Starbucks Just Made Your Coffee Experience More Innovative

When Starbucks (SBUX) announced the closure of all of its 379 Teavana stores by the spring of 2018, it came as a warning signal to many analysts. But for long-term investors, Starbucks future growth prospects could look more promising.

Acquired in 2012 for $620 million, Teavana stores are set to close due to declining foot traffic in malls. As a result of this retrenchment, Starbucks incurred asset impairment and goodwill charges of roughly $100 million during the third quarter. Following the news, Starbucks shares fell 1.2% to $58.80 in after-hours trading. For the 3rd fiscal year 2017, the Seattle-based company reported earnings of $691.6 million, down by 8.3% down from $754.1 million in the same quarter a year ago.

In the past, many of Starbucks diversified acquisitions have not gone down too well, following closedowns. Bought in 2012 for $100 million, Starbucks had bought La Boulange, but only to close it down three years later. A more recent was the closure of all four juice stores of Evolution Fresh, which was acquired by Starbucks in 2011 for $30 million. The stores served cold-pressed juices and healthy salad bowls with calorie counts. Today, like Teavana’s tea infusions, Evolution’s bottled juices form a part of the Starbucks stores’ menu.

But despite the struggling acquisitions, Starbucks roadmap looks promising for investors focusing on growth stocks.

For starters, the coffee industry is highly competitive and with low switching costs, retaining loyalty in the coffee business can be a daunting task.

Starbucks newest threat comes from independent, local neighborhood specialty coffee shops in the US which are becoming increasingly popular. Offering what Starbucks stores have offered for a long time, the coffee often comes with better prices!

In the long run, such booming local competition could hurt Starbucks store sales. At the UBS Global Consumer and Retail Conference this year, Starbucks CFO Scott Maw said, “We’re still not seeing anyone competitor or even a smaller number of group of competitors being an influence on our business at any time. But what we have acknowledged … is the collective group of independent coffee shops out there, they are doing a lot of what Starbucks has been so good at for so long.”

The company’s 5-year strategic plan aims to grow the revenues by 10% with an increased EPS of 15%-20%.

To achieve this, it is preparing to add 12,000 stores globally to a total of 37,000 by 2021, which could boost its comparable-store-sales. A closer look at the company’s recent comp- store- sales shows a growth of 5% in the U.S. and Americas, 7% in China and 4% globally in the third quarter of 2017.

Here is a focus on Starbucks growth prospects that could accelerate companies’ financial performance in the future.

  1. Starbucks Rewards™ Program

Starbucks loyalty program is carefully being included in the company’s strategic future plans.

Starbucks has 36% of its US company-operated sales from Starbucks Rewards Membership. In its fiscal third-quarter results in 2017, Starbucks said that its Starbucks Rewards membership was up 8 percent from a year ago to 13.3 million members. The retail giant now plans to provide a unique coffee experience for its loyal customers.

It has integrated its store services through its mobile app for customers. The digital connection has proved to be a boon to 1200 Starbucks stores that have seen a jump in the number of transactions.

The U.S. average ticket showed an increase of 4% with transactions growing 1% following the shift in the Starbucks Rewards loyalty program from a frequency-based to spend-based model in the third quarter last year.

With the intention of increasing customer interaction globally, Starbucks Rewards Program was recently launched in Japan and allows loyal members to earn redeemable stars on each visit. Customized and personal favorites show up on the app and for this, Starbucks has relied heavily on artificial intelligence. The app allows customers to pull up orders based on favorites with a simple click and even allows to look for closest Starbucks location.

2. Seattle Reserve Roasteries

Starbucks plans to open 20- 30 Reserve Roasteries globally for higher-priced premium coffees. The intention is to make these Reserve Roasteries the Willy Wonka of coffee.

So far, Reserve Roasteries remains a huge attempt to make coffee a niche market and this could most likely integrate with other of Starbucks store offerings.

Sales at the original Roastery have already seen a growth of 24% in 2016 over the previous year and another 18% in Q1 of 2017.

Photo by Lacey Williams on Unsplash

So far, the first Seattle Reserve Roastery sits on Capitol Hill – a neighborhood buzzing with millennials, a few blocks away from Downtown Seattle and nine blocks from the original Pike location of Starbucks.

Next year, a massive 20,000-square-foot is set to open in New York and a third one will occupy a 43,000-square-foot space in Chicago. The Reserve Roastery concept is set to make its debut in late 2018 in Milan and will be the first Starbucks Roastery to open in the Europe, the Middle East and Africa region, and fifth globally.

To be clear, the Reserve/Roastery forms the foundation for bigger plans – Starbucks Reserve® stores, “a new retail format that will integrate the theatre and romance of the Roastery with the unique culinary experience of the company’s new Italian food partner, Princi.” Starbucks is looking at these stores as a strong growth opportunity for the firm, both in the US and internationally.

The first, new Starbucks Reserve® stores are set to open in Seattle and Chicago in the second half of FY17, with further plans of opening 1,000 or more globally over time.

3. The ‘Digital Flywheel Strategy’

Although in its nascent stage, the ‘digital flywheel strategy’ is a concept that remains one of the highest priority for Starbucks.

The concept relies on four key pillars of customer acquisition, spend-based rewards, tailored offers, and expedient ordering. The company is already shifting its e-commerce platforms to third-party external sites which means that Starbucks products will be offered at other at home coffee and tea sites.

It has 8 million mobile paying customers and 1 out of 3 use Mobile Order & Pay, which allows users to place an order without a cashier. As mentioned in its latest quarterly earnings report, Mobile Order & Pay accounted for 9 percent of transactions in U.S. company-owned stores. At Starbucks Biennial Investor Conference in December 2016, Starbucks extended its digital flywheel strategy by unveiling an innovative conversational ordering system which would allow customers to place orders by speaking.

Dubbed My Starbucks® Barista, the innovative strategy is powered by artificial intelligence. At the moment, it remains available to limited beta users but could soon be accessible at the Starbucks® Mobile App. My Starbucks® Barista is a chatbot style app which will allow customers to interact with the virtual assistant. The virtual- assistant will not only confirm the location that you choose to order from but also processes the payment.

4. Expansion across China

The biggest market, Starbucks aggressively plans on tapping is China. Interestingly, the country has thrived in a tea driven environment for some time and this transition may just be the beginning and an opportunity for Starbucks.

According to the US Department of Agriculture, coffee consumption in China has already tripled in the past four years and it seems, Starbucks may be preparing to tap this huge market with a population of 1.38 billion people with the aim to open 5000 locations by 2021 across China.

Recently, Starbucks acquired the remaining shares of its longtime partner of East China JV to Operate all stores in Mainland China. Shanghai, itself has as many as 600 Starbucks stores, a number which is the largest number globally of any city where Starbucks has a presence. Later this year, Shanghai will be the first city outside of the US to have the ultra-premium Starbucks Reserve Roastery.

Starbucks future plans provide a growth opportunity for long-term investors. With company’s continuous efforts to digitally connect the audience, it seems Starbucks also wants to keep the traditional flavor of the coffee experience very much intact through its Reserve and Roastery Concept.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Originally Published on Seeking Alpha