Why Starbucks is focusing on sales leverage

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Starbucks is focusing on sales leverage

With revenues in place, it’s important for a company to carefully manage its cost of operations. For a company conducting a restaurant business, the costs of operations include food costs, occupancy costs, labor, and general and administrative.

Starbucks’ major costs of operations

The cost of goods sold for the cost of operations includes occupancy costs. Together, the costs accounted for 41.2% of sales in the quarter compared to 42.8% in the same quarter last year. Cost of sales decreased by 1.6% due to lower commodity costs of coffee. The cost of sales decreased another 0.5% due to sales leverage.

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Store operating expense accounted for 28.3% of sales compared to 29% last year. A decline of 0.7% included a decline in operating expense by 0.5% in company-operated stores. General and administrative expenses also declined by 0.2%. This accounted for 6.5% of sales compared to 6.7% last year. The decline in these two costs was also attributed primarily to sales leverage.

Understanding sales leverage

Sales leverage means the ability of a business to earn higher margins with incremental sales. This is possible when the company has high fixed costs—like occupancy costs in Starbucks’ (SBUX) case. Occupancy costs usually include the costs of occupying a store such as rent, property taxes, insurance, and depreciation and amortization. Rivals like McDonald’s (MCD) and Taco Bell, under the umbrella of Yum! Brands (YUM), are trying to capitalize on this operating leverage through their breakfast offerings.

To learn more about costs of conducting a restaurant business, click on this link.

An investor who would like to invest in the restaurant industry as a whole can invest in exchange-traded funds (or ETFs) such as the Consumer Discretionary Select Sector SPDR Fund (XLY) and the PowerShares Dynamic Food & Beverage ETF (PBJ).

 

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