A key component in the economic profit models I ran for Starbucks is the assumption that Starbucks will maintain a growth rate of 9% over the next 5-10 years. A common estimate I’ve seen in other research pieces.
The question then is how likely is Starbucks, an already large company, to grow its sales at this rate?
Like I did when evaluating Ron Baron’s sales growth estimates for Tesla, I’ll turn to Michael Mauboussin and Credit Suisse’s Base Rate Book.
Since 1950 for the full universe of publicly traded companies 24.2% of all companies have been able to grow their sales at a compound annual growth rate of 5-10% over 5-years and 28.3% of all companies were able to grow at this rate for 10-years.
Table from The Base Rate Book
We can narrow it down even further.
Starbucks Sales Growth Base Rate
Starbucks has trailing twelve-month revenue of $21.98 billion. This puts Starbucks in the cohort of companies wth sales between $12-25 billion.
From The Base Rate Book. Click image to enlarge.
Only 20.8% of companies with sales totals similar to Starbucks grew their sales at a compound annual rate of 5-10% over 10-years.
41.7% of similar companies were able to grow their sales at a compound annual rate of 0-5% over 10-years.
Based on this data it is more likely for Starbucks to grow its sales at a compound annual rate of 0-5%.
It makes sense.
Starbucks and other companies with similar sales totals are already large. And large companies tend to follow the overall growth of the economy. They are well past their rapid growth stages.
This is not to say a CAGR of 5-10% is not possible.
Path to 10% Growth
Does Starbucks have a pathway to 5-10% growth over the next 10 years? Yes.
China
Starbucks is just getting started in China. Tea has always been the caffeinated drink of choice in China. If Starbucks can get Chinese consumers hooked on its specialty coffee drinks then this will be a large driver of growth for many years.
Mobile Ordering & Sales Per Sq. Foot
Starbucks is improving its mobile ordering and pickup to reduce the long lines at physical stores and the mosh pit of people waiting for their orders. When this is cleaned up, a Starbucks store can handle more volume and generate more sales per square foot.
Delivery
Mobile ordering with delivery. The next step is figuring out delivery for mobile orders in densely populated cities.
Reserve Stores
Howard Schultz stepped down as CEO but he did not leave the company. He is focused on growing out Starbucks’ ultra-premium coffee stores, Reserve Stores. These are lower volume stores but with higher average ticket sales. Reserve stores are an opportunity to increase sales in mature markets like the U.S.
Wine, Beer, & Dinner
The weakest part of the day for sales is late afternoon and nighttime. Starbucks is experimenting with selling wine, beer, and a dinner menu to increase sales at night. People still want a quiet place to work at night and sometimes they want a drink when they do that too.
Base Rate Valuation
How confident am I that Starbucks will execute on these growth opportunities and achieve the expected 9% compound growth rate? Fairly confident.
But that is the problem. My confidence is skewed from my inside view. I need to take a more measured approach.
Given that only 20% of similar size companies were able to grow at a rate of 5-10% for 10-years. I need to adjust my primary valuation model for the more likely scenario, 0-5% growth.
