If there has been one recurring theme in my investment
recommendations over the past two years, it is this: If you want
growth, you have to look to emerging markets. With the United
States, Europe and Japan burdened with high levels of debt and
aging demographics, growth in the developed world will be hard to
come by. But in markets like China, Brazil and Turkey, living
standards are rising and a new middle class is rising. This
is a long-term investment theme that is ripe for the picking.
There are different ways to skin this cat, of course. You
can buy the shares of individual emerging market stocks (see
top emerging market stock for 2012
), or you can buy the shares of American and European companies
that get a large and growing percentage of their revenues from
emerging markets. This latter theme has been a specialty of
Sizemore Investment Letter
and the source of some of our biggest investment successes in
Today, let's consider the case of an American icon:
Starbucks is a well-run company that also happened to be at the
right place at the right time. Starbucks exploded in
popularity in the 1990s, a time when incomes and lifestyles were on
the rise in the United States. The company benefitted from
what financial writer David Brooks called the rise of the
or bourgeois bohemians: white-collar knowledge workers who shun the
trappings of wealth yet think nothing of spending $300 for a pair
of rugged hiking boots or $5 on a cup of coffee.
See the full Trefis Analysis for Starbucks
Starbucks is one of the great American success stories of the
past 20 years. But it's also a company that now faces a
saturated market. Starbucks gets 70 percent of its revenues
from the United States, and virtually every corner of every street
in every major city in America already has a Starbucks or a
competing coffee shop.
Not surprisingly, Starbucks has had to get creative in searching
for new ways to grow. The company has begun experimenting
with beer and wine sales in select markets, effectively
transforming itself from an American coffee shop to something more
resembling a European café.
For Starbucks shareholders, this should be welcome news.
The transformation turns a saturated market into a growth market
again, at least for a while. But if Starbucks wants to enjoy
sustained growth, it's going to have to look outside U.S. borders,
and that is exactly what the company is doing with its partnership
with India's Tata Coffee (see "Starbucks, Tata Coffee Closing in on
Starbucks is finalizing its retail partnership with India's Tata
Coffee Ltd, a subsidiary of the Tata Group, one of India's largest
conglomerates, to expand Starbuck's retail presence in the
country. For Starbucks, India will be a tough nut to crack.
India is not traditionally a coffee-drinking country; but it is one
of the world's largest producers and consumers of tea. Tea is
served with breakfast and throughout the day, usually with milk and
sugar. The iconic Tetley Brand, formerly British and one of the
largest, is now owned by Tata Coffee's sister company, Tata Tea
For Starbucks, success in India will mean creating a market for
coffee where none previously existed. It's hard to compete
with centuries of tradition, and Starbuck's Indian venture may or
may not work out. Only time will tell.
But regardless of what happens in India, Starbucks has the right
idea. The company is planning to expand its presence in China
from 470 shops as of late last year to 1,500 by 2015. It
similarly plans to roughly double its stores in South Korea.
And, on an anecdotal note, I wrote a recent InvestorPlace article
from a Starbucks shop in Trujillo, Peru of all places.
Starbucks is currently priced a bit richly for my liking; it
trades for 21 times estimated 2013 earnings and yields just 1.4
percent. That's a bit expensive for a company that gets 70
percent of its revenues from a saturated market.
Still, the stock warrants watching. If its transformation
to a full-fledged café is successful and its emerging market
expansion plans work out as expected, earnings growth could take a
lot of investors by surprise in the years ahead.
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