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Starbucks Franchise Revenue was over $1 million per store

Starbucks sign, featured image

Starbucks Franchise Cost and Profit

Have you ever thought about running your own Starbucks business? After all, Starbucks is a dominant force in the coffee industry, maintaining the highest share of the coffee shop market with 40% as of October 2019. Their total net revenue, according to their 2020 annual report, was over $20 billion in 2020. 


One thing to keep in mind, however, is that Starbucks is NOT a franchise. The majority of their units are company owned, which means that earned revenue stays within the company and does not go to outside investors. The rest of their stores are licensed, where outside operators are allowed to use the brand’s trademark and sell their products, but are not obligated to follow any specific business plan or rules. In exchange, licensees must pay a royalty fee to the company. 


The following article analyzes Starbucks’ most recent annual report and their quarterly filings to determine the strengths and weaknesses of their business model and their role as a major contender in the ever growing
coffee industry

Image of a few trademark Starbucks drinks

Starbucks Coffee Background

Starbucks was founded in 1971 and became a corporation in 1985. It is a publicly traded company and is listed on the Nasdaq under the ticker symbol “SBUX”. The president and CEO of Starbucks is Kevin R. Johnson, and he has served in his position since April 2017. Their flagship coffee brand is known as “Starbucks”, but they also sell goods and services under the subsidiary brands Teavana, Seattle’s Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve, and Princi. 


Currently, they operate in 83 different markets, with stores across the globe. According to their annual report, they have three main “operating segments” — the Americas, which encompasses the U.S., Latin America, and Canada; International, which includes China, Japan, Asia Pacific, Europe, Middle East, and Africa; and Channel Development, which refers to Starbucks or affiliated brand products being sold outside of their stores. 

2020 FY Annual Report (Starbucks Revenue, Costs, Number of Units)

1. Number of Units

As mentioned above, the majority of Starbucks establishments are company owned, making up 55% of the total domestic units. The remaining 45% of the units are licensed, and these stores can usually be found in non traditional establishments like airports or bookstores. Internationally, however, there are more licensed units than company owned units, with 54% of stores licensed and 46% company owned outside of the United States. Ultimately, company owned stores still have an edge over licensed units in total, with 51% for company owned stores and 49% for licensed establishments.


The following numbers are taken from Starbucks 2020 FY Annual Report, and are true as of September 27, 2020.


Company owned stores (Domestic): 10,109


Company owned stores (International): 8,245


Company owned stores (Total): 18,354


Licensed stores (Domestic): 6,528


Licensed stores (International): 7,778


Licensed stores (Total): 14,306


Total units (Domestic): 16,637


Total units (International): 16,023


Total Starbucks Locations (Worldwide): 32,660

 

2. Company Owned Units

chart of Starbucks stores opened by end of 2019
chart of Starbucks stores opened in 2020
Comparison of opened units
comparison of units closed

**Note: negative percentages in the charts displaying closed units are a POSITIVE benchmark, since they indicate a decline in store closures**

chart displaying number of starbucks units transfers in 2020
chart of net number of Starbucks stores

The net percent change of Starbucks units is positive in 2020 (despite negative percentages for individual categories) because in 2019, all of Starbucks Thailand units closed. As a result, net units were low in 2019, and the percent change for net units in 2020 is positive. 

The above charts show the numbers of company owned stores that opened, closed, and the net change from 2019 to 2020. In the U.S., they ended the 2019 fiscal year with 8,791 stores, having opened 332 and closed 182 for a net change of +150 by the end of the 2020 fiscal year. For the Americas as a whole, they ended the 2019 fiscal year with 9,974 stores, having opened 392 and closed 257 for a net change of +135 stores by the end of the 2020 fiscal year. Internationally, they ended the 2019 fiscal year with 5,860 stores, having opened 725, closed 53, and transferred 4 for a net change of +668 stores by the end of the 2020 fiscal year.

 
Company owned Starbucks units accounted for 90% of their gross annual revenue. 

 

3. Licensed Units

Chart of Starbucks licensed units open at end of 2019
Chart comparing licensed units opened
Chart showing Starbucks licensed units transfers
Chart comparing licensed units transfers
Chart showing number of Starbucks licensed units closures 2020

**Remember that negative percentages for closures are a POSITIVE thing, because they indicate a decline in the number of closures**

chart comparing licensed units closed
Chart showing net number of Starbucks licensed units
Chart comparing net licensed units
Chart showing number of Starbucks licensed units at end of 2020

 

The above charts show the numbers of licensed stores that opened, closed, and the net change from 2019 to 2020. In the U.S., they ended the 2019 fiscal year with 6,250 stores, having opened 210 and closed 73 for a net change of +137 by the end of the 2020 fiscal year. For the Americas as a whole, they ended the 2019 fiscal year with 8,093 stores, having opened 281 and closed 129 for a net change of +152 stores by the end of the 2020 fiscal year. Internationally, they ended the 2019 fiscal year with 7,329 stores, having opened 620, closed 175, and transferred 4 for a net change of +449 stores by the end of the 2020 fiscal year. 


In total, they started with 15,422 licensed units at the end of the 2019 fiscal year, having opened 901, closed 304, and transferred 4 for a net change of +601 by the end of the 2020 fiscal year. 


Licensed Starbucks units account for 10% of their total gross revenue. According to the annual report, licensed stores have a lower gross margin and a higher operating margin than company owned stores.

 
Overall, for both company owned stores and licensed stores, there is a net growth in the number of units added and retained in Starbucks. 

 

4. Risk Factors

The following are risks that Starbucks faces as a company and to their business model, as well as an analysis of how it affects them both at the individual unit and corporate level. 


