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Starbucks Seeks New Partner in New Zealand, Competition Rife

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Starbucks Corporation (SBUX - Free Report) is poised to get a new partner in New Zealand, after Restaurant Brands New Zealand Ltd. expressed its desire to not renew its license deal with Starbucks after it expires in October.

Restaurant Brands sold the fixed assets and stock of its Starbucks business to Tahua Capital, a New Zealand-owned company, for a total price of up to NZ$4.4 million (approximately US$2.9 million), after introducing the U.S. coffee brand to New Zealand 20 years ago. The sale will be finalized late next month.

Tahua, which is owned by coffee shop-operator Maestro Cafes and two investment firms, will take over the leases of Starbucks' 22 stores in New Zealand and would employ all 300 current Starbucks employees.

Competition a Pressing Concern

Starbucks’ coffee business has been contributing less than 4% of Restaurant Brands’ total sales, owing to a healthy competitive scenario. The coffee chain giant had earlier struggled in Australia and New Zealand in contrast to its solid edge in the U.S. market.

The exuberance of New Zealand’s coffee scenario makes it difficult for Starbucks to hold up against steep competition from national roasting chains like Mojo Coffee and Fuel Coffee, as well as small coffee shops offering single origin espresso.

Similarly, Starbucks reduced its footprint in Australia, closing 61 of 85 coffee shops a decade ago. Currently, Starbucks has 34 coffee shops in Sydney, Brisbane, the Gold Coast and Melbourne.

Other Headwinds

The company’s Americas segment (accounting for 70% of the total revenues) posted 2% comps growth in the first nine months of fiscal 2018, down from 4% improvement registered in the year-ago period.

Meanwhile, dismal China-Asia-Pacific (CAP) comps growth in the third quarter of fiscal 2018 further added to the woes. Comps were down 1% in the segment versus 3% growth registered in second-quarter fiscal 2018. The decline can be primarily attributed to a 2% decrease in comps from China. In the preceding quarter, China posted impressive comps growth of 4%. Starbucks now anticipates global comps growth to be marginally below its earlier guided range of 3-5%.

In the past three months, shares of Starbucks have lost 6.3% against the industry’s 1.9% growth.


Innovation, Best-in-Class Loyalty Program and Digital Offerings Bode Well

Gauging its recent decelerating performance in the United States, the company has decided to augment its U.S. store portfolio in fiscal 2019. Further, management focuses on increasing its global market share by judiciously opening stores in new and existing markets, remodeling existing stores, deploying technology, controlling costs, along with aggressive product innovation and brand building.

Starbucks, a Zacks Rank #3 (Hold) company, aims to open approximately 12,000 new stores globally by fiscal 2021, bringing the total store count to an estimated 37,000. The company’s long-term growth targets include 3-5% comps growth, yielding high-single-digit revenue improvement and EPS growth of at least 12%.

Some better-ranked restaurant stocks in the same space include BJ’s Restaurants BJRI, Darden DRI and Dine Brands DIN. While BJ’s Restaurants sports a Zacks Rank #1 (Strong Buy), Darden and Dine Brands both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BJ’s Restaurants, Darden and Dine Brands’ earnings for 2018 are projected to increase 50.4%, 14.4%, and 29.2%, respectively.

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