September 11, 2018 - 10:15am EST by
2018 2019
Price: 54.94 EPS 2.40 0
Shares Out. (in M): 1,349 P/E 22.3 0
Market Cap (in $M): 74,113 P/FCF 27.8 0
Net Debt (in $M): 4,828 EBIT 4,405 0
TEV (in $M): 78,941 TEV/EBIT 17.92 0

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Elevator Pitch:


Starbucks is the dominant global premium coffee chain. However, this once extremely fast growing company is now maturing and transitioning to a newer stage of growth. This has caused short-term fright leading to a turnover in the investor base and a significant revaluation of the multiple over the past 3 years from 33x to 20x NTM consensus earning. After pro-forma adjustments the company trades for about 19x FY18, which ends 9/30, and offers a 12-15% TSR going forward without multiple expansion.

The current opportunity exists because of the recent comp slowdown. Global 3Q18 comps were 1% vs. consensus at the start of the quarter for 3% comps. China was especially weak comping -2% down 6% sequentially and down 10% year-over-year. This has led to a significant reset in the valuation of the firm with the valuation by my math implying 1-2% comps forever. Going forward SBUX is unlikely to comp in the 6-8% range of the past; however, the 3-5% comp target is not out of reach. At the current price of $55, Starbucks represents a high quality company trading at a sizeable discount to intrinsic value.




Starbucks is a growth company in transition. Typically, a situation like this would call for an activist. Luckily, investors do not need to hope an activist arrives; management is taking action.  In 2015, Howard Shultz brought in Kevin Johnson the past CEO of Juniper Networks to be COO. Kevin was promoted to CEO in April of 2017 and recently the reins are finally shifting with Shultz finally stepping down as Chairman on June 26th. The company has announced a slowing of lower value licensed store growth in the US, a culling of the underperforming US company owned store base, new cost cutting plans, a global partnership with Nestle, and a sweeping shift in capital return. Additionally, the company is slowing their expansion of Siren Retail, Howard’s pet project, which was capital intensive and offers unproven ROICs. Starbucks is undeniably more mature than it was five or ten years ago, however the growth story is far from dead. Revenue growth should stay in the high single digits for many years to come. In addition the majority of growth is now coming from higher margin segments such as licensing, Channel and China that should lead to EBIT margin expansion.

At 19x FY18 pro-forma earnings, Starbucks is trading at a reasonable valuation for an above average company (25% after-tax ROIC) and above average grower (+HSD revenue growth expected). The short-term outlook of other market participants is offering up one of the world’s dominant global brands at a reasonable price.


Company Overview


            Starbucks is a dominant global coffee brand with nearly 29,000 locations globally, both company operated and licensed, and a strong Consumer Packaged Goods (CPG) and foodservice business.

The company owns and operates about 15,000 of their locations with the remaining ~14,000 operating through a licensed or 50/50 JV structure. The company is adding units at a rate of over 2,000 per year leading to ~7% global unit growth. Store growth can remain high even as their core US market becomes more and more saturated. This is because over 70% of new units are located internationally. In fact, 3Q18 market Starbuck’s entry into its 77th country Uruguay, 116 to go![1]

The company leverages its ubiquitous coffee brand to gain entry into the lucrative CPG and foodservice markets in a capital light fashion through distribution partnerships with Pepsi, Anheuser-Busch, Tingyi, Arla, and others. These partnerships currently bring their branded goods to over one million locations including over 120,000 grocery and convenience stores. The recently signed Nestle deal will open up the brand to Nestlé’s “unsurpassed distribution presence” in over 190 countries and over 5 million points of distribution. We have high hopes that this partnership will not only re-accelerate growth in domestic markets but will also drive incremental growth in the over 150 countries where Starbucks CPG products are not yet available. The channel business generates about 10% of company EBIT post-Nestle deal.

Impressively, Starbucks generated an ROIC of 25% after-tax in FY17 even as they have expanded internationally, a strong indication that the brand travels well.


