Starbucks Refuses To Sit And Get Cold

Investor's Business Daily

Troy Alstead is no stranger to the old joke about there being a Starbucks on every corner — not after spending 22 years at the coffee retailer, where he now serves as its chief operating officer.

There's not really a Starbucks on every corner, of course. But the fact that people talk about it all the time speaks volumes about how the company has imprinted its brand into the American consciousness.

Alstead doesn't mind the joke. In fact, he takes it a step further, saying "there's even a Starbucks inside every Starbucks.

"There's no question physical expansion in both the U.S. and around the world has been an important component of our story over the last five years," he told IBD. "And it will be an even bigger part over the next five years.

If so, there may well be a Starbucks on every corner some day.

Since its founding as a single gourmet coffee shop in Seattle in 1971, Starbucks (SBUX) has grown into one of the biggest and most recognizable brands in the world and one of the top stocks of the past 30 years.

The company, which went public in 1992, has more than 20,000 stores in 60-plus countries worldwide. It boasts about $15 billion in annual sales. Around 70 million customers walk into its stores every week.

Among restaurant stocks, Starbucks ranks behind only McDonald's (MCD) in market cap. For that, it can thank a share price that has rocketed 12,771% from the low point after its 1992 IPO.

The No. 1 Barista

Starbucks' success through the years is the result of a vision, led by founder and CEO Howard Schultz, that combines innovation, execution and an aggressive growth plan that seems limitless in its scale.

The company has flexed its financial muscles by gobbling up competitors and carving out great swaths of market share both here and overseas.

It has embraced technology by offering high-speed Internet service in its stores and mobile payment apps. It incorporated music retailing into its coffee shops with its Hear Music brand. It developed ancillary products that include everything from coffee makers and bean grinders to flavored syrups.

Starbucks has also been a leader in providing access to as many customers as possible. It has placed coffee bars in big-box retailers such as Target (TGT) and bookstores such as Barnes & Noble (BKS). It has experimented with different designs and formats, opened drive-through and walk-up locations, put a Starbucks on a passenger train and even opened a ski-up location at the Squaw Valley resort in California.

"If you look back, Starbucks clearly innovated the specialty coffee retail market," said Morningstar analyst R.J. Hottovy. "The whole idea of a coffee bar had never really existed before Starbucks, and nobody's done it as successfully or in the volumes they do.

For all the company's innovation, however, it was something basic that helped Starbucks reinvigorate its brand — and stock price — over the last half decade: a renewed focus on customer service and core beverages.

After the 1992 IPO, Starbucks stock made its first big run into 2006 with a 6,142% advance. Then with decelerating earnings growth, the stock hit the kind of slump from which most big leaders never recover.

By November 2008, shares had plunged to a nearly seven-year low of 7.06 — down 82% from 40.01 two years earlier.

The company remained profitable. But growth was slowing, and many on Wall Street considered it a mature company that had run out of fresh ideas.

Schultz, who had stepped down as CEO in 2000, retook the helm in January 2008. Eighteen months later, profits began to grow again as they would for 17 out of the next 18 quarters.

"At the time, they were very good at opening new units and creating a brand, but they had problems operating them and innovating them," said Andy Barish, analyst at Jefferies. "So they made a back-to-basics strategic shift.

That shift worked. Starbucks stock recovered dramatically, by 1,069% from its 2008 bottom.

Partners In Profit

Rather than try to reinvent itself, Starbucks committed itself to improving the experience for its employees — which it calls "partners" — and the people they serve.

"When our market cap was way low we closed some stores to retrain our partners on excellent beverage execution," Alstead said. "We wanted to make sure that when customers came in the next day or the next five years there was that deep focus.

While that was going on, Starbucks also looked to innovate its product line. At the time, the company's innovation had become "a little stagnant," Alstead says.

"Innovation was not as creative, not as dynamic, and certainly not as profit-driving as it needed to be," he said. "So we turned that whole process upside down.

The company went back to its earlier focus, honed in the 1980s and 1990s, of trotting out new products. This led to the introduction of items such as instant coffee and the Refreshers line of coffee-based juice beverages.

Starbucks also relaunched its Frappuccino blended beverage line with new ingredients and preparation methods.

The emphasis on new products — and new ways of selling them — has been a hallmark of Starbucks throughout its history and a big reason for its success, analysts say.

"They've taken their retail business and leveraged it into consumer packaged goods," Hottovy said. "You're seeing more Starbucks products in grocery stores and other retail outlets. They have been innovative not just in coffee, but in new products to broaden the accessibility of the brand.

Digital Growth

Meanwhile, the company has also expanded a digital platform that includes in-store WiFi, social media, its Starbucks Card and My Starbucks Rewards loyalty program, and its Mobile app.

Mobile payments now represent 14% of all in-store transactions in the U.S. More than one-third of all transactions are prepaid via the company's Mobile App or Starbucks Card.

"These are quicker transactions that help customer service and speed," analyst Barish said.

Starbucks is expected to use its digital platform to drive even more sales through one-on-one marketing that lets the firm send customers promotions and other incentives to their mobile phones.

"If you haven't been in in a while maybe they'll send you something to entice you to come in for a Refresher beverage, or send out introductory offers for new products," Barish said. "Digital continues to be an important growth driver."

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