which is beverage innovation, its theater in the store. It’s the beverage and bar concept and creating a new concept of a tea house. A Teavana based tea house that will feel very similar and very familiar to that Teavana customer.
But what we believe add another layer of revenue and profitability and growth into the Teavana concept which is by bringing some innovative kinds of tea beverages into that concept. So, first leg of growth for us with tea is the Teavana store.
Again, a new generation Teavana store that we’ll begin to open up later this year and we believe there is hundreds of those kinds of stores, first focusing on the US, but ultimately in other markets around the world.
The second value to us with this Teavana acquisition is to now allow us to focus much more on how we bring tea to bear within a Starbucks store. One of the things we’ve learned from our customers, particularly in the recent years as we really tried to dig deeper into understanding our customers is that the core Starbucks customer who is a coffee drinker is also a tea drinker, I’ll be honest with you, and I don’t think we understood that years ago.
But also a tea drinker, but we didn’t get that tea consumption from them even if we were getting their coffee consumption because they never view that Starbucks had the quality up to they wanted or even aware that we offer tea meaningfully in our stores.
What Teavana allows us to do is deepen our capability around high quality sourcing and blending of tea. And again by bringing together our beverage innovation capabilities in our R&D facilities, we are developing a whole new platform of tea beverages that we think will be very exciting that will come into the Starbucks store.
It’s very complementary daypart to the American consumer in particular, tea tends to be – if coffee to the American customer is a morning on your way to work fast kind of daily routine, tea tends to be a little bit more relaxed Zen like afternoon kind of experience. It’s very complementary to the four walls of our store.
So we are excited about adding that next layer of growth. So, second revenue driver and profit driver from the Teavana acquisition is within the Starbucks store. The third, and the third will be a little further off to be clear, that then takes tea and Teavana more meaningfully into the CPG channels. Tea down the grocery house is a huge category.
All forms of tea, ready to drink, dried and we have an opportunity with a brand like Teavana, particularly as we build it to the Starbucks platform to create more awareness, to elevate that brand to create that proposition, to perhaps bring to bear Starbucks loyalty program, to move our customers and to make them aware that now they can experience tea down the aisle and we’ll build the layer on to our CPG capabilities.
That’s a little bit further off. But that will also be a part of that. So that’s how we see that integration unfolding and it’s progressing nicely so far.
The Teavana and CPG is probably two to three years off. The stores of Teavana are later this year and bringing Teavana an increased tea presence in the Starbucks stores is this year also. The CPG presence will be a little further off.
I think that’s all the time we had for the formal Q&A and we have another presentation to follow. But we do want to thank Starbucks for joining us this morning with Troy and JoAnn and they’ll be with us here all the day. Thank you very much.
Okay, thank you, Jeff. Thank you everybody.
More From Seeking Alpha
- Investment & Company Information