Unit Economics


            Perhaps the most important part of any discussion revolving around Starbucks is the unit economics of their locations. If the ROIC on a new store is poor then no amount of new store growth will create value, in fact if the return on new stores are poor then opening new locations would actually be a destruction of value. Starbucks however appears to have phenomenal unit economics. I estimate that new unit economics for their drive-thru locations, nearly 90% of new company operated stores, in the US are in the 30%+ range (EBITDA/Total Investment) even after accounting for cannibalization! The company also released new unit economics for their Company owned stores in China at their May analyst day stating that consolidated ROIs were 86%! That is an incredibly fast payback period and indicates why they are building out stores so quickly. Yes this expansion is likely to generate cannibalization, but as Steve Jobs said, it is better to cannibalize yourself than let someone else do it.


G&A Cost Savings


Starbucks will likely spend $1.5bn in FY18 on corporate G&A, representing about 4.25% of system sales. The company currently plans to reduce these costs by approximately 100 basis points over 3 years, about $350mm of savings assuming about $35bn of system sales in FY2018. If all the cost saves drop down to EBIT, it would generate 8% growth on FY18 EBIT estimates. The company plans to realize 35-45% of this in FY19 with the remaining portion coming in FY20 and FY2021.

Kevin is slowly revamping the c-suite installing Rosalind Brewer to help lead the America’s division, and apparently pushing out CFO Scott Maw in favor of someone who can better support Kevin’s focus on “sustainable growth”. Prior employees have told us that Kevin is bringing a culture of efficiency to what had become a corporate office mildly plagued by bureaucracy and lacking a tech forward focus. Going forward Starbucks will be a more cost conscious organization, applying tech wherever possible to generate efficiencies. 



United States

The US is the near-term profit engine of the business generating 55-60% of total EBIT. While the recent quarter was weak, it was on top of a 5% US comp in the prior period and an unforced error in Philadelphia. The company rightfully chose to address the Philadelphia issue head-on and as a part of this, they not only closed stores for an afternoon for inclusivity training, but they also proactively delayed their advertising campaign. This segment should be able to grow profits 6%+ in the next 5+ years before settling down into the low-mid single digit range that is typical of mature restaurant concepts. 

In June, Starbucks management announced accelerated US Company owned store closures in FY19 to 150 up from 30 in FY17. In FY17, the 30 stores closed amounted to only 0.38% of the start of the year store base, an impressively low figure. At the 2018 Bernstein SDC, the Domino’s Pizza CEO commented that their LTM store closures of 50bps was such an astounding number saying, “I wouldn't have believed that you could get closures as low as they are right now.” The fact that Starbucks averaged ~53bps of closures over the five year FY13-17 period is impressive and even adjusted for the 150 additional closures the rate would have been ~0.8%, low for restaurant standards. The 150 store closures planned for FY2018 is 110 stores higher than the 5-year average but represents only 1.3% of the store base. Importantly the company noted some of these locations generated negative profit contribution and others were seeing poor comps likely indicating they would be negative contributors sometime in the future.

The 150 closures target dense urban areas and not the underdeveloped suburbs that are the focus of store expansion. Nearly 90% of new stores are drive-through locations that generate higher AUVs at lower occupancy and wage costs. These SG&A costs are lower given the lower rent of non-urban locales. The recently announced pruning appears to be a proactive management decision to set a clean slate.

Post FY19 the company is likely to return to the lower store closure trend, maybe even lower because of their proactive closings, while also benefitting from healthy growth. In addition to the store closures, the company announced a slowing of licensed store growth by 100 stores per year, and 25 fewer company owned stores per year. This brings their targeted FY19 net store growth to around 3% down from 5% in FY18, store growth will bounce back in FY20 to ~4% as they lap the elevated closure rate. The company is targeting closures of Licensed stores over Company owned stores because they generate about $30 of EBITDA per $100 of store revenue through the company operated model while only $7 of EBITDA under licensing agreements. If these locations are cannibalizing demand this should lead to a positive mix shift in profits for the business. If this does not cause a noticeable comp trajectory the company could return to the higher growth rate, no harm no foul. It is a positive that management is willing to iterate and test in order to determine the appropriate path.

