This continues the company’s amazing record of not just maintaining its margins over time, but substantially growing them as well. This just shows true power of Starbucks’ premium brand and the strong pricing power it commands.
This also explains how management was able to reward investors with a sensational 25% dividend increase and still lower the FCF payout ratio. That helps to not just make the current payout more secure (more on this later), but also increases the likelihood that the dividend will be able to keep growing quickly for years to come.
But as impressive as the company’s fast sales, and margin expansion has been, investors need to always ask themselves, “Where will continued growth come from?”
In Starbucks’ case, management has three pronged plan to keep the growth train humming.
First, the company continues to open and license new stores around the globe, especially in fast growing emerging markets such as China. In fact, over the next five years Starbucks plans to more than double its locations in the world’s most populous nation to over 5,000.
And lest you think that Starbucks is playing catch-up in China, as just another “me too” coffee shop, the fact is that Starbuck’s dominance in the Middle Kingdom is nearly as massive as its position in the US.
For example, thanks to its regional beverages tailored to unique Chinese tastes, Starbucks had a 74% market share in Chinese coffee shops, with McDonald’s Corporation (NYSE:MCD) McCafes a distant second with just 9%.
The second growth strategy for the company is to continue boosting margins via the widening of its competitive moat. Specifically, this involves the company’s improving use of technology with its wildly successful loyalty card program, which saw membership grow 18% in the last quarter to 12.3 million.
Not only does this solid growth put to fear concerns that the company’s recent change to a dollar based rewards program from a transaction based one infuriated some loyal customers, but it will also help improve overall service. That’s because it eliminates line splitting in which customers would try to maximize rewards by paying for every item separately. Thus the new system means faster turnover, shorter waits, and more efficient (i.e. profitable) stores.
Better yet, the loyalty program is just part of the company’s ongoing experiments in innovation, designed to boost customer satisfaction, as well as efficiency and margins. For example, the loyalty program, which has evolved from decades of experimentation and data driven improvements, is integrated into the Starbucks mobile app.
This allows customers to preload their app with money, locate the nearest store, order online, and then quickly swing by the store to pick up the food and drink. In other words, Starbucks focuses on making it as easy as possible for customers to get their daily caffeine fix, and in the process cement a loyalty to the brand that makes them less price sensitive. And of course the ability to ring up sales without someone standing in line means stronger comps, and thus revenue growth.
Finally, Starbucks Corporation (NASDAQ:SBUX), which took premium coffee to an art form, continues to experiment with new formats and high end cafe brands, such its new “reserve” stores, which one yelp reviewer described as “Starbucks on crack”.
Source: Business Insider
The reviewer means that Starbucks Reserve is attempting to make coffee snobs of us all with its limited time, exotic, super premium blends that are “perfectly brewed…with exquisite balance, depth of flavor, and aroma.”
And with the company’s ever more impressive dedication to growing its dividend, even non-coffee drinkers can appreciate the fact that Starbucks has mastered the art of targeting specialty, niche tastes and delivering it as efficiently and profitably as possible.
