By Todd Sullivan of Value Plays
Honestly haven’t seen that title used yet and am surprised, thought it kind of wrote itself.
Anyway, been getting tons of email on this so I thought easiest way to address it was in a post. Here is the news, I’ll use Herb Greenberg’s post on it since IMO he does a nice job:
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Its announced acquisition of miniscule Evolution Fresh as the launching pad for a health and wellness brand is not just a natural progression for Starbucks—but downright genius (and, in retrospect, so obvious.)
The success of the new venture, and its growth possibilities, is Starbucks’ to screw up.
But based on history, it won’t.
With any business or investment there is a leap of faith based, in large part, on the ability of management to execute. A hallmark of Starbucks, as a business, is execution. And one thing CEO Howard Schultz has proven is that he can execute.
He executed against an original model of opening up stores against one another that looked like a model destined to destroying itself. (I was an early critic.)
He executed on a turnaround orchestrated by Schultz after the company appeared to lose its way. (Having learned from my past mistakes, I was not a critic.)
And he is likely to execute on this new venture, as well. As he told Maria Bartiromo on air Thursday—Starbucks reinvented a generic business like coffee, so why not do the same with juice?
Now, the question we have been getting here is NOT whether or not $SBUX will be successful at this (I think most think it will) but will this somehow damage the wonderful turnaround we have witnessed at $JMBA?
Quick answer? No.
Well, fist of all, Evolution is not a smoothie maker. They have a proprietary method of making fruit juice. That’s it. As Schultz says above, the initial plan is to sell the juice in $SBUX locations/grocery stores etc and eventually enter into the “juice bar” space. Will they eventually get into smoothies? Maybe and I would not be shocked if they did. BUT, there is a material difference in the capital expenditure expanding a single manufacturing facility to provide pre-packaged juice to ship to $SBUX locations and building out a smoothie chain to match the >800 locations $JMBA will have by the end on 2012.
Frozen smoothies are not “pre-packable” in ready to drink containers ($JMBA does have frozen “make at home” kits one can buy and blend at home). It is location to location production. Because of that, even if $SBUX does get it to smoothie game, any serious competition to $JMBA on scale is many years away. Further, since $SBUXis VERY unlikely to franchise its operations, entrepreneurs wanting to join the “Health and Fitness” beverage category and its currently explosive growth, a $JMBA franchise remains the best way to do it. Because of that,$JMBA is unlikely to see any slowdown in growth in the coming years that is not self-induced (if they choose to constrain new franchise sales to maximize effective locations).
What is the larger point here being lost on most folks is the validation of the category. Both $MCD and $SBUXbegan producing smoothies in 2010. Since that time $JMBA has seen 5 consecutive quarters of increasing SSS and the outlook for 2012 is even better. Far from damaging $JMBA with their entry, they have helped it.
What? Being a category of one in a new product is tough. Yes, it enables you to capture huge share in the industry before competitors decide to join (that WILL pay of big later), but there are limits as to how fast/much the category itself and thus you can grow. Once national chains with 10?s of thousands of locations began selling the product, that beverage category was validated. Smoothies went from being a semi-regional item to national overnight. At once $JMBA benefited from the national advertising for their product provided by the other two. As$SBUX and $MCD promoted smoothies, people looked for the best one, that is $JMBA.
That massive advertising/exposure creates desire for the product in the minds of millions of consumers. Once we have that, quality and choice wins. Right now, nothing from $MCD or $SBUX can match the breadth or choice or the quality of product offered by $JMBA.
The perfect scenario is for the smoothie to become something people wake up in the morning wanting or crave in the afternoon. That isn’t an effect a $110M company like $JMBA can create on its own. It takes the entrance of billion dollar operators to do that. Once it happens, it then comes down to who can do it best (like coffee).
If you step back and look at it, why would $SBUX even want to compete with $JMBA? Why? IF this is the direction $SBUX is going in (would be hard to argue they aren’t), for a few hundred million dollars ($SBUX has >$2B cash on hand) they could just buy $JMBA, already have the store and infrastructure (sourcing, distribution, license deals etc) built out and hit the ground running. Their new juice purchase will fit perfectly inside $JMBAlocations and is something $JMBA currently does not have. It sure makes more sense than spending the better part of this decade building it yourself and competing at the same time.
Now, this was speculated about a year or so ago (early 2010). But at that time $SBUX had 1/3 the cash on hand ($600M) it does now and $JMBA was still in the very early stages of its turnaround and unprofitable. Both company’s situations are materially different now than they were then. $SBUX is flush and $JMBA has really been picking up steam in terms of both store level performance and profitability since then. What was speculation over a year ago, make a whole lot more sense given $SBUX purchase yesterday and the way Schultz is talking.