Starbucks should be able to comp at least 2% in the United States generating a minimum of 6% revenue growth for the company’s most mature segment. This slowing of store growth is something some investors had been calling for as McDonalds made a similar change a few years ago to great success. It is likely the same thing works for Starbucks.



In FY19, this segment is set to generate half of total revenue for the CAP (China Asia Pacific) region and a similar portion of operating profits. Through 2022, China that represents ~10% of FY19 EBIT should grow in the 15-20% range at a minimum. With a significant runway for mid-teens growth beyond. By 2022 Starbucks’ locations in China will represent ~15% of total stores and an even greater portion of profitability given the licensed/company owned mix. The growth of this region alone should generate 1.5-2% of EBIT growth per year in the next 5 years. Given the long-term potential of this business we believe if Starbucks China traded on its won the multiple would be in the >30x NTM range implying that core Starbucks is even cheaper than our pro-forma estimate would imply.

China’s expansion plans include 600 net new stores per year, reaching 6,000 stores and an additional 100 cities by 2022.[2] Near term, the accelerated rollout is pressuring comps; stores in Shanghai grew 40% YoY in the first half of 2018. The transition from 3P to 1P delivery through is also a headwind as we have heard estimates that delivery was around 5% of revenues for locations where 3P delivery was occurring. Given this estimate, it is likely that the government crackdown took at least 2-3 points out of comps in Q3. is the delivery arm of Alibaba and while August first was the big reveal, our due diligence indicates that the company has been piloting delivery on a small scale for longer than they let on. Initially delivery will be available in 150 stores with the goal of more than 2,000 stores by year-end. Delivery sales are typically incremental generating positive asset utilization.

The long-term potential for Starbucks in China remains bright. The best-case scenario has a long-term runway of growth to more than 20,000 stores up from ~3,500 today. We get to this estimate by multiplying the current US density of stores per million pop of ~42 by the estimated number of Chinese middle class consumers by 2022 600mm (42*600=25,200). While disposable income per person in China is, only about 26% of that in the US $4,000 vs. $15,000 disposable income is rising rapidly, we are only multiplying by 43% of the population (middle class only) and the AUV of stores in China are half of that in the US.[3] As such our adjustment factor for stores as a function of disposable income per capita is 0.2 which is conservative relative to the ratio of Chinese disposable income per capita vs that in the US of 0.27x. If we were to use this more aggressive metric, not taking into account that density of stores in the US is growing and that disposable income per capita is rising rapidly in China +HSD, we would estimate there could be over 30,000 stores![4] That is more locations than exists globally today.

Indeed, our math does indicate that at some point China could be Starbuck’s largest market given their massive population, ~1.4 billion people, and their rapid rise towards middle class consumption. The China 2020 initiative targets having 70% of the population in urban environments up from ~60% in FY2017, this should be a strong tailwind for disposable income growth and income concentration. Starbucks needs a disposable income density that is more prevalent in cities to support enough demand for one of their stores. Average yearly wage growth in the country has consistently been in the mid to high-single digits and as disposable income continues to grow the ability to splurge on Starbucks coffee should grow significantly. [5]

We spoke with a prior exec from Starbucks China, and they confirmed our views that the growth potential is immense, confirming that someday SBUX China would likely be larger than the US. The exec did note that the important variable would be time. They stated that she remembered a time when Starbucks though it would never have more than 500 stores globally, how times have changed.[6] The exec's view was that competition from Luckin was less of an issue than people were making it out to be, thinking that MCD and KFC were more likely to have problems with the upstart. The exec's view was that the issue was likely delivery combined with the mix shift of consumers to lower priced coffee. She believed that the next 6-12 months would likely be bumpy given these changes in mix, their delivery roll-out, and the company’s continued focus on food innovation and driving the attach rate higher. Overall, they were highly confident that long-term the company would begin growing quickly again and that it would grow fast for a “long, long, time”.

