Starbucks' Move Away From Coffee Will Pose Challenges

We believe US-based coffee company Starbucks' strategy to develop its higher-value non-coffee products could expand its consumer base; however, this could risk pushing away part of its existing customer base (especially if it limits innovation and quality in that segment). We see clearer growth opportunities coming from the company's channel development via other retailers and from expansion into high-growth markets where it is currently under-represented.

Starbucks' focus on diversifying into food and non-coffee drinks will help to grow its customer base in existing markets. The company recently acquired companies in the non-coffee business in order to benefit from their expertise and rapidly build up capacity in these segments, where it has little presence at the moment. In 2011 Starbucks bought Evolution Fresh Juices, an upscale juice maker whose products are distributed mainly on the West Coast of the US, and is in the process of rolling out these products through its stores. Similarly, the company acquired Teavana in 2013 and has indicated that it will open tea shops under the brand, complementing its coffee offering. The company also bought La Boulange bakery to develop its baked goods and breakfast offerings, taking advantage of a new trend among consumers to eat out more for breakfast and look for healthier options. Finally, Starbucks has slowly expanded its alcoholic offerings at its stores. The chain first tested selling alcohol in a single Seattle store in October 2010. Since then, the company has expanded sales across a couple dozen stores in Illinois, Washington, California, Georgia, Oregon and Washington DC.

The company has also pushed to move towards higher-value products. We believe targeting specialty teas makes sense for Starbucks given its historical positioning within high-quality coffee. In terms of food, however, the new bakery products have received criticism from some customers because of higher prices and generally smaller portions. As a result, the company announced it would not roll out all of La Boulange's products in its shops (in the US especially) and would bring back some of its best-selling products. The company will also focus on premium alcohol products, with glasses of wine sold for USD8-10.

Profits Increasing Faster Than Revenues
Starbucks - Operating Income & Revenue Growth (% y-o-y)

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Related sectors of this article: Food & Drink, Drink
Geography: Global

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