Starbucks (SBUX): Instant Coffee=Instant Profits

Starbucks (SBUX) has been talking about its foray into the instant coffee business for some time. The product “VIA Ready-Brew” will actually launch in the US and Canada today.

According to the company “Starbucks VIA is made with a proprietary, U.S. patent-pending microgrind technology to preserve the coffee’s taste, quality and freshness.” Starbucks CEO Howard Schultz see the launch as a way to get the firm into the $21 billion instant coffee business using its brand power as leverage.

It may not matter if VIA is “better” than the coffee that Starbucks sells in its stores since that will be a subjective decision on the part of consumers. What will matter is that the margins on the instant product are probably very high at $2.95 for a three pack. That will help Starbucks keep the momentum that cost cuts and slightly improving sales have given to its share price which is above $20, more than double its 52-week low.

VIA is a financial breakthrough because it allows Starbucks to attack a market much larger than the coffee house business and because the product does not rely on a system of relatively expensive stores with relatively expensive employees for its sales. Starbucks annual revenue is just above $10 billion, and its growth has stalled. The odds that people will flock back to its stores in droves given the relatively high costs of its drinks and food are relatively low, even if the recession is ending.

VIA is Starbucks path to improved sales and profitability, and, in the final analysis, the introduction of the product carries almost no risk.

Douglas A. McIntyre