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Here's Why Starbucks' Most Important Number Is $400 Billion

There are lots of ways to break down the numbers for a restaurant chain, but only some are truly significant to its operations and its potential. Total sales, gross margins, and net profit are just a few metrics that immediately come to mind. But arguably, a very important number for a company's success is its total addressable market (TAM).

The TAM, also sometimes referred to as the total available market, is an educated estimate of the total potential demand for the company's products and services in a given year. Knowing the figure can help in determining the growth opportunity that might be available to the company.

In Starbucks' (NASDAQ: SBUX) case, the TAM for coffee is forecast by the company to grow to $400 billion annually by 2024. As popular as Starbucks is worldwide, its total sales still represent just a fraction of that market, indicating a real potential for continued growth.

Image source: Getty Images.

A bigger piece of the pie

Here is what Starbucks management said regarding the coffee industry in its most recent conference call:

The total coffee addressable market is large and growing rapidly. The market is expected to grow to well over $400 billion in size globally over the next three years. That represents a compound annual growth rate of 8% to 9% as the market rapidly recovers from the global pandemic. Second, within this large and growing market, consumer preferences continue to shift from mainstream robusta coffee to premium arabica coffee where Starbucks is the leader.

In fiscal 2019 and 2020, the restaurant chain's overall revenue was $26.5 billion and $23.5 billion, respectively. The decline in 2020 was the result of pandemic disruptions. If you calculate Starbucks sales growth very conservatively based on past average growth, its projected revenue in 2024 of roughly $30 billion would be about 7.5% of the total coffee market. Other analysts, using more optimistic calculations where Starbucks hits the higher end of the average, have pegged Starbucks' sales at about $38.5 billion and share of TAM at 9.6%. Either way, there's still plenty of room for growth.

Although Starbucks does not account for a large majority of the overall U.S. market, management says it is the leader in the away-from-home coffee market in the United States, and its lead is the highest it has ever been. When folks look to have coffee outside of their home, they choose Starbucks more often than any other brand.

Moreover, Starbucks management claims the company is the No. 1 premium brand globally in ready-to-drink coffee. These are the coffees already mixed in bottles and cans on the shelves of grocery and convenience stores worldwide. This segment is growing by double-digit percentages for Starbucks and its partners in North America, the Europe, Middle East, and Africa region, and the China and Asia-Pacific market. And Starbucks has announced plans to expand the drinks across Southeast Asia and Latin America.

Another way Starbucks aims to take a larger share is by opening more locations. It has a total of 33,295 stores open, with 18,175 in the Americas and 15,120 internationally. In the near term, the chain is emphasizing growth in international locations. In fiscal 2021, nearly all its net store growth will be global. The company already has plenty of stores domestically, and the international stores tend to produce higher store-level profit margins. Therefore, the international focus seems like a prudent move by management.

What this could mean for investors

Given the strong numbers Starbucks generates and its claims of market leadership in so many product categories, it's easy to fall into thinking that Starbucks has reached saturation. I don't know where you live, but around here, it feels like it has a store every few blocks. How many more could it possibly add? While that may be the case in the U.S. (and perhaps is why management is de-emphasizing store growth in the States), that is not yet the case internationally.

In addition to growing the store base, Starbucks can make each store more efficient through operating improvements and beverage innovation. It increased revenue at a compound annual rate of 8.2% in the last decade. Considering the $400 billion size of the coffee market that is being projected, there are still plenty of coffee drinkers available to convert into Starbucks customers in the next few years.

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Parkev Tatevosian owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends the following options: short October 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.


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