Starbucks Corporation (NASDAQ:SBUX) Morgan Stanley Global Consumer & Retail Conference December 5, 2023 12:45 PM ET
Company Participants
Laxman Narasimhan – CEO
Conference Call Participants
Brian Harbour – Morgan Stanley
Brian Harbour
Okay. Thank you. Thank you, everyone. I’m Brian Harbour. I’m the Restaurant and Foodservice Distribution Analyst at Morgan Stanley. First of all, this is a joint forum here. So I just wanted to thank everyone for being here. It means a lot and just a couple of stats. Sorry if this sounds appreciate an earnings call. But since 2019, we have 30 more investors here. We have 30% more companies, 65% more meetings compared to our 2019 conference. So thank you all for making it so successful. And thanks, especially to the team behind the scenes that has organized all of this.
And now I’m very excited. We’re excited to have Starbucks here. The new CEO — relatively new CEO, Laxman Narasimhan.
Laxman Narasimhan
You’ve pronounced that really well.
Brian Harbour
I had some coaching. So thank you. And Starbucks certainly needs no introduction. So actually, if you have any opening comments, I’ll turn it over to you.
Laxman Narasimhan
Well, first of all, I don’t see a drink and this is a holiday.
Brian Harbour
Next year, we’ll have a Starbucks…
Laxman Narasimhan
We’ll start with that. It’s a Doppio Espresso Macchiato. It’s inside me now. Well, first of all, thank you all for being here. Starbucks as a company is a very strong brand. We’re focused on human connection and I think the need for human connection is even more relevant today than it ever was. I’ve just come out last night of launching our values across our entire company. In fact, it was — it’s been a 9-month process of us landing the mission, the promises and the values. And I joined Starbucks because at the heart of it, it’s a giving company. If you look at our — if you just look at our promises, our promises say that for our partners we bridge to a better future. For our customers, we uplift the everyday. For the farmers, we ensure the future of coffee for all. For the communities, we contribute positively. For the environment, at our best, we give more than we take. And what that leads to at the end of it is, for our shareholders, it results in enduring long-term returns, for our shareholders.
I’ve worked in stores, I’ve worked in stores in many, many countries around the world and particularly as you see the environment right now. I have had an international career over 30 years where you look across the public sector, the private sector and the social sector and it’s clearly quite an intense environment out there, the headwinds and what you see there are actually quite large.
And we as a company are a company that is a — we are against violence of any kind, everywhere and all the time. And we’re clearly pro joy and pro belonging, which were two of the values we talked about as a company. We talked about craft, coffee and what we bring, results, courage, belonging, and joy. And I think it needs to be said at this moment in time, because there’s no question that what you see out there, the geopolitical challenges are large. There are clearly headwinds out there. And just as an example, what you see in areas of conflict with our business in some of those places. Additionally, what you see as a context is and you’ve read this in the press and everywhere else and everything that’s going on is, you’re operating in an environment where the U.S. consumer is slowing.
And despite all those different headwinds, if you think about what we stood for and what we talked about a month and a week or so ago about our strategy, which is the Triple Shot Reinvention with the two pumps. It’s an extremely relevant strategy for the long-term. So, it’ll help us in the long-term really achieve a large amount of value for our shareholders, for our partners, for our customers, as well as for the communities in question.
Question-and-Answer Session
Q – Brian Harbour
One thing I just wanted to address upfront, you created a new committee on your Board. Could you maybe talk about the impetus for that and how we should think about that?
Laxman Narasimhan
Well, first of all, I think as I’ve joined the company, governance is obviously front and center in our minds and we think long and hard about it. And the Board, Mellody Hobson, our Chair; Jørgen Vig Knudstorp, who is the Head of a Nomination Committee and I have been working very intensively on how we ensure that we make Starbucks and we continue to make Starbucks a paragon for governance going forward. And so, in this world that we’re in, there are a bunch of commitments that we’ve made, be it to the environment, be it to the partners, be it to the communities that we live and work in.
