SBUX - Starbucks Corp

[sleepydragon]

My wife used to love Starbucks. But in recent years the drinks got so sweet she hated it. She will ask the employee every time to pump “1 unit of sugar syrup”, but they frequently make mistakes. And Their coffee doesn’t even taste better than donkin donuts.

[augustabound]

She will ask the employee every time to pump “1 unit of sugar syrup”,

 

I used to love the cafe mocha and noticed it was way too sweet and I usually don't mind sweet.  When my wife gets Starbucks she'll ask for a half sweet mocha (or  pump) and it's much better. When I order I always forget........

[frommi]

Yeah, went in the shitter last time.  Schultz said it is "cheap and undervalued."  Hmm.

 

EDIT:  Looking a little bit.  Seems like its in the region of an 8% earnings yield.  NSRGY deal probably has yet to take effect other than big ass cash payment up front.  Brand seems....good. 

 

Insiders steady dumping stock since middle of 2017, might be full of sh*t.

 

Just from reading the Nestle news it looks like SBUX gets 7.15$ billion USD and additional revenue. That sounds pretty weird to me, what am i missing?

[atbed]

Yeah, went in the shitter last time.  Schultz said it is "cheap and undervalued."  Hmm.

 

EDIT:  Looking a little bit.  Seems like its in the region of an 8% earnings yield.  NSRGY deal probably has yet to take effect other than big ass cash payment up front.  Brand seems....good. 

 

Insiders steady dumping stock since middle of 2017, might be full of sh*t.

 

Just from reading the Nestle news it looks like SBUX gets 7.15$ billion USD and additional revenue. That sounds pretty weird to me, what am i missing?

 

They get a lump sum, but give up sales for the CPG business. Despite the royalty and lump sum payment (buybacks), I don't think the deal is accretive to EPS.

[Spekulatius]

She will ask the employee every time to pump “1 unit of sugar syrup”,

 

I used to love the cafe mocha and noticed it was way too sweet and I usually don't mind sweet.  When my wife gets Starbucks she'll ask for a half sweet mocha (or  pump) and it's much better. When I order I always forget........

 

Agreed on sweetness. and the worse thing is that it isn’t consistent, even within the same location. if there was one thing to fix with their coffee blends, that would be it.

[TheAiGuy]

Thanks, but I'm good.  My current positions rely on application of the rule of law in the U.S. and a "retailer" run by an Ayn Rand acolyte.  Feeling good.  Why would I waste my time owning a company that sells addictive products that all their customers love?

 

I've been thinking a lot about Starbucks and I think there are worse ideas than buying this and holding on. I generally think this will do very well over time, but here's sort of a loose outline of what I think:

 

• People really like their coffee. You don't, I don't, but millions buy it every day.
  
• I like that people make small, nearly automatic transactions everyday. The cost of each coffee, in dollar terms, not relative to other coffee, is low and I doubt too many people pay attention to the price of a single coffee, let alone their run rate costs.
  
• I think this is the type of thing that they win a customer at a young age and have them for decades as habits and preferences take root
  
• Coffee is mildly addictive with little health risks and low potential for future concerns of adverse effects.
  
• There has been a demonstrated ability to raise prices
  
• The company is currently quite profitable.
  
• I like the management. I think they have shown persistence and strategic focus (e.g. multiple attempts to enter the tea market, multiple attempts to enter higher end coffee shops.)
  
• I think they have a good chance of entering and, frankly, dominating the higher end coffee market over time.
  
• I like their capital management.
  
• I like their returns on capital
  
• I think they can continue to grow in Asia and in the US
  
• Little to no technological risk
  
• Demonstrated ability to scale without brand dilution
  

 

If you take a look at the competitors in the space, the one I'd worry most about is JAB b/c I don't fully understand their strategy. They have a lot of good brands, but it's going to be hard for them to compete with SBUX outside the CPG space. Dunkin is a regional brand and MCD promise as a brand isn't good coffee, and as such, they aren't a strong competitor (though it is worth their while to try). Third-wave coffee shops are largely small chains and independents, and Starbucks is well finance and has substantial real estate expertise, which can make them a formidable competitor (I don't know about you, but most indy coffee shops are shit, though I would recommend la Colombe if you come across it).

 

The multiple's high but I can't think of anything else that's wrong with the company, and the multiple is only a major concern if there is a risk to the company's perception as a going concern. This isn't like a retailer or fashion brand where purchases are large enough and infrequent enough to promote comparison shopping. Purchases are habitual. It's a high margin product with a low absolute cost and generally affluent customer base concentrated in urban areas. And they own their go to market and have an actual relationship with their customers.

