Starbucks: Growth Ahead, Costs A Concern

Starbucks Corp. said it would accelerate growth in 2012, not only with new units but also with the extension of several product lines, which the company called "billion dollar businesses," that were launched in 2011.

After reporting a 29-percent increase in fourth-quarter profit on Thursday, Starbucks chief executive Howard Schultz thumbed his nose at observers he called cynics who once predicted a destructive effect at Starbucks resulting from efforts by McDonald's and Dunkin' Donuts in the premium coffee space.

That, Schultz said, "has proven to be not only not the case, but I think the more money that's been spent against the category has helped Starbucks create awareness, new customers and obviously distance between them and us."

"We've never been stronger or better positioned for sustained profitable growth," he said Thursday afternoon during the company's conference call with investors.

In the United States, same-store sales rose 10 percent at corporate locations, and Schultz credited menu additions like the Bistro Box line and Petites that have added incremental sales and boosted business during the traditionally slower daypart of between 11 a.m. to 3 p.m.

"Starbucks is increasingly recognized by consumers as an excellent option for a healthy lunch," Troy Alstead, Starbucks chief financial officer, said.

New products planned for the holidays and into next year – including more Bistro Box offerings – are also expected to help drive sales. Sales this season of the pumpkin spice latte are up 44 percent compared with last year, the company noted.

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Starbucks ended its fiscal 2011 with about 350 fewer domestic locations than the prior year, mainly because of the closure of 475 Seattle's Best Coffee outlets that were in the now-defunct Borders bookstore chain. At the end of the Oct. 2-ended year, there were 10,787 company and licensed Starbucks Coffee locations in the United States.

Next year the chain is planning to expand, with the expected openings of about 800 locations worldwide, including at least 200 in the United States.

China remains a focus internationally. The company recently passed the 500-store mark there, and Starbucks' goal is to reach 1,500 locations by 2015. In 2011, Starbucks on average opened one store every four days in China, a pace that Schultz said would be accelerating next year.

Beyond building coffeehouses, Schultz's blueprint for growth depends heavily on building its consumer packaged goods.

Last month, Starbucks announced plans to roll out a new light-roast Blonde coffee, which will be available in January.

Taking aim at the lighter-roast world of McDonald's and Dunkin' Donuts, Starbucks Blonde will be a brewed option in U.S. coffeehouse locations, as well as a packaged coffee in retail stores, and a K-cup and VIA Ready Brew option.

Schultz described the new Starbucks Blonde as having the potential of becoming another "billion dollar business" for the company. Starbucks estimates that about 40 percent of consumers prefer a lighter roast, which Starbucks has not offered before.

Another billion-dollar line, according to Schultz, is Starbucks' VIA Ready Brew, an instant product introduced last year that generated more than $250 million in systemwide sales in 2011.

And this week, Starbucks began selling its new K-cup single-serve pouches in a partnership with Green Mountain, maker of the Keurig single-brew system. The K-cups will be a "greater than one billion dollar business over time," Schultz said.

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Analysts expressed concern that the new K-cup offerings could cannibalize Starbucks' packaged coffee business. Jeff Hansberry, president of Starbucks channel development, said the company's addition of the new Blonde light roast and new packaging to debut in January to help customers find the right packaged brew for their tastes, would likely offset any sales lost to K-cups.

"We do expect some cannibalization," said Hansberry, "But it will be modest and packaged coffee will continue to grow."

Following are additional highlights from the company's conference call:

Commodity costs: Starbucks said higher coffee costs took a toll on corporate profit in 2011, to the tune of about 20 cents in earnings per share.

Next year won't be much better, it said. In projecting earnings per share for fiscal 2012 of between $1.75 and $1.82, the company will absorb about 21 cents as a result of higher coffee prices, mostly in the first half of the year.

Coffee costs are expected to moderate in 2013, however.

Remodels: Starbucks plans to remodel about 1,700 existing units next year.

He pointed to the newly remodeled flagship location on New York's Times Square, which has seen a 70-percent increase in traffic and a doubling of revenue over last year.

Schultz described the location as "a showcase of retail innovation and green construction that we will be drawing upon as we build and remodel future stores across the country and around the world."

Loyalty: The My Starbucks Rewards program how has more than 3.6 million active members, nearly 2 million of which are Gold level. Schultz said 1 million new members signed up during the fourth quarter alone. For the full year, $1.1 billion in purchases were made on Starbucks cards, which are now used by customers in one in every four transactions.

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