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Starbucks back to growth mode

Coffeehouse chain looking to expand, tea is set up as big business

Promising to “go hard and go fast” after growth opportunities ahead, Starbucks officials said the 40-year-old coffee company has never been healthier despite “stubbornly high” commodity costs.

The Seattle-based company booked a 34-percent increase in net income for its latest quarter, and Howard Schultz, Starbucks Corp.’s chair, president and chief executive, outlined strategic plans for the company. He noted accelerated unit growth in the U.S. and overseas, a planned debut of new retail products such as K-Cups and new flavors of instant coffee Via, and a new initiative to build the Tazo brand into a significant player within the $90 billion tea category worldwide.

Schultz told analysts Thursday that Starbucks is ready to “win and win big” with its new three-region global management structure announced earlier this month, which he said will help the company build its international business to rival that of the U.S.

The regions will include China and Asia Pacific; the Americas, including the United States, Canada, Mexico and Latin America; and Europe, including the United Kingdom, Middle East, Russia and Africa, or EMEA.

“I am very confident that it will enable us to maximize our speed, efficiency and ultimately our success as we move ahead all over the world,” said Schultz.

For the quarter, top-line growth and cost-controlling measures have helped mitigate higher commodity costs, primarily coffee, though dairy, cocoa, sugar and fuel also contributed. The company absorbed a hit of 7 cents per share during the quarter because of commodity inflation, it said.

Schultz, however, said coffee prices have retreated somewhat from the high of $3 per pound earlier this year to about $2.40 per pound, and the company has now locked in coffee contracts for 2012.

In the U.S., consumers are responding to the chain’s traffic driving initiatives, said Schultz.

Domestic same-store sales during the third quarter increased 8 percent, which reflected a 6-percent increase in transactions and a 2-percent increase in average check. Menu pricing and incremental food sales, which the company attributed to the chain’s new Petites line of cake pops, mini cupcakes and other small treats, helped to drive check.

Though discounting and other promotional activity offset the benefit of incremental food sales somewhat, Starbucks officials said the average daily transactions per store in the third quarter eclipsed 2006 levels, which was previously the highest year on record.

“Two years ago, when the world was coming to an end, not only were we dealing with the economy, but there was concern about McDonald’s and others,” said Schultz. “I think we’ve done a very good job in creating the kind of experience that really does differentiate Starbucks from everybody else.”

Additional Starbucks updates:

New products. This fall, Starbucks will debut its single-serving K-Cup option, which will initially be available in grocery and other retail mass channels. Late next year, Starbucks locations will also begin selling K-Cups.

The company’s instant coffee, Via, which debuted last year, continues to sell well and is now available in more than 70,000 locations, Schultz said. This fall two new flavors will debut: Breakfast Blend and House Blend.

Tea. Starbucks acquired Tazo Tea in 1999 and Schultz said he is convinced that brand can be built into a billion-dollar business.

“After water, tea is the most consumed beverage on earth,” he said. “We have exciting plans to leverage our global retail store footprint and growing Consumer Product Group presence to go after the tea category in a way we’ve never gone after before.”

In the recent executive reshuffle, Starbucks’ chief marketing officer Annie Young-Scrivner was given the added role of president of the Tazo tea division.

International. Same-store sales in China, where Starbucks has 800 stores and hopes to reach 1,500 locations by 2015, grew in the mid-30-percent range in the third quarter, exceeding levels in the mid-20-percent range earlier this year.

Canada was the softest international market, though same-store sales were positive, the company reported.

Schultz said growth opportunities abound. He pointed to Brazil, a country with fewer than 100 locations that he envisioned could grow to more than 1,000 units.

The company is on track to open its first store in India next year, Schultz said.

In Japan, where a devastating earthquake and tsunami closed nine of 900 Starbucks locations there, Schultz said business was “recovering nicely ahead of plan.”

In 2012, Starbucks expects to open 600 new locations internationally, about 25 percent of which will be in China.

Domestic growth. The U.S. market has not reached a saturation point, said Schultz, and domestic growth will pick up next year. This year, 100 new units were scheduled to open, while next year it will be 200 units.

Schultz said the closure of close to 1,000 U.S. locations during the recession caused the company to stop searching and securing new locations. Now Starbucks is taking a more disciplined approach to real estate acquisition, he said, and it will take time to ramp up that effort. In 2013, U.S. growth will likely accelerate, he said.

Seattle’s Best. Starbucks’ secondary brand Seattle’s Best Coffee, or SBC, was reduced to fewer than 100 retail locations last week after the liquidation of the Borders bookstore chain resulted in the closure of about 248 of the coffeehouse chain’s outlets.

Starbucks officials said the company already took impairment charges for the expected closures, in addition to 228 Seattle’s Best locations in Borders stores that closed earlier this year.

Mobile payment. The use of mobile phone payments has continued to grow among Starbucks customers. Schultz estimated that 1 million mobile devices were loaded with more than $50 million during the quarter, for use in Starbucks.

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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