And if you look at what’s coming with regard to the changes taking place in regulations, in places appreciate Europe for example, particularly on climate, if you look at the assessments that we’ve been doing internally on us as a company, we felt it was appropriate to actually put a committee together that would actually manage what we do in this entire space of environment, partners as well as of the community and the community impact that we have. And so in our meetings in July and even in September, we agreed that we would actually put this committee together which we announced just some time ago. We have Beth Ford leading as the CEO of Land O’Lakes and she comes — she’s obviously uniquely capable and qualified person. She provides the oversight for the community, for the committee and what she does along with a Nomination Committee and a Chair provides us the ability to ensure that we’re living up to the commitments that we have made. And so I feel good about it actually and it’s going to continue to step up in governance of the company.
Brian Harbour
Okay. What surprised you most when you joined Starbucks?
Laxman Narasimhan
The amount of coffee knowledge people had. It intimidated me actually because it was a — it’s very, very deep inside the culture of the company. But on a more sort of serious note, what surprised me most about the place was actually how partner centered the company actually is. The strength of the brand and what it really meant. And I think if I think a little bit about the commitment that we have made over time, the ability, the appeal for this brand globally is actually really quite large.
And things changed on Starbucks over the course of COVID. COVID was tough on the company. And I think as we came out of it, as we recovered from it, it was clear that with the right level of investment and with a focus strategically as to where we would go, we would have the ability to truly capture those limitless potential. So what surprised me in a very positive manner was what you have to work with, the strength of the partners, the strength of the management team, the base from which the business is starting, the international presence. But even though we were international, we were frankly not fully tapped, let alone internationally, in the U.S. If I look at what’s going on in the South or Southeast and businesses in many of these places, Tier 2, Tier 3 towns, the potential for this brand is actually really quite large.
And so I think that if I look at food, it’s an opportunity, an attached business to beverage, full play, if you look at the merchandising the stores opportunity, if I look at Starbucks Reserve over time, an opportunity. So there’s many things, the digital piece of the business, which I know you surely you want to talk about. It’s really untapped in terms of the full play that we have. So I think there are several elements of this business that actually have a bigger play, and that is at the heart of the Triple Shot Reinvention with the two pumps. Productivity by the way is the other one that I know we will touch on.
Brian Harbour
Don’t worry, we’ll get to it.
Laxman Narasimhan
I’m sure.
Brian Harbour
One more general question, I think your U.S. business did quite well in fiscal ’23, you’re still driving traffic growth. What do you think is kind of behind that, right? You also think perhaps there’s just less likelihood for people to trade down to at-home coffee. What do you think has continued to drive that strong performance?
Laxman Narasimhan
I think first of all, if they do want Athene coffee, we are the #1 brand there. So we have presence there with the business there. So coffee clearly is there. I think if you look at the U.S. business, what you now have is a business that through COVID has evolved enormously. I mean it’s got a digital footprint that is much larger than it was. There’s a delivery business which didn’t exist. And I think we’re just tapping the surface. If you just look at the different occasions, when our stores aren’t open and the demand that we have, and we know this through things that we’ve looked at, and pilots that we run, there is, in fact, advance potential, which we haven’t fully tapped into.
If you look at the afternoons, we still have play there. But we now have a business that actually is digital. The mornings are obviously the heart of the business. The afternoon still a play. We still have geographical penetration in the U.S. that could be large. But we have a strength with our loyals, with our people who are on the app. We have 33 million people now and it’s growing every year. But when we see frequency going up. We have a large number of people we have access to that are not in the 33 million that we haven’t fully tapped into. But at the core of it is innovation, product, what is it that people coming to the store for, customization at the heart of who we are, the experience that they get in the stores and what that’s about.
And if you take all that into account and what the brand stands for, the ability for us to deliver consistent quality mostly and have realized that sometimes it doesn’t really happen. Our ability to do all of that makes us very distinctive in this world. And so that’s what I believe is actually going on in the U.S. business and contributed to the kind of performance that we saw last year, where if you ignore the effects of foreign currency last year, the FY 2023, we grew at 14%.
