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Hello!
An exciting Monday here in Sydney, we’ve officially out of lockdown! We’ve also got even better (in our opinion anyways) exciting news - we’ve redone our website and we’re launching it very soon! It’s live here if you want to check it out and we’ll slowly be migrating our Substack content to our website.
You should sit back, have a pint and a parma at a pub if you’re based in Sydney, and catch our latest episodes from last week!
- ☕ A deep dive into Starbucks
- 🤑 And a simple sprout outlining revenue, cost of goods sold and gross margin
In today’s newsletter:
- Overview of the Coffee Industry
- The Opportunity for Starbucks
- Our Take on Starbucks

Overview of the Coffee Industry
Coffee is one of the most exported agricultural products around the world, accounting for over 8m tonnes of coffee produced and exported. The industry is valued at over $100bn and employees 125m people. For a plant (and drink) that has been around for centuries, the coffee industry has seen significant growth in Western markets, and is now seeing significant growth in emerging markets such as Asia Pacific and Latin America.
Coffee has become a staple of everyday life. From getting a coffee with coworkers, to catching up with friends at a cafe, to getting a coffee on the go, Westerners love coffee almost as much (perhaps even more) as alcohol.
This demand for coffee has been met by a vast suite of players, ranging from large international corporations such as Nestle and Starbucks, regionalised players like Pret, and a long tail of players including independent cafes and coffee roasters. The industry is fiercely competitive, with limited opportunity for differentiation between core coffee products which has kept coffee (and bean) prices relatively similar between competitors.

However, coffee consumption is predominately a Western pastime. Coffee consumption in the APAC, LatAm and African regions still remain low and lag behind. As the middle class grows in these countries, coffee consumption may increase and follow the same pattern as Western countries, leading to opportunities for coffee players to enter these markets. This leads us nicely into our next point…

The Opportunity for Starbucks
Starbucks is a quite different to the companies we analyse on Fresh Capital. It’s an incumbent player selling a highly undifferentiated product. Their coffee might come in fancy sizes or with unique flavours (pumpkin spiced latte anyone?) but what Starbucks has going for it is their brand.
Starbucks is ubiquitous with coffee. Starbucks is undoubtedly the household name around the world for coffee. And herein lies the strength of Starbucks as they start to capture the opportunity in developing countries.
Consumption habits in China have slowly started to shift away from tea and towards coffee and localised players see this shift. Chinese entrants such as Luckin Coffee have quickly outgrown Starbucks in less than 4 years in China, indicating the growing demand for coffee.
Starbucks has operated in China for over 20 years and represents their second largest country by presence and have played a role in educating the market and growing their brand. But now as the country’s middle class continues to grow Starbucks has a major opportunity now to capitalise on its investment in China, the broader APAC region and LatAm and Africa to leverage its brand and its playbook.
In fact, investing in China could produce immense returns for Starbucks. Each $1 invested in China generates a 15x return for Starbucks, with a new store costing less than half the cost of a store in the US.
Source: Perching Capital

The genius of Starbucks as a business? The Starbucks app. This app lets customers load money from their bank accounts onto their Starbucks loyalty account. Across their customer base, they have a total of USD $1.6bn loaded onto the app. This is cash that Starbucks recognise on their balance sheet because they’ve been given the money from customers. The best part is that this $1.6bn is effectively a loan at -10% interest because 10% of Starbucks customers don’t use the money they’ve loaded onto the app. This means Starbucks has received $160m for absolutely free.
Assuming a store in China costs $300,000 to build, that’s 533 extra stores that Starbucks can build in China at no cost to them. And herein lies the genius and opportunity for Starbucks. They’ve already built their brands, and now they’ve built a cash machine to help them expand their brand in new markets.
Our take?
It won’t be any surprise but we both love Starbucks here at Fresh Capital. On face value, the business itself is boring - coffee and coffee shops, but under the hood, Starbucks has built an incredible business with a strong focus on the customer experience.
🎙️ Want more detail on Starbucks and how they’ve created a strong customer experience? Listen to this week’s podcast here!
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