Starbucks Corporation‘s (SBUX) Chief Executive Officer, Howard Schultz recently told The Financial Times that he plans to revive the company’s sluggish business growth in Europe by enhancing its presence in the continent. The goal is to make the brand as popular in the currently economically challenged Europe as it is in Manhattan.
As part of this strategy, the company will increase its number of stores operating in the UK from 760 to 1,060 over the next five years. The company is also planning to sell its drinks to passengers in trains and airplanes. Moreover, the coffee giant has plans to introduce a promotional campaign that incorporates free drinks and an ad campaign in the UK to boost sales. Further, the company plans to introduce localized and cheaper coffee offerings in France, Greece and the UK.
The operations of Europe, Middle East and Africa (EMEA), which is headed by president Michelle Gass, currently accounts for less than a 10th of its total revenue. The segment recorded margins of 6.5%, much lower than 22.0% in the US.
The expansion plans are expected to pull down margins even further, though temporarily. However, improved lease terms in the UK and economies of scale are expected to partially offset the margin pressure. Moreover, the company is looking into franchising in the UK, which can further hurt margins.
The company’s business in the EMEA region suffered in the past due to management’s lack of focus as Mr Schultz and his team were focusing to bring the company’s US business on track. However, the growth in Europe has now become a much bigger priority for the coffee chain. In case the company succeeds in its efforts to revitalize growth in Europe, its top line will be significantly boosted.
Our Recommendation
We currently have a Neutral recommendation on Starbucks. However, the stock carries a Zacks #2 Rank (a short-term ‘Buy’ rating).
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