Starbucks

Writing black numbers with brown beans

Whether it's a latte macchiato, espresso, cappuccino or regular filter coffee - a day without the brown pick-me-up would be hard to imagine for many Germans. All in all, around 164 liters of coffee per capita are drunk here every year, and the trend is rising. I contribute a good part of that myself. At this point I'd like to subtly point to the coffee donation feature below this article :-)

The fact is, a lot of coffee is drunk not just in Germany but worldwide. Even in countries better known for their tea consumption, the caffeinated drink is becoming increasingly popular. One company that has specialized in exactly this growth market is Starbucks. With over 31,000 coffee shops worldwide, the American coffee chain is the absolute number one. Reason enough to take a closer look at the company ...

The origins and business model of Starbucks Corp.

According to legend, the discovery of coffee has its origins in what is now Ethiopia, more precisely in the Kingdom of Kaffa. There, some shepherds are said to have once noticed that part of their goat herd stayed wide awake into the late evening hours and jumped around full of energy, while the other goats were tired as usual. Looking for the cause of this behavior, the shepherds came across a shrub with white flowers and cherry-like fruits. The shepherds were puzzled and asked monks at a nearby monastery for advice. Without further ado, the monks made an infusion from the bitter fruits, possibly the world's first coffee. The invigorating effect of the drink quickly made the rounds, and a small trade developed around the coveted coffee beans.

Later, Seattle developed into a real trading hub for coffee. In the time before World War II, the city was mainly known for its first-class coffee. However, by the end of the 1960s the quality of the beans had declined so much that coffee lovers began turning to other sources. Among them was journalist Gordon Bowker, who regularly made the pilgrimage to Vancouver to buy his beans there. It didn't take long before he was also bringing back coffee beans from his favorite roastery for friends and acquaintances. When the entire coffee supply chain in Seattle was increasingly collapsing, Bowkers decided, together with his two college friends Jerry Baldwin and Zev Siegl, to fill this gap. They each put up 1,350 dollars, borrowed another 5,000 dollars and opened the store "Starbucks Coffee, Tea and Spice" in April 1971. By the way, the name Starbucks is a nod to the bold and experienced first mate Starbuck from the novel Moby Dick.

Since all 3 were big coffee lovers but by no means experts in the field yet, they decided to get to know their craft better. So Siegl went to Berkely, California, to learn from the Dutchman Alfred Peet, who had already been successfully running Peet's Coffee & Tea for several years. There he learned how Peet roasted his high-quality Arabica beans very dark to create a better coffee flavor. For the next 9 months, the Starbucks founders bought their beans exclusively from Peet and tried to win new customers with free coffee tastings. The plan worked, and within a very short time Starbucks was able to open its second store. The trio also invested in a modern roaster so they could now process their coffee beans themselves.

Within 10 years, the small coffee shop grew into a solid retail business with 5 stores, its own roastery and even a wholesale business that mainly supplied coffee to local restaurants. In 1982 they brought Howard Schultz on board, who from then on was to take care of retail and marketing. At a trade fair in Italy, he got to know the local coffee culture in many small bars. Convinced by the idea, he wanted to implement this concept at Starbucks, but the 3 founders were skeptical. After some disagreements, Schultz went into business for himself and opened his own coffee bar Il Giornale in 1985. With investors' money he finally managed to take over Starbucks in 1987 and restructure it to his liking. He followed his vision and bet on rapid expansion. In 1992 he took his company public. Since then Starbucks has developed into the world's largest coffeehouse chain.

How could Starbucks develop in the future?

When I think of coffee chains in Germany, McCafé and Tchibo come to mind first. Starbucks has a rather middling presence in Germany. Apart from the supermarket range - though the Swiss food company Nestlé bought that from the Americans. In general, Europe isn't on the coffee company's expansion course either. Most locations, and therefore most of the revenue, are (still) in its home country of America. But China, India and the Asian market in general are currently the biggest growth markets. Starbucks also had to learn that of course you can't push into these markets without competitors. However, the Chinese coffee chain Luckin Coffee is out of the race for now, since it's struggling with a massive accounting scandal. Besides the regular Starbucks shops, the company is also opening some upscale coffee bars that go by the name "Starbucks Reserve". These exquisite flagship stores are meant to be an experience world all about coffee, with their own on-site coffee roasteries.

How is Starbucks coping with the corona crisis?

Of course, the crisis initially brought Starbucks' business to a standstill. At times almost all stores were closed, and the company had to book massive drops in revenue. To serve its customers delicious coffee even in times like these, many stores now have drive-ins. Apart from that, there are supposed to be even more coffee-to-go shops (without seating) soon. But little by little all the stores are reopening and business is slowly getting rolling again. So there definitely is a light at the end of the tunnel, and I'm sure that Starbucks will have fewer problems surviving this crisis than some competitors. Nevertheless, everyone has to be aware that in a possible economic crisis, people will also cut back on premium coffee.

And what about the dividend?

Starbucks shareholders have been receiving a dividend since 2010. Since then the payout has been raised in exemplary fashion, and at an unbelievable pace. Over 10 years, the dividend growth rate is a whopping 32.2 percent! Looking at 5 years, the percentage is "only" 22.3 percent, but even that is an exceptionally decent result. Currently the dividend yield is 2.2 percent and the payout ratio around 56 percent.

Conclusion:
A good coffee is a fine thing. Starbucks benefits from the growing popularity of the pick-me-up and also still has great growth potential ahead of it. I'm confident that it will emerge stronger from the corona crisis, and I can only recommend that long-term investors take a closer look at the company.