Carefully manage the cost of conducting business
With revenues in place, it is important for a company to carefully manage its cost of operations, which, for a company conducting a restaurant business, includes food costs, occupancy costs, labor, and general and administrative costs.
Starbucks’ major costs of operations
Starbucks’ cost of goods sold includes occupancy costs, which together amounted to 41.2% of sales, or $1.723 billion in the third quarter of 2014, compared to 43% a year ago in the same quarter. Cost of sales decreased by 1.8% due to lower commodity costs of coffee and sales leverage.
Store operating expenses declined 60 basis points year-over-year. General and administrative expenses were $239 million, down from $226 million year-over-year, 5.7% of sales compared to 5.9% a year ago in 2013. The decline in these two costs can be 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 such as occupancy costs in the case of Starbucks and low variable costs. Occupancy costs usually include the costs of occupying a store such as rent, property taxes, insurance, and depreciation and amortization. Rivals such as McDonald’s (MCD), Dunkin’ Brands (DNKN), 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, read Rising food costs hit the restaurant industry. 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). In the next part of this series, we’ll look at Starbucks’ bottom line and margins.