Brian Harbour
Yes. Let’s talk about product innovation a bit. I think one thing you mentioned quite a bit last month was PM daypart opportunity. So maybe talk about what kind of opportunity you see there? What we should look forward to in the next couple of years on the PM daypart?
Laxman Narasimhan
So if you just look at our business and on the beverage side, it is — it has shifted heavily to cold. But what we’re seeing in the PM daypart is there’s even more potential. And it’s going to be innovation that is going to be highly targeted that we bring in. We already have the footprint. There’ll be a lot of people who say we’re targeting the PM footprint. But we actually have stores and we have the ability and the capacity to be able to do it, including the innovation. So on the beverage side, it’s really quite large, possibilities are real.
But in addition to that, we have a food attach opportunity. I mean this breakfast business, which I think we went into reluctantly many years ago, right? All of a sudden, it’s a huge business. And we’re selling along. What we see from our customers is they would appreciate all-day breakfast. They would appreciate all-day snacking. They would appreciate to find a way to attach our food to the beverages they buy. And particularly as you think of drive-thrus and you look at what’s going on with mobile order pay, it’s much easier to customer attach what we have.
So I think there’s a real play the afternoon that we haven’t fully tapped into yet, and that’s going to demand innovation. It’s going to demand digital, it’s going to demand customization. It’s going to demand attach. And we have the capacity and the ability to do it. It’s an area for us that will be a big growth opportunity for us going forward, too.
Brian Harbour
Do you have a different view of food than some of your predecessors? Because I think that’s kind of ebbed and flowed over the year at Starbucks. What do you think about kind of the food opportunity?
Laxman Narasimhan
I think, first of all, I think it’s different. I think the customer has changed. As you think a little bit about the customer going through mobile order pay or through drive-thru, we’re seeing attach rates that are quite high. I think in the U.S., it’s 2 or 5 that are attaching. But it’s not 3 or 5, which, again, were just fundamentally changed, just the size of that business. I mean, it’s already a $6 billion business growing enormously, right? And the opportunity, though, is for us, and particularly as you bring in tools appreciate the warming ovens that are more evolved and what we do with Siren System and how we think about things that we bring in, I think you have the ability to actually create an experience there, too, that’s also more elevated.
So the innovation, coupled with what we’re bringing in, in terms of the physical footprint, coupled with what we have digital as well as drive-thrus and delivery, that is actually adding to the nature of this business. And it will always be an attach business for us. We’re always beverage first.
Brian Harbour
I was actually somewhat surprised by the stat that I think you gave 85% of beverage sales or core products, 15% are seasonal/new. Has that always been the case? Do you think that will change over time?
Laxman Narasimhan
Yes. I think it’s a question of how you think about what core is, right? So what is interesting about this that you take a core espresso and then you have things that you’re innovating, particularly with customization, customization business is really quite large. So think of it as a landscape on which you’re painting or canvas on which you are painting. And I think customization keeps core at 85%. And obviously, the strength of core is really quite important. And what we do with the others, the other 15%, is we’re bringing people in with things that are exciting. And so you will see us continue to do that. But customization, just today, we’ve just launched for new winter foams, cold foams that you can use for customization. You will see more there in the way that we help people have core, but also bring a twist to the core.
And then, of course, you have new products and you have LTOs and so on that we bring people in. So it has been so. But if you look at hot coffee, which is again part of our core, the fact that we’re rolling out the Clover Vertica is going to mean a much higher quality coffee that is delivered on demand. And that’s going to make the core hot coffee better as well. It’s still an opportunity for us.
Brian Harbour
Great. Yes, makes sense. Maybe let’s talk about digital a bit. I mean, clearly, you have a very impressive digital business, right? I go into my local Starbucks and it’s clearly quite highly used, right? What — and you want to double it. So what’s going to drive that? What’s key to that? Do you think — you talked about some of these partnerships, what else?
