"Starbucks day"Image by flickr user rekre89 under Creative Commons license.
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When a company reaches massive scale, how does it continue to expand? Search for the answer to this question in a finance textbook, and you'll probably find guidance that seems, well, academic -- an admonition to lift organic sales growth, or to supplement primary revenue with acquisitions.
But at the point where an ambitious multinational finally dominates its industry across the inhabited continents, simply maintaining market share can be a mountainous task -- as the Coca-Cola Company can attest.
At the Morgan Stanley Global Consumer & Retail Brokers Conference held on Nov. 18, Starbucks Corporation CFO Scott Maw offered a compelling explanation of how his organization has approached this problem:
Maw alludes to a process which other companies of comparable size should strive to replicate. The coffee retailer doesn't struggle with questions such as "How will we expand our sales?" or "If we invest $X million (or billion), will our top line increase?"
That's because Starbucks has "aggressively" -- or, more accurately, relentlessly -- executed on several simultaneous revenue-generating priorities, with the idea that each area will eventually be ripe for profitable reinvestment.
This leaves the company in a position to roughly project what additional invested dollars will yield in terms of revenue, which is quite a different feat from detailing how many millions can be saved from a round of cost-cutting. This process happens within, as Maw reminds us, a corporation boasting $20 billion in annual turnover.
The clearest illustration I can cite is the company's digital ecosystem.At the conference, Maw described how at the end of fiscal 2104, quarterly comparable sales had drifted down to the 5% level -- the red zone of the company's 23 quarter global "comps" streak of at least 5% year-over-year growth.
So management began to reinvest "earnestly" in its digital business and certain employee initiatives in January of this year. By the last quarter of the fiscal year (ended Sept. 27), the company had raised both its global and U.S. quarterly comps to 8%.
Starbucks did this by investing more in systems it had already pushed its capabilities to build. Especially in the U.S., the "My Starbucks" rewards program, enhanced with the 2015 launch of "Mobile Order & Pay," provides a direct point of frequent interaction with customers. You can think of Starbucks' wired -- both technologically and in terms of coffee consumption -- customers, as an army of purchasers, waiting to be directed by headquarters through incentives and marketing messages.
Is this analogy a bit hyperbolic? Indeed, channeling funds, technology, time, and management resources to build the "My Starbucks" mobile app system has led to a deep well of potential revenue enhancement, tapping into fervid customer demand.
Consider that since the completion of the Mobile Order & Pay U.S. launch in September, Starbucks is experiencing a run rate of 5 million transactions per month, a number that CEO Howard Schultz recently disclosed to be growing "by the hour."
Well-placed, finely tuned aggression
A slide from CFO Scott Maw's Nov. 18 presentation, titled "Playing the Long Game: Uniquely Positioned at the Intersection of Physical and Digital."
When you sift through the various iterations of the company's priorities and investments over the past few years (which remain unchanged in the near term, helpfully laid out in the preceding graphic), Starbucks' approach to growth appears to be a three-stage process:
1. Identify true drivers of revenue, and by extension, earnings momentum.
2. Be quick to commit capital to these drivers, and execute energetically.
3. Once a return on investment is proven, make reinvestment a priority.
These steps may seem like the type of process every great company follows or should follow. But as a corporation evolves to global scale, identifying what I've called "true drivers of revenue," and not simply red herrings, becomes exceptionally difficult. And risking profits to keep pouring money in these priorities, especially when setbacks occur, also proves a high hurdle that many management teams are unable or unwilling to clear.
Starbucks' management team somehow stays above the muddle and enlarges the company's "great big network" with zeal. It does so using a clear-headed, thoughtful, approach, but one that's also underlined by fine-tuned, purposeful aggression.
The article The Well-Placed Aggression of Starbucks Corporation originally appeared on Fool.com.
Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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