 

I think they get low, double digit EPS growth over the next decade, through a combination of store openings, price increases and share shrink, plus another 1.7% in current yield. Even if the multiple shrinks in half over that period, that's a mid-to high single digit return for what is essentially a consumer stable.

 

 

I'm calling this one a win. The stocks up ~35-40% from two years ago when I posted this and earnings look good!  Healthy revenue growth, healthy SSS, etc.

[cameronfen]

^This is probably been mentioned but in their big emerging market (China) and main growth opportunity to compound capital at high rates is facing increasing competition from local players (Luckin Coffee) and likely Roics are going to be significantly lower in China compared to the last 10 years. 

[TheAiGuy]

^This is probably been mentioned but in their big emerging market (China) and main growth opportunity to compound capital at high rates is facing increasing competition from local players (Luckin Coffee) and likely Roics are going to be significantly lower in China compared to the last 10 years.

 

Or, alternatively, Luckin helps normalize and spread Coffee drinking in China with a product regarded as (1) cheeper and (2) worse.  The entrance of a real competitor can a good thing -- it can mean that there is a real market worth pursuing.

 

And, just checking, SBUX revenue and margins are UP over the last year in China, which suggests the competition hasn't hurt it so far.

[HJ]

Luckin is burning through so much cash you wonder how long it will last.

[Spekulatius]

Chinese go to Starbucks for the cache and the environment. Westerners go there to feel a bit like home. I don’t think imitators like Luckin can quite compete on above. There is always going to be competition in China and imitators, but authentic western brands do very well in China and i expect Starbucks continue to do so too.

[cameronfen]

^ I don't know the SBUX very well, I think I just like posting things sometimes but because I'm tempted to respond:

 

1.  The argument that Luckin will normalize coffee in China:

 

a.  I have never see the introduction of competitors helped market dominating incumbents. 

b.  You probably have never been in China.  In tier 1 cities, everyone knows what Starbucks is and most people drink coffee.  This is why ROEs are so good there are 2 or 3 starbucks on every block and they are all crowded.  And I readily admit that this is the bull case (but it is priced into the stock). 

 

2.  Starbucks margins and revenue is up from last year

a.  So were newspapers revenues and margins in the early days of the internet.  As were mall REITs/Retailers a couple years ago, even though anyone could predict that online retail would cause problems.  This is because the momentum of same store sales growth built up over time masks the effect of a competitors and threats to a companies moat, especially when the threat is relatively small but fast growing (granted Luckin is not small).  By the time you see deterioration much of the moat is already irreparably damaged.  I don't know how much Luckin will effect SBUX, but by the time you see it in the financial statements it will likely be too late.  I don't know what info SBUX provides, but if I were in the stock I would closely monitor IRRs for new stores and marginal returns on newly deployed capital overall in China.   

 

3. Luckin burning through cash:

 

a.  That never stopped companies like Uber or Lyft.  Or for public market comps: Amazon and many SaaS companies.  If a recession happens, it might be a problem for Luckin, but I see no wavering of demand for a emerging market brand that is rapidly taking share in a high ROE subsector (coffee shops)

b.  The fact that investors will subsidize Luckin will be problematic for Starbucks as they have to compete with prices that are below marginal cost

c.  I will say Luckin is probably opening too many stores/kiosks and is risking oversaturating the market.  If they over commit they could go belly up given unfortunate circumstances (like a recession). 

 

4.  Chinese go to Starbucks for the western brand effect.  (The expat market is small so I will ignore that)

a.  I do agree, but Luckin is so much cheaper by a long shot and I do think that will begin to play more and more of a factor. 

 

Ultimately, Luckin does not need to be better than Starbucks.  The threat to SBUX's pricing power only depends on Luckin to be viewed as a viable competitor.  If people realize that they don't need SBUX, but trade off the costs and benefits of SBUX vs Luckin, there goes SBUX's pricing power.  I'm not saying SBUX will go the way of the horse and buggy, but there vaunted ROICs are dependent on there domination of the coffee market in the main countries their in.  They have almost half of all coffee shops in the US and they had almost the entire Chinese market to themselves, but they are losing that. 

[Spekulatius]

I have been to China a couple of times and I have been to a Chinese Starbucks. This doesn’t make me an expert, but I do know how my Chinese colleagues felt about western brands. They loved Nike

E, Levi’s, Adidas more so than there own brands, even though a lot of these goods were produced in China. The few Starbucks shops I have been too were pretty crowded and it was obvious that Chinese went there to show off. This was a couple of years ago and things may have changed, but Chinese coffee culture is in its early innings.

