SBUX Stock: What Does The Italian Move Mean For Starbucks Corporation?
Starbucks (SBUX) announced recently that it will be opening its first stores in Italy next year. Starbucks currently has stores in 65 countries; Italy is arguably among the most important markets it hasn’t reached yet. Let’s take a broader look at Starbucks’ international presence, and see what the move into Italy might say for the company’s international growth strategy and SBUX stock.
Starbucks currently has just over 20,000 stores worldwide. According to this exhaustive data analysis from Quartz in 2014, roughly 55% of these stores were located in the United States. Following the United States, the next top markets by store count were: #2 Canada, #3 China, #4 Japan, and #5 United Kingdom.
Tallying the top 5 together, you account for about 15,000 stores, or almost 75% of the company’s total store count. For the long-term SBUX stock growth story, you need more stores. That, along with other concepts such as Teavana, represent the best avenues for expansion.
Europe: SBUX Best Opportunity?
You’ll notice no continental European countries are in the top five by store count. Despite the long and storied history of coffee and the café culture in Europe, SBUX has a relatively limited presence. On the continent, Germany is the company’s largest market. However, it only hails with 163 stores there.
France and Spain, both seemingly ideal markets, barely scrape the company’s overall top 20 markets, and each geography has fewer than 100 stores. The city-state of Singapore has more stores (99), than either France (97) or Spain (81). Other cultured Western European countries such as Belgium, The Netherlands, and Portugal didn’t have enough stores to make Starbucks’ top markets list.
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And, to this point, SBUX doesn’t have single store in Italy. That’s despite it being one of the most important centers of coffee culture globally. A visit to Italy is listed in Starbucks’ corporate biography as an important turning point in founder Howard Schultz’ outlook.
Yet inexplicably, SBUX has had little presence on the continent. Compared to the 1,396 stores in Canada, population 35 million, it’d seem there’d be possibilities for many thousands of stores in mainland Europe. The continent has hundreds of millions of educated, refined, and wealthy consumers. Instead, Starbucks has a much smaller presence than in Canada or other smaller markets such as Japan.
European Market: Not An Easy One
On the other hand, while there’s a great opportunity, there’s also significant risk. The European market has been notably difficult for many American multinational firms, particularly in the restaurant sector. McDonald’s(MCD), for example, has suffered more embarrassment in its European efforts than anywhere else internationally. Eventually, after much struggle, McDonald’s managed to transform France into its second-biggest market. But it didn’t come easily.
Given SBUX’s muted growth rate up to this point in Europe, it seems likely they’ve had similar growing pains. In markets where there is less opposition to American culture and its way-of-life, the company has exploded. In Canada, it has more stores per capita than even the US.
In South Korea, not known for having a robust coffee culture, Starbucks has 632 locations. Here where I live, Mexico, Starbucks is already over 400 stores. Even poorer markets that draw little international attention can grow rapidly. Malaysia, for one, has almost 200 stores already. This is a great long-term tailwind for SBUX stock.
So when Starbucks has zero stores in Italy and less than a hundred in Spain and France among other European markets, it speaks to both great opportunity…and difficulty.
SBUX has to overcome significant opposition to its American image. The espresso has a higher cultural standing in Europe than the US; it’s unlikely that the majority of European customers will be quick to adopt to taking Starbucks products to go in plastic containers like they do in the states. Stated otherwise, Starbucks drive-through probably isn’t going to be the big selling point for the new outlets.
Starbucks Market Adoption Is Likely With Time
SBUX has had better luck with entering foreign markets than many other American multinationals. While the company is still distinctly American, it doesn’t quite have the same negative perception that McDonald’s or Wal-Mart (WMT) does.
When Starbucks announces that it is opening stores in a new country, generally the complaints are more about the quality of the coffee and the different shop experience; rather than that the company is causing obesity, destroying jobs, or ruining the local retail economy.
In examples where SBUX has faced sharp local resistance, generally the coffee itself is the issue. In Colombia, for example, where coffee-growing is a national passion, Starbucks had to overcome intense opposition to the idea of selling a homogenized product. To get around this, Starbucks promised to offer 100% Colombian coffee in its stores there, and packaged several regional Colombian beans for wholesale. After a lengthy delay, Starbucks successfully opened its first store there in the summer of 2014.
While in the long-term there will be limits to Starbucks’ growth, for the time being, the company is still managing its affairs wonderfully. The company is increasing margins despite entering many new markets simultaneously. Gross margin for SBUX stock has steadily edged higher. It notched up from 55% seven years ago up to 60% today. Net margin, which never exceeded 8% prior to the recession, is now up to 12%. Remarkably, this is a company that has gotten substantially more profitable since spreading its wings and moving beyond the domestic market. Usually the opposite occurs.
Starbucks’ valuation is tough to stomach for new shareholders. SBUX stock isn’t cheap today. The market is paying up for Starbucks’ excellent performance. But make no mistake; the company is firing on all cylinders. And its expansion into Italy foreshadows a broader growth strategy in Europe. If successful, it should offer several more years of notable revenue growth.
At the time of this writing, Ian Bezek had no position in Starbucks stock. He owns shares in Wal-Mart. You can reach him on Twitter at @irbezek.
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SBUX has to overcome significant opposition to its American image. The espresso has a higher cultural standing in Europe than the US; it’s unlikely that the majority of European customers will be quick to adopt to taking Starbucks products to go in plastic containers like they do in the states. Stated otherwise, Starbucks drive-through probably isn’t going to be the big selling point for the new outlets.
Starbucks Market Adoption Is Likely With Time
SBUX has had better luck with entering foreign markets than many other American multinationals. While the company is still distinctly American, it doesn’t quite have the same negative perception that McDonald’s or Wal-Mart (WMT) does.
When Starbucks announces that it is opening stores in a new country, generally the complaints are more about the quality of the coffee and the different shop experience; rather than that the company is causing obesity, destroying jobs, or ruining the local retail economy.
In examples where SBUX has faced sharp local resistance, generally the coffee itself is the issue. In Colombia, for example, where coffee-growing is a national passion, Starbucks had to overcome intense opposition to the idea of selling a homogenized product. To get around this, Starbucks promised to offer 100% Colombian coffee in its stores there, and packaged several regional Colombian beans for wholesale. After a lengthy delay, Starbucks successfully opened its first store there in the summer of 2014.
While in the long-term there will be limits to Starbucks’ growth, for the time being, the company is still managing its affairs wonderfully. The company is increasing margins despite entering many new markets simultaneously. Gross margin for SBUX stock has steadily edged higher. It notched up from 55% seven years ago up to 60% today. Net margin, which never exceeded 8% prior to the recession, is now up to 12%. Remarkably, this is a company that has gotten substantially more profitable since spreading its wings and moving beyond the domestic market. Usually the opposite occurs.
Starbucks’ valuation is tough to stomach for new shareholders. SBUX stock isn’t cheap today. The market is paying up for Starbucks’ excellent performance. But make no mistake; the company is firing on all cylinders. And its expansion into Italy foreshadows a broader growth strategy in Europe. If successful, it should offer several more years of notable revenue growth.
At the time of this writing, Ian Bezek had no position in Starbucks stock. He owns shares in Wal-Mart. You can reach him on Twitter at @irbezek.
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