Laxman Narasimhan
Look, we’re on a track, even if you just look at the current run rate, if we just preserve that, you get very close to that. So we’re starting from a great base. Secondly, we’re actually really changing the metabolic rate inside the company around digital and digital innovation. We’re into literally 30-, 60-, 90-day releases. The team has meetings with me in every 6 weeks. And we look back and say, what do we say, we accomplish 30 days, 60 days, 90 days? Where are we at now? What’s coming in the pipeline, 30, 60, 90? And so there’s a metabolic rate and the way the team is working together, that is actually much faster in terms of the innovation that’s coming. Some of the stuff you will see and some of the stuff is actually behind the scenes in terms of making a much better recommendation if you’re out of stock or something as an example.
What’s going to drive it is, first of all, just — we have a huge universe that we’re already in touch. I think in the Investor Day, we talked about if we take globally at 75 million members of the Starbucks Rewards. We have some kind of a digital relationship with over 300 million people, so the base exists. Then it’s a question of how you ensure that you make offers that makes them attractive to come in? How do you ensure that you deliver conveniently? It’s the business model and how we evolve it. Mobile order pickup as an example.
It gets them get into the level of customization that you’re bringing in and then potentially what you do with loyalty, particularly with Starbucks Rewards. And I think this is the way this partnership fits in. We’ve already got a partnership with Delta, and you see what happens. If you go to the week of Thanksgiving and the travel data that existed then that we — the partnership with Delta obviously meant that there were specific offers to people who were traveling that week as one example. We’re going to announce 2 more, one with a hospitality company and the other with another financial institution that will actually give us advance connectivity in base and actually increases value to our loyals in terms of the benefit that we supply them.
There are digital businesses that we’re incubating even on top of all of this. That would actually help us advance scale what we do there outside the store, different profit pools that are available. I won’t get into all the details on that. But all this actually tells you that there’s a digital opportunity that is actually quite significant. It drives business into the stores. It makes people shop there more frequently. But it also gives us the ability to add more to what they do. That’s at the heart of what we’re doing.
Now in order to do that, we’re, and you heard in the investor forum that we had, we’re working on technology and how we architect that. Clearly the partnerships with some of the leading providers in this space, we mentioned the partnership with Microsoft and GenAI, the work we’re doing at Apple products on how we ensure we bring that into the partner experience as well as the work we’re doing with Amazon on payment. All these things put together actually tells you this is a brand that people want to partner with and actually bring to life in a way that we can actually fully capture the digital opportunity as a company.
Brian Harbour
And I think some of that also plays into just personalization. So how do some of those partnerships and what you’re doing today kind of help with personalization specifically?
Laxman Narasimhan
First of all, the business is set up for customization, which is actually at the heart of personalization in a physical sense. And that’s going to get even more amplified as we think a little bit about what is going on with regard with GenAI coming in and how we sort of make all that work.
We are still a journey of how we learn more and more about individual customers. I mean, there is still work to be done. And, I think what it does for us is, we are clearly ahead. We have built Deep Brew which is our platform, artificial intelligence and machine-learning platform which we have built for 5 years, quite forward by the way to think about when it was done. And now as you see this tech change, the architectural change that’s coming, the work for us now is to how we then take that across all the data that we have, our partners as well as our customers and how we put together pictures that actually give us even more on what’s going on with individual customers. So that’s the personalization journey we will go into, which actually helps you to come up with products that you could customize for yourself and make it easier to make. Offers that actually will make you even more loyal and just achieve more value from stop us rewards, that’s the journey we are on.
Brian Harbour
Okay. Makes sense. Maybe let’s talk a little bit about store operations and efficiency. What do you think has actually been most impactful so far in the past year? And then what do you think will be most important in ’24?
Laxman Narasimhan
I think if you look at the work and reinvention, which make complete sense to me when I came, actually when I joined, we went through the entire program and the efforts all made sense to me. And I think you see that in the results from last year just around the progress we have made with just reinvention. We have invested something appreciate $9 billion over the last three years, with a combination of things that we put into stores as well as a partner experience, almost 1/3 of that is into the partners themselves, which is about 20% of the profit that we produce has actually gone into that, which has been a very good set of investments that we have made.
