Starbucks ( SBUX ) is the world's leading roaster and retailer of specialty coffee. Through its global network of owned and franchised coffee retail outlets, Starbucks offers a wide range of products from coffees and teas to sandwiches and brewing equipment. It competes with McDonald's ( MCD ), Caribou Coffee ( CBOU ) and Peet's Coffee ( PEET ) in the broader market for specialty coffee.
We estimate that the Starbucks' company-owned stores constitute around 46% of our $26.41 price estimate for Starbucks' stock while franchised stores generate an incremental 30%. Our price estimate stands roughly 18% below the market price.
Rising Commodity Prices
We examined the impact that rising commodity costs could have on Starbucks in an earlier article (See Starbucks Shielded from Further Downside Due to Rising Input Costs ). We've also previously discussed how these trends might impact large manufacturers like Kraft, noting that profit margins could come under pressure and market share could suffer as manufacturers try to offset the cost with price increases (See Rising Commodity Prices Could Limit Kraft Upside).
Here we discuss the potential upside to Starbucks from increasing coffee prices. Bad weather in South America coupled with speculation of hoarding by leading exporters like Brazil and Vietnam has contributed to increasing coffee prices, which have recently increased to 13-year highs. The price increase corresponded to coffee futures increasing by 44% between fall and summer of 2010. Many expect Starbucks to pass the higher coffee prices on to customers.
How will higher prices impact demand?
As we discussed in the earlier article, Starbucks primarily serves a demographic from which demand is relatively price inelastic, meaning that changes in price does not impact demand. (See Starbucks Shielded from Further Downside Due to Rising Input Costs) Hence we do not expect the number of daily customers per Starbucks store to drop by that much. However, if costs are passed on to customers in the form of higher prices for coffee beverages at stores, we believe it may impact our forecasts for average spend per customer visit.
Beverage spend per customer visit increased from 2005 by nearly half a dollar to $4.61 by 2009, with a slight correction in 2008, during the economic downturn. We forecast it to further increase at an annual growth rate of around 2% to $5.40 by the end of our forecast period.
However, if coffee prices continue to increase through 2011, it can provide an upside to our forecasts. If the beverage spend per customer visit increases by around 10% in 2011 from our current forecast and then continues to increase at an annual growth rate of around 3.5%, which is higher than our current projected growth rate, it would reach around $6.50 by the end of our forecast period. This would imply an upside of around 12% to our current price estimate for Starbucks' stock.
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