COVID-19 Pandemic: Like many other businesses, Starbucks units both across the United States and the globe encountered challenges from mandatory shutdowns due to the onset of a global pandemic. Even as units began to reopen, Starbucks establishments continued to struggle with modified hours and reduced traffic. Furthermore, the economic downturn brought on by the pandemic has also adversely affected Starbucks, both in terms of increasing the volatility of their stock price and decreases in consumer activity, which in turn negatively impacts revenue. 


Brand Relevance and Changing Consumer Preferences: Much of Starbucks business success relies on their brand image and consumer perceptions of their brand. Any controversies or negative press associated with the name of Starbucks will have a damaging effect on their brand and a detrimental effect overall on their revenue. In terms of consumer preferences, while coffee remains a very popular commodity with both domestic and international consumer markets, this is always subject to change. If consumers believe that the adverse health effects of coffee or sugary caffeinated beverages outweigh the benefits, they will be less likely to purchase Starbucks products, which will hurt their revenue. 

 
Cybersecurity: Like the vast majority of businesses in the modern age, Starbucks is heavily reliant on information technology systems for their business operations. This leaves them heavily susceptible to cyber attacks from hackers, which can severely disrupt the everyday operations of their business. 


Labor and Supply Chain: The increasing cost of coffee beans and decreasing availability has a significant impact on the business operations of Starbucks. Increased costs and decreased availability will lead Starbucks to increase their coffee prices, which could in turn decrease consumer demand and potentially revenue. 

Running a Global Business: Although Starbucks is primarily dependent on the financial performance of their domestic units, they have become increasingly dependent on the financial performance of certain international markets that have experienced a large boost in customer demand. This includes China, which has an enormous consumer market but is also often subject to rocky relations with the United States. 


Governmental and Regulatory Changes: Finally, Starbucks is subject to the laws and regulation of the governing bodies of the countries in which they operate. Since Starbucks has become a global brand, this not only includes US business and consumer protection laws and regulations, but for each country they have units in. 

 

5. Starbucks Revenue: Financial Statements Analysis 

Income Statement (in millions)

 

Cash Flow Statement (in millions)

Part 1 of Starbucks 2020 Cash Flows Statement
Part 2 of Starbucks Cash Flow Statement 2020

 

 Key Takeaways: 


An important feature to focus on is the section “net earnings attributable to Starbucks” in the income statement, or “Consolidated Statements of Earnings”. This is the number that Starbucks earns as a company after all other expenses are taken care of, and a crucial metric to determine the financial health of a company. One thing to take note of is the fact that Starbucks experienced a significant decrease in net earnings due to the COVID-19 pandemic. They went from making over $3 billion in 2019 to making $900 million in 2020.

 
Although Starbucks is still a profitable company, this loss is significant. One interesting component of the income statement is the fact that company owned stores account for the vast majority of Starbucks’ yearly revenue, about 90%. These vast discrepancies in revenue are not reflected in the actual makeup of company owned versus licensed stores, which are practically 50/50. However, this could be an indicator that Starbucks will invest more of their resources into their successful company owned stores while issuing fewer licenses. 


The final piece of analysis takes a look at the cash flows statement  — often considered the most important out of the three financial statements. This is because the amount of cash a business has is a key indicator of their financial health. Companies can go to great lengths to manipulate their earnings, but the amount of cash it has demonstrates its true ability to meet expenses and repay investors. According to Starbucks’ cash flow statement, they gained a net increase of $1.6 billion in cash, and at the end of the fiscal period, their total cash and cash equivalents amounted to approximately $4.3 billion. 

Starbucks Revenue: Quarterly Earnings (Q2 2021)

While the annual report measures the financial performance of a company as a whole in the last fiscal year, the quarterly earnings provide a much more recent, up to date outlook on company financials. Overall, Q2 for Starbucks proved to have a significant rebound in sales, showing promise of a full economic recovery from the pandemic. Below are a few of the key points of this earnings report, and what this means for the future of Starbucks as a whole. Global comparable store sales increased 15% in total, and in the Americas, comparable store sales increased by 9%


Internationally, comparable store sales increased by 35%, largely driven by an enormous growth in sales in the region of China, where comparable store sales increased by 91%Overall, this growth was driven by increases in average ticket (the amount of sales per customer) which compensated for declines in comparable transactions (the amount of times that customers came and purchased Starbucks). This trend can be interpreted in a number of ways — it could reflect the increasing prices of Starbucks products and coffee as a whole, which could increase total sales but decrease total transactions, or it could mean that even as less customers buy Starbucks, the purchasing customers are buying more. 


The company saw an increase in +5 net stores over the Q2 fiscal period (see chart below), although the proportion of company owned and licensed stores (51/49) remained the same. The majority of stores are located in the U.S. and China regions. Consolidated net revenues increased 11% from the previous year to $6.7 billion, and  operating margin increased from 8.1% of the previous year to 14.8% (see chart below).

 

Conclusion

Overall, Starbucks is a very profitable company that operates both company owned and licensed units. Although the pandemic did take a toll on their earnings, their quarterly report shows that they were able to make a strong rebound in 2021 and will likely continue to do so. Although the cost of coffee has increased due to limited supplies, the fact that Starbucks dominates the coffee beverage industry helps mitigate these risks and renders it a strong force in the broader food and beverage industry


As detailed in the graph below from Statista, Starbucks dominates the other major coffee chain in the industry, Dunkin Donuts, by a very high margin in terms of the number of existing outlets. 

Coffee industry growth graph from Statista

Although Starbucks does not offer franchises, there are plenty of other coffee businesses that you can explore on the Vetted Biz website along with other successful franchises in the coffee industry.

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