And I think what you have seen there is, we have been able to put in to the stores, some equipment that has been very helpful, portable cold foamer/blender as an example, help us with the customization of some of the foams. We did it just before the summer holidays, so it actually played itself all the way through.
What’s coming though is — what has been being built is, if you look at the waste, we attacked waste quite systematically. It is $90 million of waste savings that we delivered just last year. There is more to come with that, but that was very powerful and good. But really the big thing was what we did with staffing and scheduling. It was very clear to me working in stores that we could do better there. How we match demand with supply, how we get more personalized in terms of what the partners want, we are not fully there yet. But if you just look at what we have been able to do, if I go back to 2020 to where we are now, right, essentially the take home compensation has gone up for the partners by 50%. And we think by 2025 it is going in effect from 2020 be double. Hours are a very big part of this. And the way we work it is actually quite important.
There is a lot more stability — operational stability in the stores. You see tenure go up. It is always up by a year, which is a lot for us. And so traffic and scheduling has been a big area of work. We are not fully there yet and there is more to come. And what we are doing is, I mean, the level of math, the level of technology that’s going into it. I mean, we have a large number of shifts around our network. And you have got people who want to work for 20 hours and someone wants to work for 30. So we actually — it’s a very complex set of teams working really hard and how we unpack all that. So there is more to come.
Looking ahead, actually, we should look above the store, the $3 billion productivity program that we touched on, 70% of it is outside the store. I ran the supply chain for 6 months along with running stores. Rachel gives me no credit for that. I just want to point out. But by the way — but I was actually running the supply chain. And by the way, attach rates went up and then stock went up. Rachel, just so you know.
In any event and it would be obviously a great talent in there, but why did I do that? Part of it was to really lift that in the company. If I think about innovation and what we can do, lots of great ideas on what we do with tech and innovation. Product has to be available. And so — but we can buy better, we can flow better. We can store better and there’s really work going in there.
And what is interesting in all that is we’ve actually put in place a muscle in the company on productivity that is in fact the engine of what’s going to keep driving this going forward. And is it the base of what we call progressive margin expansion over time. So today there’s a language inside the company around where we have an ideas, who is managing the pipeline, how do we go, there’s a review every 30 days on it to say how we make a progress versus not. And frankly, I feel very good about the traction in the progress we’re getting.
Brian Harbour
It sounds appreciate a store with all the new equipment that you’ve talked about, are you running that with fewer labor hours, are you well able to gauge that at all?
Laxman Narasimhan
I don’t think the focus is to run it with fewer labor hours. The focus is to improve the labor hours to face greater demand. So it’s a throughput question. I mean, there’s no question that I know and we know this that if I look at bulk rates, so what we have, what we call couch bulk, people sitting at home, in a drive-thru coming into the store looking at the line say, you know what, I’m not going to do this. We clearly have that. And we’re working to make it better.
Brian Harbour
At the vast majority of stores would you say, the throughput, still a pretty widespread limitation in your view?
Laxman Narasimhan
I don’t think it’s all the stores, but I think it’s in many stores.
Brian Harbour
Makes sense. This is maybe a dumb question. Why is the third place model still important, right, given you’re mostly an off premise business today.
Laxman Narasimhan
Well, just think of it, right? I mean, listen to what’s going on today. There are people who are looking to find ways to connect and they do come into our stores by the way, they do come into our stores. And despite all the misinformation and despite all the overhyping that is going on, people still come in. They want a place where they can have a warm connection, a conversation, frankly get product and leave. I grasp fully your point around saying there are several people who have moved their behavior into more drive-thrus are online. But the third place actually has quite a relevance both physically, but increasingly also digitally.
