Why Starbucks’ channel development produces higher margins

Adam Jones - Author
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Nov. 20 2020, Updated 2:12 p.m. ET

Channel development

Channel development contributed 9.5% of the revenues for the fourth quarter of 2014. This segment earns revenues from channels such as grocery stores, convenience stores, specialty retailers, warehouse clubs, and U.S. food service accounts by sale of ground and whole coffee beans, Tazo teas, Starbucks Refreshers, and ready-to-drink beverages. This is a good strategy to diversify the more volatile restaurant business, but since this channel is not a conventional Starbucks store, it does not use same-store sales as a measure of performance. Read Restaurants do better in stronger economic climates to understand why channel development may soften the impact of bad economic cycles on restaurant stock.

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Channel development vs. store operating margins

In the above chart, we compare Starbucks’ operating income excluding channel development, which was $872 million, or an operating margin of 23% of related revenues. Operating income for the channel development segment was $172 million, which would give an operating margin of 43% of the channel development revenues. Revenues for the channel development segment grew 10.5% in 4Q14, to $399 million compared to $361 million in 4Q13. Dunkin’ Brands (DNKN) also has a similar coffee product sold at grocery chains.

Channel development is bringing in a favorable higher margin and a business avenue to focus on.

Diversify revenue streams

Businesses often engage in multiple revenue streams to diversify its sources of revenues. McDonald’s (MCD) and Yum! Brands (YUM) both have engaged in breakfast offerings to leverage their resources such as building and labor in order to increase their revenues during the day. To learn more, read Why McDonald’s (MCD) is diversifying its portfolio and Why Yum! Brands (YUM) is focusing on the breakfast menu. Starbucks’ channel development segment competes with specialty coffee and teas at the above mentioned channels.

Investors 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 Standard & Poors depositary receipt (or SPDR) fund (XLY), which includes Chipotle Mexican Grill (CMG) and some of the restaurant stocks mentioned above.

In the next part of this series, we’ll discuss the cost of operation at Starbucks.

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