Starbucks International Growth
I just came back from a week-long trip in Europe where I spent four days in Vienna and three days in Sofia (Bulgaria). I was surprised to find very few Starbucks (SBUX) shops in Vienna. Despite traveling extensively around the city I counted only two. Both are primarily frequented by — you guessed it — tourists. I’ve been told SBUX has closed down a number of stores over the years. After visiting London in August and seeing a SBUX on every corner, I figured the firm had spread the decaying American capitalism evenly around the world. Remember, Britain is a nation that drinks tea – or so we’ve been told.5,000 stores worldwide SBUX is not exactly a spring chicken anymore, and its growth going forward will be lower than it was in the past.
Austria is a country with only eight million people and SBUX’s failure there will not necessarily derail its global growth strategy. But the SBUX failure in Austria — a western European country where coffee consumption is deeply ingrained in the culture — makes me pause. Maybe growth from over-caffeinating the rest of the world is not a slam dunk as everyone perceives.
SBUX, along with other high quality companies with strong competitive advantages and an impressive growth track record, have traded at a premium to the market (higher Price to Earnings ratio). There were actually two premiums: one for quality and another for consistent high growth. eBay (EBAY), Whole Foods (WFMI), Wal-Mart (WMT), General Electric (GE) and many more come to mind here. Most of which are in different stages of seeing their growth premium deflated.
When it comes to SUBX, the quality is undoubtedly still there. But the growth premium has been deflating as its expansion has slowed.
P.S. I did not see a single SBUX in Sofia, but paid a visit to a Dunkin Donuts that shared space with KFC (YUM) which in Bulgaria is still called Kentucky Fried Chicken.
Disclosure: No position in SBUX
I just can’t imagine SBUX doing much of anything in Europe, outside of a few tourist locales. The idea of SBUX teaching Austrians about coffee is, obviously, misguided. Not to mention SBUX’s requirement of drinking their coffee out of a paper cup. Works for Americans on the go, but not so much for Europeans who typically like to sit down and drink their coffee in a proper cup.
Perhaps in your native Russia, which tends to go for more American chains, or at least the concept of chains. Perhaps in train stations on the continent. But that’s about it.
Vitaliy — I met you at the Albqueruque AAII show. You gave a terrific presentation. Great insights. Thank you, Todd
Enjoyed Active Value Investing as informative, data-driven (with better interpretation than the goons at the Fed), and well-written. Hope to see you at MIM4 (if they have one someday)…
Todd, thank you I ejoyed meeting you too.
Ron, looking forward to meeting your at MIM4 (Minyanville’s Minyans in the Mountains). MIM2 and MIM3 were a lot of fun!
Vitaliy
I should also add that I loved your book (Active Value Investing), and I’m recommending it to all my friends. Just finished it for the second time. I’ve already pruned my portfolio a bit, thanks to your advice (a couple of companies didn’t pass the QVG test). And I’m in the process of calculating sell values for the remaining companies (something I obviously should have done when I calculated the buy price, but I was trapped in a LTBH mentality). I’m not a huge fan of most investing books, but yours was different. It has fundamentally changed how I invest. And I hope for the better.
Thanks!
This reminds me of the Peter Lynch school of investing. Invest in what you know. If from anecdotal experience you notice something interesting then invest accordingly. The problem with is that it offers no edge, is random, and makes insufficient allowance for whether the observation is already priced into the stock.
(Mr. Vitaliy doesn’t make all these errors here obviously because he looks at what type of growth premium is priced into the stock. But I wonder if his anecdotal observation really offers a sufficient trading edge.)
I got coffee from a Dunkin Donuts this afternoon and it was packed. But I will not be buying the stock.
Tom,
Look at it this way: if you believed that Starbucks US success will translate into a similar success outside of the US you may have to do more homework on SBUX’s international expansion.
Best,
Vitaliy
Mr. Vitaliy, thank you for your reply.
Did you go for Erste Bank or OMV or something else to Austria. I hope you will let us know (after you bild your position
).
Why did you not stop for Bucharest instead of Sofia?
Best regards
Friend, American’s think SBUX is a high end coffee experience. It really is not when you are used to coffee made in your typical European cafe. Compared to the usual 7-11 crap coffee, SBUX is superior. However, In countries where there is an established cafe experience (mostly independent) where they really know how to make coffee, SBUX does not stand a chance. They might be able to do something in Asia but not the well established coffee markets.
A stock market blogger criticizes the Peter Lynch style of investing …
>>Stupid people making stupid calls based on incredibly simplistic and variables that have probly already been priced in since they’ve been expected for uite some time. Take this article–who cares if the Olympics are coming to China—you don’t buy random-ass Chinese stocks just cuz you’re capable of Caveman-like thinking “Olympics bring people, people bring $, people spend $, company get $, stock go higher.â€
Oops the link didn’t print
http://timothysykes.com/2008/04/03/the-joke-that-is-financial-commentary-some-frauds-morons-comedians-and-marketers-you-should-beware-of/#more-701
One of my good friends lived in Vienna for a year and he claims that the coffee in Austrian Starbucks much worse than other Starbucks that he has been at (England, Ireland, Japan, etc.). He actually wrote an email to Starbucks asking them to change something in Vienna because it will ruin their reputation.
But part of what you said is true too, most of Europeans experience coffee as an experience during midday and afternoon, but Starbucks has it chance at the morning when coffee is a necessity and not an experience. 
Vitaliy,
many thanks for your interesting site ContrarianEdge and for this article on Starbucks.
I am from Austria, so here are my five cents on this topic:
Back in 2001 or 2002 I made a pilgrimage to Vienna during the first week after the first Starbucks opened in Austriat. I did not know a Starbucks before but heard a lot about it and wanted to take a close look at its concept before buying the stock. The concept convinced me but somehow I managed not to buy the stock. It more than quadrupeled a within three or four years.
Already then I knew that Austria would probably become the most difficult market for Starbucks because of the issues which Vitalij descibed above. However, Starbucks had one big advantage: its locations were smoke-free! Nevertheless, Starbucks’ underperformance in Austria did not surprise me. Starbucks made no major mistakes in Austria, in my opinion. It just was the most difficult market.
However it made some mistakes in Germany, a potentially large market. It formed a joint-venture with Karstadt-Quelle, a struggling retail chain which needed money and management’s power for turning around its own business instead of expanding Starbuck’s presence in Germany. Therefore, there was much room left for copycats to close the gaps Starbucks did not.
After problems in Vienna, Starbucks’ expansion plans in Austria stalled too. I live in Linz, with more than 200,000 inhabitants Austria’s third larges city. We have no Starbucks in Linz, but several copycats such als “Coffeeshop Company” and others. This happened because Starbucks pushed its international expansion much too slowly. In my opinion, Starbuck’s quality is no issue. At least its espresso is excellent. The problem is more about pricing. Starbucks’ coffees nearly cost twice as much in Germany and Austria than in the US – which is not only because of the weak USD. It is nearly impossible to command a premium price with self-service in Europe. The traditional coffee shops in Austria are a bit cheaper and you really can spend half an hour or even an hour there only drinking your cup of coffee and reading a newspaper.
Best wishes from Austria,
Bernie