            The delivery partnership with also brings an interesting benefit of turning Alibaba’s Hema grocery stores into delivery hubs for Starbucks coffee, however this is not entirely important because locations is really just a way to try and estimate long-term sales potential. The concept of delivery hubs is key for a high delivery market as it enables consumers to get the Starbucks coffee they want without over burdening store staff and ruining the customer experience by filling stores with “loud and rude” delivery pick-up employees. Our long-term target for Starbucks locations is likely high because of the different channels such as delivery hubs that are likely to develop over the long-term in China. The team is extremely innovative and we look forward to what they come up with next.

            Another longer-term opportunity is the potential to crack breakfast demand. Currently the morning daypart represents only 16% of total store revenues vs. over 50% in the United States. The company has a Chinese R&D facility that is working hard at developing an appealing product to put through their distribution network effectively to bring more and more customers to Starbucks. The shift to coffee consumption in the morning is occurring, but it is happening slowly with coffee consumption only at 1-2% of what it is in the United States today. This untapped potential portends very well for comps long-term as SBUX’s daypart would need to 5x holding the other dayparts constant for breakfast to become the same size it is in the US. This would lead to a rise in AUVs of ~70%.


Asia Pacific


            Starbucks has been breaking out China for the past few years but it still truly resides in the China Asia Pacific region that includes 14 other markets, including Japan and Korea two of their top five markets that are examined in more detail below. While China gets all the major headlines, this fast growing region benefits from high GDP growth rates, population growth and remains underpenetrated. Half of the region’s FY19 revenues be non-china related and ex-China the segment has grown stores at a 12% rate over the past 5 years! Impressive! Going forward Asia ex-China, ~11% of FY19 sales, should be able to generate at least one point of EBIT growth for the whole company per year.


Nestle Partnership

The recent negative headlines have also pushed the announcement of the Nestle Starbucks global partnership to the wayside. Nestle sells their products in over 190 countries while Starbucks only sells their consumer products outside of stores in over 40 countries to date. This partnership will accelerate the growth of Starbucks branded products globally, and generate a high margin revenue stream. This partnership also brings global access to the Nestle Nespresso and Dolce Gusto coffee platforms that have a significantly larger global install base than the Keurig. In September 2016, UK Starbucks launched branded Nespresso pods and reached 14% market share in ~7 months. If past is prologue the Starbucks and Nestle partnership should reap significant gains for both parties. The one downside of the Nestle deal is that in the short-term the company is giving up profitability that is unlikely to be fully offset by the buyback enabled by the $5bn after tax payment ($7.2bn pre-tax) Nestle is making for the assets. The company has guided to this transaction representing a 2% headwind to both revenue and EPS. Back of the envelope math implies that Starbucks is giving up about $375 mm of EBIT implying that the channel business will represent about 10% of EBIT post sale. The segment is likely to generate ~$600mm of EBIT in FY19.

As a case study, it is useful to examine the partnership between Monster and Coca-Cola that launched in mid-2015. In FY2015 Monster’s Gross OUS sales grew 8.4% on top of 13.3% growth in FY14. Then in FY16 and FY17 revenue growth accelerated to 24.6% and 23.2% respectively. It is almost as if added points of distribution can help drive sales. In addition, Monster continues to launch in more and more countries adding India in April in addition to many other new entries this year. It will be a long time before they tap out this growth benefit.

Under Appreciated Markets


Korea is their fifth largest market and is fully licensed. It sits within the CAP region but does not flow into comps and is smaller than China so it sometimes gets less than the attention it deserves. In 3Q18, the region comped 6% and grew system sales in the mid-teens. The company had 1,108 stores in the region as of YE2017 (4% of total stores) and is growing this store base rapidly, in 2017 their stores count grew 16%, and through the first ~3 months of FY18 the company added over 30 new stores for a growth rate of 11/12%. In fact, Korea ranked 4th globally for lowest number of people per store and this number will decline to ~43,000 by FY18. For reference, America was at ~23,000 people per store at YE17 and store counts are growing MSD. In FY17 Korea put up double digit comps.[7] Another impressive statistic about the health of the Korean market and the brand is that Korea is pulling off this success with the lowest level of GDP/store in the world, even lower than that in the United States. There are many reasons to be positive about Korea.


