Category: entrepreneurs

Paying a visit to Starbucks

My friend Tanya Seyfert, an early investor in Starbucks, passed along this update on a great American entrepreneurial success story:

I first bought [the stock] around ’96 or ’97 – I’d gotten involved in an investment club, gotten hooked on frappuccinos and just was totally taken with the concept. It felt much less like a franchise and more like a hip new concept back then – just going in to one felt like an escape to me. I read Howard’s book and really liked his philosophy, in general and specifically for Starbucks – the whole idea of capturing the European coffee house “3rd place” resonated with me.

I made my first buy and kept adding to it from time to time, back when I still qualified for a Roth IRA! They continue to be successful in expanding the concept in places I never would’ve believed it would work – Asia, specifically. I wasn’t sure they could sell coffee to tea lovers! But everywhere you go – any country in Europe – they are busy. There’s always a line, and people wait regardless of how many are in front of them, if the barista is annoying – they don’t leave the line. I think it lost some of its hip luster – they’re on every corner so are much more of a commodity – but with the addition of the music label, etc they’re recapturing some of that coffeehouse vibe.

I haven’t sold any of my shares – I think they will continue to rock on… They are nowhere near the saturation point when you view it globally. Example – I recently moved offices, to a building 2 blocks west of where I was [in Washington, DC)] and further away from the action of restaurants, delis, etc. I never would’ve believed how much difference those few blocks would make, but now I rarely take the time to walk 4 blocks to Cosi vs. right across the street to a local deli – even if I prefer Cosi’s food. I just can’t/won’t take the extra time.

When you think how often people just want to take a break from work, popping out to the neighboring Sbux works – every one is always busy because it’s there. I think that’s why they’re still successful – they’re not only hip, they’re hip and convenient. They’re also branding themselves as a “meeting place” – they’ve aligned themselves with meetup.com (don’t know how official that is, but they have meetup cards now, preprinted with order forms that your group can fill out and give to a barista and they bring the drinks for you). I’ve noticed quite a few meetup groups at my local Sbux – book clubs, political discussion groups, you name it. One of the great things the company does is continue to evolve and find ways to be relevant while staying true to the “3rd place” coffee house idea. They are pretty darn smart!

In the fiscal year ended September, 1997, Starbucks generated $967 million in revenue. Ten years later, analysts expect $9.33 billion for an annual growth rate of 25.4%. Meanwhile, the stock is up exactly five-fold, or 17.5%/year. In 1997 just 17 (1.2%) of Starbucks’ stores were outside of the U.S. Today, international store count is around 4,000, or 29% of the total.

The law of large numbers applies, even to SBUX, as growth rates have slowed from 35% ten years ago to a still impressive 20% today. Enterterprise value is $21.2 billion on $5.2 billion in gross profit (58% gross margins). EV/gross is 4.08, near the low end of the 4.00-8.00 range of the past 10 years.

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