- Starbucks took a hit to their stock price despite a good quarterly earnings result.
- Starbucks has a good rate of innovation.
- There is a big growth opportunity in China.
As Starbucks (NASDAQ:SBUX) investors recently learnt, high expectations can be both a blessing and a curse. Otherwise dubbed the “Apple effect” investors simply expect revenue to keep climbing, forgetting that every company has to have a point of consolidation. Moreover, market forces can cause a slump in growth. Interestingly, this wasn’t quite the situation for Starbucks. The coffee house giant managed to increase earnings, profit margins, and even showed record revenue. Moreover, same store US sales shot up by 7% and 6% globally, which is impressive.
Why did Starbucks stock price take a dip?
Firstly, the fact that they missed analysts’ expectations indicates that their growth could stall in the future. As a result, some investors would rather move their money to other stocks with more momentum. For instance, McDonalds (NYSE:MCD) reported a same store sales increase of 5.4% in their most recent earnings report. This caused Mcdonald’s stock to rise as they are widely regarded as a bigger and more stable brand than Starbucks.
The bearish sentiment surrounding Starbucks is unfounded, and recent movements by management show that this is a company with a plan for long term growth. This provides an opportunity for the long term investor. On the other hand, short-term investors can also capitalize on their momentum.
Below are some reasons why Starbucks is a wise addition to your portfolio.
A willingness to adapt to the needs of consumers
As Western society becomes more health-conscious, every food and drinks chain needs to be able to satisfy their need for healthy choices or lose grip on the market. This is something which McDonald’s is struggling with hence the difference of 1.4% in same store sales as compared to Starbucks. Due to certain events, documentaries and campaigns, McDonald’s is viewed as an unhealthy choice. They are being helped by the fact that their economies of scale are unparalleled and their food is cheap.
On the other hand, Starbucks has been quick to stay on the pulse of health trends and quickly rollout a compelling product to take advantage of it. For instance, the Match green tea trend has been on an exponential rise since 2003, and Starbucks quickly created a Match green tea drink and were able to grab sales from a savvy, health-conscious, millennial segment. The trend is still growing, and Starbucks has increased their Match offerings.
The speed of adaptability and execution which Starbucks is unmatched within the food and beverages industry.
Convenience and efficiency
In a move to reduce queues, serve more customers, and embrace technology, Starbucks released their mobile ordering app in 2015. This allows consumers to request and pay prior to entering a nearby Starbucks. As a result, they don’t have to wait long, and in most cases are able to pickup their drink and leave. Following a successful release in the United States, it was rolled out in the United Kingdom.
Due to the data collection possible, this easily allows Starbucks to recommend similar products to app users; thereby increasing sales. It is also an effective way to build a long term relationship with consumers. Competitors have been slow to respond, despite the fact that it is fairly straightforward to implement.
Expansion in the East
Don’t let China’s economic woes fool you, they have a growing middle class keen to spend- especially on Western brands. Starbucks was able to grow same store sales by 3%, which is impressive when one considers the fact that they are relatively new in the Chinese market and the wealth of cheaper alternatives available to consumers in the East. You can expect to see growth in China increase during their next earnings call as they penetrate the market with more purpose.
Starbucks is keen to significantly increase the number of stores in China over the next 3 years. In fact, in five years time, China could contribute significantly more to Starbucks’ revenue than the United States.
In conclusion, Starbucks coming under analysts’ estimates isn’t a cause for alarm. This is a company which has a stable position in the Western world and is set to make huge inroads in the East. The platform for their long-term growth is a willingness to move with the times and create offers to capitalize on trends.
Starbucks is a “must have” stock for any serious investor.