Starbucks’ operating versus channel development margins

Adam Jones - Author
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Nov. 20 2020, Updated 1:06 p.m. ET

Channel development

Channel development contributed to 12% of Starbucks’ revenues for the third quarter. This segment earns revenues from channels like grocery stores, convenience stores, specialty retailers, warehouse clubs, and U.S. food service accounts. Starbucks sells ground and whole coffee bean, Tazo teas, Starbucks (SBUX) Refreshers, and ready-to-drink beverages. Since this channel isn’t a conventional Starbucks store, it doesn’t use same-store sales as a measure of performance.

Channel development versus operating margins

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In the above chart, we compare Starbucks’ operating margins, excluding channel development. They were $556 million, or 15%, of related revenues. The operating margins for the channel development segment were $139.3 million, or 37%, of the channel development revenues. Revenues for the channel development segment grew 12% in 3Q14 compared to a 6% in the 3Q13.

Channel development, according to management, helps take Starbucks’ products outside its stores. It also creates brand awareness. However, management also admitted that the channel development cannibalizes its in-store sales. When the quarter ended, Starbucks had 100,000 points of distribution.

Along with sales leverage—discussed in the earlier article—channel development is bringing in a favorable higher margins and a business avenue to focus on.

Diversify revenue streams

Businesses often engage in multiple revenue streams to diversify sources of revenues. McDonald’s (MCD) and Yum! Brands (YUM) have both engaged in breakfast offerings to leverage their resources, like building and labor, to increase their revenues during the day.

To read more click on the respective links for McDonald’s and Yum! Brands. Starbucks’ channel development segment competes with the specialty coffees and teas at the above mentioned channels.

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

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