[TheAiGuy]

 

a.  I have never see the introduction of competitors helped market dominating incumbents. 

 

 

The introduction of Starbucks itself on the global coffee seen has probably help Nestle and Dunkin Donuts, among others, by increasing the amount of money people are willing to spend on coffee.  (I admit this is difficult to prove, as you would need a counterfactual).

 

I would also argue that the rise of Nike has helped Adidas more that it has hurt it, by growing the market.

 

Same thing for MasterCard to Visa and Visa to American Express.

 

Android has probably helped Apple more that it has hurt it by growing the overall market for smartphones, and thus its ecosystem (I'm thinking wireless providers and manufacturing, not apps) and the size of the market for its products.

 

You can argue any of these, of course.

 

 

 

b.  You probably have never been in China.

 

Nope! But I have access to lots of reading materials that I can find on the internets. Sometimes podcasts are helpful.

 

 

 

2.  Starbucks margins and revenue is up from last year

a.  So were newspapers revenues and margins in the early days of the internet. 

 

Yes, yes, all things end and billions of years after we die the universe will disperse into an ever expanding, uniform field of entropy. 

 

The point is there is no evidence, as of yet, of any decline.

 

 

3. Luckin burning through cash:

 

I have no opinion on Luckin.  Fail, don't fail, who cares?  I'm here for the Benjamins.

 

I assume, that like the United States, Europe and Japan, Starbucks will face well funded and run competitors, that are popular and have better coffee at a cheaper price, and Starbucks will nonetheless sell more Frappacinos each year for like the next couple of decades.

 

 

 

Ultimately, Luckin does not need to be better than Starbucks.  The threat to SBUX's pricing power only depends on Luckin to be viewed as a viable competitor.  If people realize that they don't need SBUX, (...)

 

People like nice things.  The presence of cheep knock-off is not a bad thing for luxury products.

 

 

[cameronfen]

So I think it makes sense that there is still a lot of pie to be won in China.  I probably didn't consider that as much as I should in my previous response.  It may turn out to still be a very good investment.  I just think the growth will not be as easy to win as in the past. 

[SHDL]

I normally don’t go to Starbucks because I don’t like their coffee, but I noticed something interesting when I was in Tokyo a while ago: they serve way better drinks there than they do in the US (on par with some of the nicer cafes in my area, minus the fancy latte art).  I tried a few other local chains/shops while I was there too and came away with the impression that Starbucks seems to have earned an Apple-like market position there with a strong brand supported by a genuinely good product (which is not easily done especially in a foodie capital like Tokyo).  That was a bit surprising to me.  Maybe something similar is going on in China?

[rkbabang]

I normally don’t go to Starbucks because I don’t like their coffee, but I noticed something interesting when I was in Tokyo a while ago: they serve way better drinks there than they do in the US (on par with some of the nicer cafes in my area, minus the fancy latte art).  I tried a few other local chains/shops while I was there too and came away with the impression that Starbucks seems to have earned an Apple-like market position there with a strong brand supported by a genuinely good product (which is not easily done especially in a foodie capital like Tokyo).  That was a bit surprising to me.  Maybe something similar is going on in China?

 

Interesting.  Do they roast their beans differently for the Japanese market?  In the US they roast at too high a temperature which burns the beans something awful and it tastes burnt.  Sure most people in the US get drinks containing tons of milk, sugar, flavors, syrups, and whipped cream, so they don't notice, but if you order a double shot of espresso or just a black drip coffee you notice how bad it is.

 

[SHDL]

I normally don’t go to Starbucks because I don’t like their coffee, but I noticed something interesting when I was in Tokyo a while ago: they serve way better drinks there than they do in the US (on par with some of the nicer cafes in my area, minus the fancy latte art).  I tried a few other local chains/shops while I was there too and came away with the impression that Starbucks seems to have earned an Apple-like market position there with a strong brand supported by a genuinely good product (which is not easily done especially in a foodie capital like Tokyo).  That was a bit surprising to me.  Maybe something similar is going on in China?

 

Interesting.  Do they roast their beans differently for the Japanese market?  In the US they roast at too high a temperature which burns the beans something awful and it tastes burnt.  Sure most people in the US get drinks containing tons of milk, sugar, flavors, syrups, and whipped cream, so they don't notice, but if you order a double shot of espresso or just a black drip coffee you notice how bad it is.

 

I don’t know about the beans, but apparently their milk comes from a local ultra premium brand (the kind you can’t buy at a normal grocery store).  I guess a latte is like 98% milk, so I would imagine that makes a big difference.

