Starbucks: 5 business moves that could change its brand

Starbucks is expanding its grocery store sales, opening a juice bar, and adding beer and wine to even more locations. Will coffee get lost in the shuffle?

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Starbucks (SBUX) CEO Howard Schultz had a lot of positive news to highlight yesterday at the annual shareholder meeting. Since the company’s lowpoint in 2008, when the stock closed below $8, Starbucks has turned itself around, opening 1,400 stores worldwide, bringing the total to 17,200.

The company’s stock has performed well as a result, with a 32% growth in profits for the end of its fiscal year in October 2, 2011, and the stock price has risen from $37 to $53 since that month. Now, the company hopes to maintain the momentum, with the aid of lower coffee prices, by pushing into new international markets and expanding its client base with new products.

Before Schultz retook control of the company in 2008, Starbucks had focused almost solely on its cafes in the US and inventing new coffee drinks. Spurred by the growing middle class in emerging economies and the shrinking middle class in Western nations, the company has changed course, with 600 of the 800 stores slated to open in 2012 opening in foreign countries, and China taking a quarter of that 600.

Starbucks also hopes to open its first store in India this year and to have 7,000 stores in South Korea by 2016. MorningStar analyst R.J. Hottvoy says the company has done a good job turning its business around by closing unprofitable stores, streamlining its supply chain, and offering higher-margin consumer products.  

The new business ventures of the company will be equally important to profit growth, and investors and analysts will surely be keeping eye on these five new business concepts recently begun by the company. At yesterday’s meeting, the company stated it aims to reach between 10% and 15% in annual revenue growth, and it forecasts earnings per share growth of 15% to 20%. UBS agrees with the company’s predictions, as analyst David Palmer boosted the target price of the stock to $61, an increase of around 15%.

The success of these five new projects will determine if Starbucks can continue its robust profits growth.

1. Evolution Fresh

Starbucks’ most recent addition to its business is its juice bar, called Evolution Fresh. The first store opened in Bellevue, Washington, this past Monday, and Starbucks looks to turn the brand name into another successful restaurant chain. Its success will depend on people’s willingness to pay $8 for a 16-ounce cup of juice and $7 for a 16-ounce smoothie, which is more than the cost of a sandwich and nearly the same as a salad.

At first glance, the steep prices would suggest that the new store will struggle with its rival Jamba (JMBA) and its Jamba Juice stores, one store located only a short walk away from Evolution. Jamba Juice offers more selections for smoothies, and its 16-ounce smoothie costs half the price of Evolution’s equivalent. However, Starbucks proved that people will pay high prices for coffee, and they seem willing to pay high prices for juice, too. According to local reports, people packed into the store to test the new drinks. The store offers delivery service and emphasizes a healthy lifestyle.

As it does its coffee products, Starbucks will also sell the store’s juices at grocery stores, including Whole Foods (WFM).

 

2. Seattle’s Best Coffee

Starbucks bought Seattle’s Best Coffee last November after the chain had to close many of its locations in the former bookseller Borders. Starbucks is now expanding the stores around the country and describing Seattle’s Best as a “billion dollar brand.” A new store opened up in Northlake, Illinois, that features the chain’s first drive-through (some Starbucks cafes already have drive-thrus) to appeal to the busy suburban middle class population.

This drive-through experiment will test never-before-seen coffee beverages and show its competitiveness against rivals such as the Dunkin’ Brands Group (DNKN) and its Dunkin Donuts stores, many of which have drive-throughs.

Starbucks will also sell the Seattl's Best brand at Kmarts and at Chevron (CVX) gas station stores across the country.

3. Starbucks Bars

The Starbucks in Calabasas, California, is among the first Starbucks stores in California to file for a beer and wine license. The company wants to draw more traffic to its stores in the evening as the flow of customers tends to taper off later in the day (see Starbucks Adds Alcohol to Its Usual Caffeine Fix). The company successfully experimented with selling alcohol at branches in its home base of Seattle in October 2010. Now, the company plans on having 25 more stores that sell alcohol by the end of the year, mostly concentrated in Atlanta, Chicago, and Southern California.

4. Verismo Coffee Machine

Starbucks aims to get inside its customers’ homes, too, with its Verismo single-cup coffee machine. When the machine lands on shelves later in the year, Starbucks fans will be able to make their own Starbucks espresso drinks and brewed coffee. Schultz wants to tap into this $8 billion market and to continue capitalizing on the consumer products group, which is the fastest growing branch of the company. He claims that it is “the fastest growing business within the global coffee industry.”

Starbucks denies that it will hurt its partner Green Mountain Coffee Roasters (GMCR), which makes the Keurig Vue single-cup coffee makers. Green Mountain’s stock dropped 20% minutes after the news two weeks ago, but the stock rose close to 10% after the two companies reached an agreement to expand their partnership by marketing Starbucks’ Vue coffee packs for use in Green Mountain’s Keurig machine, ideally increasing demand for the Keurig. Analysts remain skeptical, though, believing that Starbucks will cut out the middleman.

Whether Starbucks willl destroy its partner remains to be seen, but analysts are confident that Starbucks will eat into Nestle’s (NESN.VX) sale of its single-cup coffee machines, the Nespresso and the Nescafe Dolce Gusto. The fastest-growing market for Nestle is the US, but analyst Pablo Zuanic of Liberum Capital states the Verismo may steal 20% of Nestle’s overall annual profit growth. Nestle's product sales jumped 20% to more than $3.8 billion last year with the help of the Nespresso, and Starbucks wants a piece of these revenues. Analyst Johnny Forsyth of Mintel says single-cup coffee "machines are the future of coffee."

5. Refreshers

Starbucks will also begin carving out its own slice of the energy drink market at the end of next month. Yesterday, the company announced its new product Starbucks Refreshers, which will be the first energy drink to use flavorless green coffee extract. The new drink will compete with Red Bull and Rockstar energy drinks, and it will come in Raspberry Pomegranate, Strawberry Lemonade, and Orange Melon, all containing real fruit juice. This product line is another push by Starbucks to grab a larger foothold in grocery stores.

Starbucks' expansion in grocery stores makes some analysts a little hesitant. Peter Saleh from Telsey Advisory Group points out that 91% of revenues still come from Starbucks cafes and notes, “My concern would be that they get distracted from the real revenue and profit driver.”

Investors, though, have so far responded favorably to Starbucks newest plans, with the stock up about 1% in morning trading.



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