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This stock has outperformed the S&P 500 by 200% over the last five years, but this retail innovator offers plenty of upside ahead.
Despite the concern that Dunkin’ Donuts (NASDAQ: DNKN) can ramp up expansion on the West Coast, Starbucks (NASDAQ: SBUX) is still leading the way when it comes to the best coffee shop around. Starbucks has a large head start over the competition, being one of the most recognized names in the coffee business.
But at its core, it’s an innovator.
This includes beverage, food, tea and coffee-at-home. Think: its energy drink (aka Starbucks Refreshers), success of seasonal offerings (e.g. pumpkin spice latte) and new premium arabica coffees for single-brew (e.g. Starbucks Reserve and Clover).
And innovation is set to continue.
Starbucks is now looking to launch three new store formats, which will cater to two different customer groups. One, the coffee connoisseur, and two, the coffee-on-the-go drinker.
Toward the end of the year, Starbucks will be rolling out an interactive Roastery and Tasting Room in Seattle, which will serve to educate consumers and use more of its speciality beans.
Meanwhile, it’s also experimenting with the Starbucks Express model, which focuses on small-footprint outlets. This comes as its drive-through outlets (accounting for over 40% of total store sales) have been growing sales faster than the average store. These new smaller outlets will serve fewer options for food and beverages but will be focused on speed and accessibility, including the potential for mobile orders.
One of the most exciting opportunities for Starbucks is its entry into the “evening” marketplace. This includes offering dinner food, as well as wine and beer. This is expected to be rolled out to 1,000 stores over the interim.
Competition for This Coffee Stock?
Starbucks’ earnings are expected to grow at an annualized 18.4% over the next five years, topping main competitors Dunkin’, McDonald’s (NYSE: MCD) and Burger King (NYSE: BWK). Burger King is looking to become a serious contender in the coffee market with its purchase of Canada-based Tim Hortons (NYSE: THI).
But Tim Hortons has yet to put up any meaningful competition in the U.S. Although it has over 3,000 stores in Canada, it only has 850 in the U.S. Part of this comes as the demand for doughnuts in the U.S. is slowing as the American consumer becomes more health conscious.
Then there’s McDonald’s, which is the unprecedented leader in the breakfast market. It’s also looking to introduce its McCafe branded coffee into grocery stores. However, it can be argued that McDonald’s food and coffee competes more with the likes of Dunkin’ and Tim Hortons than Starbucks.
Food generates about 20% of Starbucks’ U.S. revenues. It’s offering of more health-focused, high-quality, foods has been resonating with shoppers. This includes its breakfast sandwiches, oatmeal and salads. Then there’s the 2012 acquisition of La Boulange bakery, which has given Starbucks a leg up. La Boulange lunch items are expected to launch in 2015.
Starbucks is also unrivaled when it comes to customer loyalty. It has mobile capabilities and a stellar rewards program, not to mention new initiatives that includes “treat receipts.”
The coffee giant also has its sights on expanding beyond the U.S. (which accounts for around two-thirds of revenues). One of the focuses is Asia, which has a fast-growing middle class. Starbucks has grown revenues by over 20% in Asia for 15 straight quarter.
If you need an extra jolt in your portfolio for long-term performance, this coffee stock could be just the caffeine buzz you’re looking for.
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