Japan is also a top five market, with 1,218 company owned stores at YE17 (4% of total stores). The company is growing their Company operated store base at ~6% per year. In 3Q18 excluding 2 points of Fx the company generated ~6% sales growth in the region implying no comp, but a positive overall given the implied transaction growth from the store base growth. In September 2017 the company finally launched their loyalty program which should be positive for comps. Additionally, there was only one store per ~100k people in Japan as of YE17. This implies room to double the total number of stores. A headwind is obviously the ageing and declining population in Japan given SBUX skews to a younger demographic, however ~60% percent of the population is still below 55, versus ~70% in the United States, the age demographic that represents around 90% of total Starbucks consumers and nearly all heavy consumers in the United States.[8]


India is a long-term play for Starbucks. The Country is in its infancy with only 116 stores as of March 31, 2018, up from 91 (March 31, 2017). The India JV added 25 stores in FY18 and they entered Kolkata giving Starbucks presence in seven cities in the country.[9] Starbucks entered India in 2012 through a 50/50 JV with Tata and longer-term this should be a massive market for them. India will be the most populous country in the world by around 2022 and given current levels of GDP and the rapid growth rate of GDP the country should be able to support two to three thousands stores long term, perhaps in the coming 15 years. Longer-term as Indian consumers see their disposable incomes rise rapidly this region should become a top five market for Starbucks.[10] In FY17-18 Tata Starbucks grew revenues 28% in rupees and recorded positive EBITDA for the first year ever. Based on FY17 revenues of 272 crore this revenue growth implies 348 crore of sales and over three crore per locations. [11]

Tata Starbucks was named one of the ‘Top Ten India’s Best Workplaces in Retail’, by the Great Place To Work® Institute in 2018. Indicating that Starbucks is following its successful business model of “doing well by doing good”. 


EMEA is a small portion of profitability and plagued by negative headlines such as their write-down of the Switzerland and weak headline comps. However, under the surface the segment is actually operating nicely when you look a bit deeper and appears to be turning a corner. System wide comps were up +3%, a more valuable number than the headline comp given 85% of the region operates under license agreements.[12] In addition, store counts were up 12.7% YoY as of 3Q18. All-in all this implies ~16% underlying system wide sales growth at the small EMEA segment that is only 11% of total stores, but growing meaningfully faster than the overall rate. This indicates that Starbucks has a bright future ahead in the EMEA market even though it gets little attention given it represented only ~3% of company EBIT in 3Q18. In light of the 85% license mix, the low EBIT margin, ~11%, implies that the company is losing money on the company owned stores, and/or that the licensing business is not operating to its full potential. Long-term this segment should see significant margin expansion generating strong profit growth going forward coming from store growth and margin expansion. Profits in the coming 3-4 years could double as topline grows ~10% and margins expand to the high-teens or low twenties. This would lead to segment EBIT of ~$300mm in FY2022. This would generate about 4-5 points of cumulative growth in EBIT or ~1% annually. Impressive for a segment currently generating only 3% of total EBIT.


Management Compensation


            The annual and long-term incentive plan design is favorable to shareholders, and aligns well with the company’s targets. The company sets out a target of >25% ROIC, 15-20% EPS growth, and HSD revenue growth. All of these metrics are also part of the incentive plan indicating that the company not only talks the talk but plans on walking the walk. The long-term plan is 50/50 weighted to ROIC and 2-year adjusted EPS CAGR. The ROIC target for FY17 was 24.9% effectively in-line with the target and the EPS target was for a 15.8% two year CAGR. The EPS target is a tad on the low side given the stated management targets however the 13.1% threshold for comp payout supports the fact that they truly believe they can generate double-digit EPS long-term. The long-term comp is around 80% of total comp for the Starbucks C-suite as such we can be confident they are focused on ROIC, one of the most if not the most important metric in all of business.

Investors should be pleased that ROIC is a major part of Starbuck’s long-term incentive plans because a recent Goldman report noted ROIC is the only factor for management compensation incentive that has a positive correlation with equity outperformance.




