Starbucks Corporation (NASDAQ:SBUX) recently announced that it will open its first store in Italy in 2017, a country which is directly linked to its history and origin. The company has identified Percassi, a renowned Italian company known for its brand partnerships across Italy, as its licensee for the country.
Italy is the fourth largest economy in Europe and the eighth largest in the world. It is thus an important market for Starbucks, especially given its strong its strong coffee culture. However, the region may be slow to release the full measure of this potential, growth given likely stiff competition from established players and practices in the region. While the Italian coffee culture is unique, with classic cafes being popular in the country, Starbucks can leverage its international brand appeal to establish itself in the region and attract young consumers who are already familiar with its brand.
According to EuroMonitor, coffee in Italy is expected to increase at a CAGR (compounded annual growth rate) of 1% in retail volume from 2015-2020. Lugi Lavazza SPA is the leading player in this market, with a 37% retail value share in 2015.
The Italian coffee market, with expected revenues of $ 1.85 billion in 2015, is much smaller compared to the U.S., where the coffee house industry is expected to generate $31 billion in revenues in 2015.
While Starbucks is an established player in the U.S., entering the low growth Italian market with a strong established competitor and a unique coffee culture can be challenging for the company.
Moreover, most Italians prefer densely brewed expresso, delivered in small ceramic demi-tasses, rather than Grande and Venti of their U.S. counterparts. Starbucks can appeal to the younger population in the region who are looking for modern amenities, to-go coffee and a meeting place for friends and business associates.
Attracting the older generation with finer tastes and a preference for traditional Italian coffee might be challenging for Starbucks, which has not seen strong growth in Europe. In Q1 2016, its comp store sales in EMEA (Europe, Middle East, Africa) increased 1% driven by a 1% increase in traffic.
Similar numbers for America were 9% increase in comp store sales driven by a 4% increase in traffic. And for China/Asia Pacific there was a 5% increase in comp store sales driven by a 4% increase in traffic. In the same quarter the company opened 281 stores in China/Asia Pacific and 79 stores in EMEA.
The valuation of Starbucks does not get significantly impacted if there is a slight acceleration in the pace of increase of its franchise stores.
So for Starbucks, the Italian market could prove daunting. Italy’s traditional coffee culture may well not be open to an Americanized beverage.
It is already dominated by a key player and generously populated with traditional cafes. Starbucks can appeal to the younger generation of the country and establish itself as an international brand in the region.
Given the size of the Italian coffee market and future growth trends, we believe revenues from Italy should not make a significant difference in Starbucks’ valuation in future, at least in the near term.