3 Things You Didn't Know About Starbucks
Nov 4th 2013 6:00PM
Updated Nov 4th 2013 6:02PM
One of the most exciting aspects of investing is finding the next big thing. Whether it's a fast growing tech stock, or a game changing drug company, there's nothing more thrilling than being at the forefront of growth.
What you may not know, however, is that the best growth opportunities typically lie right in front of your face. Take Starbucks , for instance. The stock has rallied from roughly $9 per share, to $80, just over the past four years; even though it was already one of the best known brands on earth.
So why did this growth opportunity go unnoticed by so many? And is there anything we still "don't know," that can keep this growth story brewing?
What you may not know about Starbucks
Contrary to popular belief, well established businesses can grow faster than small and trendy one's. The key is finding businesses that have a unique competitive advantage, that all-important moat that Warren Buffett is always talking about.
Here are three things that give Starbucks a unique moat, some of which you may not be familiar with.
1. Starbucks is in a high growth business
You may not think of coffee as a growth industry, but did you know that coffee sales actually increased 5% last year? The fastest growth sector in the industry was the single serve market, with Green Mountain Coffee Roaster's Keurig machine's churning out more k-cups than ever.
Yet, Starbucks most recent quarter showed whopping comparable sales growth of 7%, outpacing competitor Dunkin' Brands , which only grew same-store sales at 1.4%. Why is Starbucks growing so fast? There are a few reasons: Starbucks struck a successful deal with Green Mountain to sell Starbucks brand k-cups, taking advantage of the hot single serve market, and Starbucks Teavana acquisition may drive store growth going forward.
The biggest reason however, has been Starbucks "quality moat." While there are other options for coffee, there are very few that offer Starbucks combination of quality and scale. So, even as coffee prices have slowed, Starbucks has been able to raise prices, which has led to outstanding margin growth.
This wonderful moat isn't a knock to Dunkin' or Green Mountain. Dunkin's recent quarter showed 36% revenue growth, and Green Mountain has grown sales over 60% during the past five years; they're both great businesses with their own niche.
What this moat shows, however, is that they're different businesses. Starbucks shareholders should be excited to know that their in a business that literally no one else competes in, high quality coffee shops, which will drive future growth.
2. Starbuck's recent growth was triggered by slowing down
So how did Starbucks establish its quality reputation, and separate itself from the coffee herd? The path was reestablished when Starbucks CEO Howard Schultz came back to get his beloved company back on track.
In 2008 Schultz ordered a worldwide, three hour shutdown of all Starbucks stores for training. The move was criticized by many investors, as closing the stores cost Starbucks revenue in the short-term. But shutting down during peak hours to "perfect the art of espresso" was exactly the kind of message that Schultz needed to send to the market.
It was all part of a very simple campaign; Starbucks simply started listening to its customers. From the period of 2007-2009, Schultz made a point to slow down Starbucks hyper-growth and instead focus on quality.
3. Howard Schultz is Starbucks soul
When Howard Schultz returned to Starbucks he, now famously, stated that the company had lost some of its soul. Ever since he's returned, Schultz has spent every day recapturing that soul. When Starbucks customers felt the stores had lost their focus on quality, he shut them down for training. When customers complained that the stores were too "cookie-cutter," he listened and slowed the hyper-expansion.
Schultz has even payed attention to where the consumers mind-set is out-side of coffee. Whether it was lending customers an ear to Washington's dysfunction, or just staying in front of millennial's values such as doing passionate work, Schultz has been one step ahead because he listens.
Foolish conclusion: Invest in good souls
Starbucks is a perfect example of how you can find fast growth in seemingly boring industries. Starbucks has a wonderful moat, high-quality coffee and a great experience, but it's so much more than that.
I'm often asked by friends why I'm willing to pay more for a cup of Starbucks, and it's not a simple answer. Perhaps it's the brand habituation, just the fact that I've been doing it for years. Then again, perhaps it has more to do with Starbucks "halo effect," and social image, perhaps I feel like they just "get me?"
Maybe it's just because the coffee is good?
The truth is that I, like so many others, buy Starbucks everyday for a combination of those reasons. They're all a result of the "soul," that wonderful leaders like Schultz can bring to businesses.
There is no way to value great CEO's, but their impact on growth can be unlimited.
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The article 3 Things You Didn't Know About Starbucks originally appeared on Fool.com.Adem Tahiri owns shares of Starbucks. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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