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Starbucks Channel Development Offers Diversified Revenue Stream

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Channel development

Channel development contributed 9.2% toward Starbucks (SBUX) revenues in the first quarter of 2015. This segment earns revenues from channels such as grocery stores, convenience stores, specialty retailers, warehouse clubs, and US food service accounts. Products sold through these channels include ground and whole coffee beans, Tazo teas, Starbucks Refreshers, and ready-to-drink beverages.

Alternate channels are a good way to diversify from the more volatile restaurant business. That said, because these channels aren’t conventional Starbucks stores, you can’t use same-store sales to measure performance. For more on channel development, read Restaurants do better in stronger economic climates.

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Channel development versus store operating margins

In the above chart, we compare the operating margins of Starbucks stores excluding channel development against channel development. Starbucks stores saw income of $975 million, or an operating margin of 23.25% of related revenues. Operating income for the channel development segment was $157.5 million, giving an operating margin of 36% of channel development revenues.

Revenues for the channel development segment grew 10% in 1Q 2015, to $442 million, compared to $401 million in 1Q 2014. Clearly, channel development is returning favorably higher margins and is a business avenue worth focusing on.

Diversify revenue streams

Businesses often engage in multiple revenue streams to diversify revenue sources. To increase daily receipts, McDonald’s (MCD) and Yum! Brands (YUM) started offering breakfast to leverage resources such as buildings and labor. And, like Starbucks, Dunkin’ Brands (DNKN) also sells coffee products at grocery chains.

Investors who would like to invest in the restaurant industry as a whole can invest in the Consumer Discretionary Select Sector 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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