[rkbabang]

I normally don’t go to Starbucks because I don’t like their coffee, but I noticed something interesting when I was in Tokyo a while ago: they serve way better drinks there than they do in the US (on par with some of the nicer cafes in my area, minus the fancy latte art).  I tried a few other local chains/shops while I was there too and came away with the impression that Starbucks seems to have earned an Apple-like market position there with a strong brand supported by a genuinely good product (which is not easily done especially in a foodie capital like Tokyo).  That was a bit surprising to me.  Maybe something similar is going on in China?

 

Interesting.  Do they roast their beans differently for the Japanese market?  In the US they roast at too high a temperature which burns the beans something awful and it tastes burnt.  Sure most people in the US get drinks containing tons of milk, sugar, flavors, syrups, and whipped cream, so they don't notice, but if you order a double shot of espresso or just a black drip coffee you notice how bad it is.

 

I don’t know about the beans, but apparently their milk comes from a local ultra premium brand (the kind you can’t buy at a normal grocery store).  I guess a latte is like 98% milk, so I would imagine that makes a big difference.

 

That makes sense.  A quick search online, I found people saying that the quality of milk that Starbucks uses differs from country to country.  I always get a latte when I go to Starbucks, because the steamed milk masks the taste of the awful espresso.

 

[Castanza]

 

 

Ultimately, Luckin does not need to be better than Starbucks.  The threat to SBUX's pricing power only depends on Luckin to be viewed as a viable competitor.  If people realize that they don't need SBUX, but trade off the costs and benefits of SBUX vs Luckin, there goes SBUX's pricing power. 

 

I don't agree with that. I think you're a dismissive of brand and the social "power/equity" they hold. SBUX is a bit of a status item. Sure there may be a slightly cheaper alternative but as a general rule people want to feel "included" etc. As shallow as that sounds even simple everyday purchases give people this sense of satisfaction. There is a reason you don't see people post Instagram pics with #McDonaldsCafe nearly to the extent of #Starbucks (or whatever the actual hashtags are) even though McDonald's coffee products have improved a lot.  The Chinese are no different from westerners. I trust Starbucks marketing team to position themselves firmly in the social stratosphere.

 

Look how many knockoff brands there are for basically every product. In my opinion it only solidifies the social aspect of the product that is being ripped off. It's human nature to recognize this. Otherwise we would see cases of knockoff brands overtaking the originals. Off hand I can't think of any examples (there may be some).

[Spekulatius]

I normally don’t go to Starbucks because I don’t like their coffee, but I noticed something interesting when I was in Tokyo a while ago: they serve way better drinks there than they do in the US (on par with some of the nicer cafes in my area, minus the fancy latte art).  I tried a few other local chains/shops while I was there too and came away with the impression that Starbucks seems to have earned an Apple-like market position there with a strong brand supported by a genuinely good product (which is not easily done especially in a foodie capital like Tokyo).  That was a bit surprising to me.  Maybe something similar is going on in China?

 

 

 

Interesting.  Do they roast their beans differently for the Japanese market?  In the US they roast at too high a temperature which burns the beans something awful and it tastes burnt.  Sure most people in the US get drinks containing tons of milk, sugar, flavors, syrups, and whipped cream, so they don't notice, but if you order a double shot of espresso or just a black drip coffee you notice how bad it is.

 

Starbucks has now a blonde espresso that you can add to all espresso drinks per request. It’s not a French roast with the somewhat burned taste that they popularized in the US. The bigger issue I have had recently more so is that the espresso drinks ( I mostly drink. Cappuccinos) are too inconsistent. Often , the cappuccinos are like weak Latte’s ( too much milk). I have returned them in this case sometimes, but then I mostly get the same thing as a replacement.

[rkbabang]

I normally don’t go to Starbucks because I don’t like their coffee, but I noticed something interesting when I was in Tokyo a while ago: they serve way better drinks there than they do in the US (on par with some of the nicer cafes in my area, minus the fancy latte art).  I tried a few other local chains/shops while I was there too and came away with the impression that Starbucks seems to have earned an Apple-like market position there with a strong brand supported by a genuinely good product (which is not easily done especially in a foodie capital like Tokyo).  That was a bit surprising to me.  Maybe something similar is going on in China?

 

 

 

Interesting.  Do they roast their beans differently for the Japanese market?  In the US they roast at too high a temperature which burns the beans something awful and it tastes burnt.  Sure most people in the US get drinks containing tons of milk, sugar, flavors, syrups, and whipped cream, so they don't notice, but if you order a double shot of espresso or just a black drip coffee you notice how bad it is.

