Sipping Starbucks Around the World

I made a quick note about Starbucks (SBUX) during my travels around India last week. My impression of the company's creeping encroachment globally is based not on that trip alone, but also visibility during trips to Vietnam, China, Hong Kong and other locales around the world.

Starbucks has clearly replaced McDonald's (MCD) as the global ambassador of American food and drink culture. More importantly, Starbucks represents the ultimate in an aspirational brand for developing economies around the world.

Average Americans can barely afford their Starbucks habit, but indulge as an affordable luxury. In countries where people get by on $5,000 a year, a $5 latte is out of reach of most and to indulge is a symbol of success for those that can afford it! In fact, the accessibility is such an issue in China that  CCTV ran a story on the "scandal" of high prices at Starbucks!

The street is mostly still focused on per-unit economics, not without good reason. Upticks or downticks in any number of metrics, when multiplied across over 20,000 units, can create meaningful swings in margins and profits. For instance, recent concerns are the rising price of green coffee, the impact of promotions to drive foot traffic, and seasonality as we roll out of the hot beverage season in the northern hemisphere.

Recent comparisons at 5% are making investors nervous, although that level of comp is still enviable when compared to most restaurant chains. On the positive side, Starbucks has only rolled out new breakfast foods in 50% of the US units (which are the vast majority of the system -- about 2/3s of total units). Furthermore, "hand-crafted" carbonated beverages will roll out this summer, and lunch items will follow later in the year.

In the short term, these concerns will affect trading, especially with the stock trading at a premium 26x forward earnings. Nonetheless, in the near term I can stomach the multiple because the positive margin contributors are overwhelming the negative, leading to a steadily better earnings expectation.

Whenever the estimate trend and price trend diverge, I take notice. As long as I have confidence in the estimate trend, I believe the stock can "correct" higher.

Longer term, I view Starbucks like Buffett viewed Coca Cola (KO) 20 years ago. The brand equity and product quality translates to most cultures, and the per capita consumption is still quite low worldwide. Like McDonald's, the U.S. is the model of what can be in other developed countries today, and in developing countries 20 years hence. Check out this map of Starbucks locations -- they have barely begun to scratch the surface of their global expansion potential.

I see no reason the world could not support 50,000 or more stores in the next five to seven years. Multiply that by same-store sales and margin opportunities, and the opportunity starts to look significant.

(In fact, if you want to study this further, here is a very cool interactive map with which you can study Starbucks locations by geography.)

My travels across India reinforced the idea of this opportunity for Starbucks. In fact there are very few units in India, even with a middle class of over 100 million people. China has less than 2000 units. Unlike Coca Cola, which is everywhere and you expect to see, and McDonald's which is also expected, Starbucks is both welcome and unique, and desirable for emerging economies.

 I think it has years and years of growth ahead of it. Often we comment on "small world" moments, but sometimes you realize it is a very, very big world out there.

At the time of publication Dvorchak had no positions in stocks mentioned.