On Wednesday, Seattle’s Best, a wholly-owned subsidiary of Starbucks, rolled out Just Pure Flavor, a new line of flavour essences for coffee-based beverages. The move is consistent with Starbucks’ recent efforts to diversify revenues away from retail stores and focusing more on home-based consumption. In an environment where consumers are thinking twice about splurging on $5 lattes, Starbucks definitely “gets it”, and continues to show that they are nimble in adapting to new trends in consumer behaviour. The stock closed above $20 for the first time since January 2008, and we believe that there are many reasons to expect more upside in the months to come.

Lower coffee prices and rent expenses = higher margins

As shown in the chart below, prices for coffee, the lifeblood of Starbucks, have fallen dramatically over the past 18 months, in line with other commodities as the global economic recession took hold. Furthermore, higher vacancies in the commercial real estate market have given Starbucks leverage to push its landlords to lower rents by up to 25%, according to Bloomberg news. What these developments mean for the company is that investors can expect higher margins (and earnings) as Starbucks benefits from decreases in its two biggest expenses. Also, the ongoing closure of unprofitable stores (announced in July) will also help Starbucks continue to trim costs and grow its earnings over the next few quarters.

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