 

Starbucks has now a blonde espresso that you can add to all espresso drinks per request. It’s not a French roast with the somewhat burned taste that they popularized in the US. The bigger issue I have had recently more so is that the espresso drinks ( I mostly drink. Cappuccinos) are too inconsistent. Often , the cappuccinos are like weak Latte’s ( too much milk). I have returned them in this case sometimes, but then I mostly get the same thing as a replacement.

 

I haven't tried the blonde espresso yet, I'll have to try it.  But the issue isn't French roast vs. a lighter roast.  When I buy a french roasted beans from my coffee guy (dark beans, dripping with oil) it is amazing.  He explained to me that the reason is that large roasting operations use use a really high temperature for a short amount of time in large batches to roast as much coffee in as short amount of time as possible.  Starbucks does this to such an extent that it actually literally burns the beans (chars them to ash).  Whereas he uses a much lower temperature for a much longer time to progress through the 1st crack and the 2nd crack, etc.  His beans get dark, but not burnt.  You are local, if you want to try the best coffee you've ever tasted, his place is in Salem NH.  I've been buying my beans from him for about 15 years or so.  But beware, it will ruin other coffee for you forever.  Every time I buy coffee beans from anywhere else I am disappointed.

 

http://coffeeroastersnh.com/

 

[Pauly]

I normally don’t go to Starbucks because I don’t like their coffee, but I noticed something interesting when I was in Tokyo a while ago: they serve way better drinks there than they do in the US (on par with some of the nicer cafes in my area, minus the fancy latte art).  I tried a few other local chains/shops while I was there too and came away with the impression that Starbucks seems to have earned an Apple-like market position there with a strong brand supported by a genuinely good product (which is not easily done especially in a foodie capital like Tokyo).  That was a bit surprising to me.  Maybe something similar is going on in China?

 

 

 

Interesting.  Do they roast their beans differently for the Japanese market?  In the US they roast at too high a temperature which burns the beans something awful and it tastes burnt.  Sure most people in the US get drinks containing tons of milk, sugar, flavors, syrups, and whipped cream, so they don't notice, but if you order a double shot of espresso or just a black drip coffee you notice how bad it is.

 

Starbucks has now a blonde espresso that you can add to all espresso drinks per request. It’s not a French roast with the somewhat burned taste that they popularized in the US. The bigger issue I have had recently more so is that the espresso drinks ( I mostly drink. Cappuccinos) are too inconsistent. Often , the cappuccinos are like weak Latte’s ( too much milk). I have returned them in this case sometimes, but then I mostly get the same thing as a replacement.

 

I haven't tried the blonde espresso yet, I'll have to try it.  But the issue isn't French roast vs. a lighter roast.  When I buy a french roasted beans from my coffee guy (dark beans, dripping with oil) it is amazing.  He explained to me that the reason is that large roasting operations use use a really high temperature for a short amount of time in large batches to roast as much coffee in as short amount of time as possible.  Starbucks does this to such an extent that it actually literally burns the beans (chars them to ash).  Whereas he uses a much lower temperature for a much longer time to progress through the 1st crack and the 2nd crack, etc.  His beans get dark, but not burnt.  You are local, if you want to try the best coffee you've ever tasted, his place is in Salem NH.  I've been buying my beans from him for about 15 years or so.  But beware, it will ruin other coffee for you forever.  Every time I buy coffee beans from anywhere else I am disappointed.

 

http://coffeeroastersnh.com/

 

 

Looks like the only coffee maker that they sell is the Aero Press! That thing has replaced every coffee making device that I own, I love it.  And just about everyone I've made coffee for ends up with one too. Seriously, if you don't have one pick one up, it's a very good value.

[Castanza]

 

Looks like the only coffee maker that they sell is the Aero Press! That thing has replaced every coffee making device that I own, I love it.  And just about everyone I've made coffee for ends up with one too. Seriously, if you don't have one pick one up, it's a very good value.

 

Couldn't agree more! Perfect for backpacking as well. Always gives me a chuckle when the company who makes them is also known for making Frisbees....SO random

[rkbabang]

Looks like the only coffee maker that they sell is the Aero Press! That thing has replaced every coffee making device that I own, I love it.  And just about everyone I've made coffee for ends up with one too.

 

I'm going to have to get one to try it. I've always used either my espresso machine or my french press.  I know people rave about them but I've been leery about putting hot liquids into something made of plastic.

[boilermaker75]

I also do not like SBUX coffee. So I always get a latte at SBUX.

 

Don't laugh, but I use McCafe to make my coffee at home. I think it is better then anything else I have tried.