Starbucks trades at 19x FY18 pro-forma EPS of $2.71. I exclude the loss the $375mm of EBIT sold in the Nestle transaction, add back the $350mm of G&A cost saves, bringing EMEA margins up to 20% from 11%, a $100mm benefit, add in a fourth quarter of owning the east China JV worth ~$35mm of EBIT and assume a repurchase of $14.2mm. The estimated repurchase of $14.1 million comes from taking $25mm removing the $5.1bn of repurchases and the $1.3bn of dividends completed through 3Q18, assuming Starbucks pays $4.4bn of dividends over the coming 9 quarters. At the current share price, this reduces shares outstanding by 20%, but also requiring a debt raise of $9.3bn, bringing net debt to $13.9bn or 3.1x pro-forma EBIT.

An accelerated repurchase of this nature is unlikely, however the purpose of this math is to exhibit that Starbucks trades at a discount and offers a margin of safety. Note that in 3Q18, the recent mess of a quarter, the company grew organic revenues 7%! If the company can improve comps growth should top 7%, and operating margins should expand generating LDD EBIT growth. Adding the conservative estimate of 7% revenue growth to the pro-forma FCF yield of 4.5% yields an 11.5% return. Adding in potential margin expansion from a continued mix shift to the higher margin CAP region and the high margin licensed business, combined with comps in the company’s target range of 3-5% versus the 1% comp embedded in the 7% estimate yields a total return potential in the mid-teens.

Additionally, the company is likely to maintain a constant leverage ratio that should generate about $1.7bn of incremental debt capacity at the high end of their 2.9x debt/EBITDAR leverage ratio, or said a different way over 2% of the current market cap.



At 19x FY pro forma 2018 earnings Starbucks trades at its lowest multiple since the financial crisis. The shares offer low double digit to mid-teens prospective returns without banking on multiple expansion. The massive share repurchase should provide some downside protection if fundamentals deteriorate modestly, while providing significant upside potential by turning Starbucks into a coiled spring that is ready to explode if/when the company regains its mojo and comps 5%




Restaurant margins can be volatile:

Restaurant margins are inherently less stable than CPG margins given the importance of comps to offset ever-rising labor and rent costs. The volatility and potential downward pressure that comes from slowing demand growth means that the multiple should be lower for a given level of growth. Partially offsetting this is the continued shift of SBUX to licensing out their non-core market stores. An example is Brazil, which transitioned to fully licensed in 1Q18.


Price could be a headwind to growing transactions:

Starbucks is a premium product and sometimes that can create a price problem. Just like W.W. Grainger, Starbucks is growing sales with its core customers, but losing transactions from their non-core consumer. In the US, Starbucks is adding customers to the loyalty program in hopes of generating revenue uplift with these consumers over time. In the past few months, this initiative added 6mm digitally enabled members bringing the total customers that are part of their digital platform to 21mm. The company plans to turn on their personalization engine for the customers in the next couple of quarters and expects this to drive higher comps in FY19.


Competition in China:

In China, an upstart, Luckin coffee is growing rapidly rolling out 525 stores in 4 months.[13] The company is in the venture stage and not focused on generating profits today making its long-term success questionable. They charge 20-30 RMB for specialty drinks vs. 30-40 at SBUX and have other discounts such as buy 2 get one free and a crazy buy 5 get 5 free offer. In addition, Luckin focuses on delivery collaborating with SF Express in order to control the experience and collect data. Belinda Wong, the head of SBUX China, and her team are not sitting by idly and have upped their store growth targets to 600 from 500 in order to compete head to head in the real estate land grab. A strategy that helped choke off competitor Luckin was the 2:1 strategy launched ~4 years ago where Starbucks focused on opening at least two location near every Luckin location. Now the company has significantly surpassed this and according to someone we spoke to Costa is no longer a potential threat. Luckin raised $200mm at a $1bn valuation in July. The CEO Jenny Qian commented that they had spent $150mm in the 6 months since their soft launch and that they had sold 5mm cups of coffee in the first four months. Speaking to the South China Morning Post Qian said, “With the latest funding round and other financing, we now have a cash reserve of 2 billion yuan. The company is in no rush to make a profit.”


