The coronavirus outbreak caused a sudden halt to business as usual worldwide. Companies were no longer afforded the ability to rely on old ways of doing business, and on came a creative reshuffling of operations and changes that may last beyond the aftermath of the pandemic.
Over the years, Starbucks (NASDAQ:SBUX) has connected itself to working consumers. For example, it has established locations in business districts so people can stop at a Starbucks during their breaks to grab a coffee. But more people are working remotely now, and many believe this shift will stick around even after the pandemic.
In this changing environment, Starbucks saw an opportunity to adapt its store development strategy.
From downtown to suburbia
Starbucks believes some of the pandemic-driven changes to consumer behavior are permanent. CEO Kevin Johnson described the company’s thinking during the company’s most recent earnings call:
It is no secret that consumer behaviors were disrupted as a result of the pandemic. We recognized shifts in behaviors early, and our understanding of those behaviors will guide our strategy well beyond the pandemic as we believe many of these behaviors are here to stay.
The biggest of these changes for Starbucks customers has been the shift away from buying coffee in urban areas to suburban ones. Customers are also buying more of their coffee at drive-thus. Even though economies are reopening worldwide, one of the last things to come back has been the return of employees to offices.
Last October, Starbucks highlighted how drive-thru and suburban locations saw strong comparable-sales growth in the fiscal 2020 fourth quarter, in stark contrast to the declining comps for stores in dense metro areas.
The company has moved quickly to adapt to the new way people are working and buying coffee. Johnson updated investors on the company’s efforts, including its plans to close 800 total locations in the U.S. and Canada during the current fiscal year:
Last June, we wrote a letter to all stakeholders outlining our plan to accelerate strategic initiatives focused on rapidly transforming our store portfolio and optimizing for shifting consumer behaviors. This plan, which we refer to as the Americas Trade Area Transformation, has positioned us extremely well for the future. We called this early, and in just nine months, we have already completed 70% of the strategic store closures, clearing the way for the development of new, innovative, and more efficient retail store formats over time.
So how is this going to improve Starbucks’ profits? By reducing expenses — locations in downtown districts tend to require higher rent and lease payments compared to suburban locations. If consumers are buying more coffee in suburban areas, Starbucks can focus its stores in those lower-cost areas, thereby maintaining its revenue while decreasing its overhead.
The second leg of its transformation is a focus on international store growth. In the past year, Starbucks has added 1,044 net new locations abroad while reducing the number of stores in the Americas by 151. In total, Starbucks has 18,120 locations open in its Americas segment and 14,823 in its international segment.
Moreover, the coffee giant is not finished with its international expansion. In fiscal 2021, Starbucks is planning on opening 1,050 of its 1,100 net new stores internationally. In other words, 95% of new store growth in 2021 will be in locations outside its home market.
And how is that going to improve Starbucks’ profits? In the most recent quarter, store-level operating expenses as a percentage of overall revenue came out to 51.6% in the Americas segment but only 44.8% in the international segment. By opening more international locations, Starbucks can improve its operating margin over time.
These two initiatives have the potential to boost Starbucks’ bottom line long term. As a result, investors looking for a stock that can push forward as the world recovers from COVID-19 should consider buying Starbucks.
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