Financial Engineering is reducing balance sheet strength:

            The company is levering up the balance sheet and intends to approach 3x lease adjusted ND/EBITDAR. This is enabling their large buyback, which should boost EPS and FCF/share however; this makes the fundamentals of the company more volatile by adding debt. One of the positives is that the company has been growing their licensed revenues and channel business mix which have more stable profitability and should help the company maintain strong financial wherewithal through the cycle. For reference YUM, QSR, and DPZ fully franchised models operate with 5x or higher leverage ratios. Around 35% of the company’s profits are from licensed and channel revenues should be able to support a 5x leverage level while the remaining store business which is extremely high margin and growing rapidly should be able to support 2-3x reasonably. Applying the different leverage ratios to their 2 profit streams it appears that a 3-4x leverage ratio is within the realm of reasonableness, as such the company’s goal of staying at “less than 3.0x” to maintain BBB+/Baa1 ratings is a positive. As of FY14, the company was at 1.65x lease-adjusted debt/EBITDAR.[14]


Starbucks is ubiquitous in the US and may be at saturation

            The company has typically provided an average weekly unique customer number for US visitors and in 1Q18 the company stated this number was ~75mm unique customers. Flat with two quarters prior and up from ~70mm unique in 4Q2014. Additionally at this point, there are more Starbucks in the United States than there are McDonalds! On the one hand this is a strong indication of both the ubiquity of the brand and the consume reach; it also indicates that the brand is at or near saturation. Another data point supporting saturation is that a Morgan Stanley Survey online survey done in 2018 indicated that of the 2,056 people surveyed 64% had gone to Starbucks for coffee in the last six months. This was the highest on the list and above McCafe at 57% and Dunkin Donuts at 45%. Additionally the AUV for a Company Operated Starbucks is $1.5mm versus MCD at around $3mm indicating significant runway, especially in light of the fact that SBUX skews towards a consumer pool with a larger addressable disposable income.

Their survey also showed that only 11% of coffee drinkers had never gone to Starbucks with 7% saying that they would never intend to go to a Starbucks. This shows that the company has to increase market share with current or lapsed US based customers to grow given they have reached the vast majority of their addressable market. Luckily, the company focuses on driving higher digital engagement to increase market share of current customers and to improve the chance of retaining lapsed customers when they return.


[1] The shift to international stores does mean that the company will face pressure on the AUV (Average Unit Volume) metric, we expect these less mature markets to drive above company average comps partly negating this effect. Also using the UN’s definition of 193 recognized countries.

[2] The average population of each of these cities is equal to that of LA!

[3] US BEA for US disposable income measure in 2018, National Bureau of Statistics of China for the Chinese statistic, measure as of 2017.

[4] 25,200 *1.27/1.20 = 34,020 Locations.

[5] I do question whether government statistics are accurate due to the Hukou benefits system, and believe this metric is likely higher. That said many of the migrant workers that are uncounted would likely see their ability to consume rise, as the system was reformed and opened up to make life equal for the rural population.

[6] Back then global included on the US and Canada

[7] Scott Maw, UBS Global Consumer and Retail Conference, March 2018

[8] Morgan Stanley Research AlphaWise Survey, 2018

[9] Tata Starbucks FY ends March 31st

[10] John Culver at Grand opening of first Starbucks in Mumbai, 2012.

[11] Crore means ten million rupees, 1 crore = 10 mm rupees at the current exchange rate of 69 rupees per USD 1 crore = $145k implying ~$450k in sales per store location. Revenue number from

[12] Licensed locations are not included in comps.

[13] For reference, SBUX is targeting 600 stores per year for growth, so this is nearly 3x the pace.

[14] Lease obligations are capitalized at 6x rent.

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Comps improve (China or US)
Share repurchase kicks into high gear after Nestle deal
Nestle deal accelerates channel growth
Revenue/store growth continues at a 7% pace leading to an ever higher valuation
G&A cost saves come through

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