And I keep using the story of my time and working in the stores in Beverly, in the South of Chicago with a woman who was in the drive-thru at 7:00 in the morning on Monday, and I recollect opening the window to deliver the customized hot coffee that she had wanted. And the window rolled down and the woman was half made up and had the makeup there. And she looked at me with a combination of anxiety, but also relief to see what she was getting. And I just said, I hope you had a great weekend and I hope you have a great day at work. That moment matter, because I was probably the first person she was talking to all weekend.
And so I think we cannot really take away from this idea that there is a point of human connection. And that’s what this brand is about. That’s why the values we have, the mission we have, the purpose of the brand is big in this. But digitally we’re able to do it too, with what we do with mobile order pay and others, but messages that you get and so on. And we haven’t fully tapped that out yet fully.
So I think third place is a broader definition. I know we used to talk about the fact that people go to Starbucks to connect with others. The reality is people rely on Starbucks to connect with themselves as much as they through that connect with others. And I think that’s a broader expansion of what our mission is. And with that you see the Starbucks at home and the moment is then you have at home. It’s the moment you have the drive through, what you do later on at work, with others as well. So I think it’s a broader definition of who we are. The classic definition of third place, it’s a box where I go to face someone. It’s frankly not relevant anymore in this context.
Brian Harbour
Okay. Makes sense. I do want to talk about the cost and margin side a little bit. The margins side, you said historical margins could be in play over time, right? And may I’m not going to put words in your mouth, but if I were to say 5% same-store sales roughly, maybe 3% to 5% cost inflation over time, you kind of get there naturally and you would say, okay, some of the $3 billion cost program that you’ve talked about, adds to that. What other pieces would I think about there?
Laxman Narasimhan
I think what we talked about is progressive margin expansion which comes from a combination of sales leverage, which is all the math that you have there. It comes from the productivity programs that we have, which are broad. They are above the store as well as in the store. And also the advance enhancements that’d be the think of the area of revenue management that actually help us overall with the progressive margin expansion.
So I think as we don’t set a margin target or a time, but in the long-term, I think you can clearly see how we will get back to the levels that you would talk about.
Brian Harbour
Yes. You sort of mentioned this. Behind the $3 billion program, part of that is waste, part of that is supply chain. I mean, what are the other major initiatives we should be thinking about within that program?
Laxman Narasimhan
In the productivity program?
Brian Harbour
Yes. In the $3 billion cost program.
Laxman Narasimhan
Yes. So as you said, 70% is about the store that actually looks at everything from procurement to supply to the services that we supply and how we improve all of it. And there’s clearly more in the store including waste, including looking at how we get much better at bringing in the right equipment that helps us, helps our partners do things more efficiently in the store. So it’s literally a comprehensive program. Obviously you get sales and sales leverage above that, including the G&A, which as we didn’t make an investment in order to launch the program and as sales keep growing, you’re going to see that number come down over time.
Brian Harbour
Do some of your ESG initiatives help there, right? appreciate I think you’re starting to push more reusable cuts? I mean, does that make a difference on the margin side for example?
Laxman Narasimhan
We are embedding a lot of the sustainability ideas into how we do this. I mean, almost every single touch point that we have in the productivity program there is a question around how do you ensure that sustainability is built into what we do. So it will have an impact there. Waste reduction, for example, is a big way for that to happen.
Brian Harbour
I do want to talk about China a little bit. I think we’ve all gotten the message that the business is very different than 4 years ago. And certainly, there’s drastically different number of stores there. Today it is lower volume, it is lower margin. You’re still kind of in a recovery phase there. So we know what your store expansion target is. What else do you think is really going to drive China on a same-store basis perhaps over the next several years?
Laxman Narasimhan
Well, firstly, it is a different business from where it was pre-COVID. We went to China in 1999 with the idea of actually working to create this specialty coffee industry. And a tea drinking country, massive tea drinking country. I heard people talk about how the next China is China. We actually subscribe to that view. And so if you look at where you’ve gotten after 24 years, we’ve gotten them to 12 cups per capita. Japan is at 280, which has a big history of coffee drinking over the years and the U.S. is at 380. So we are still in early days. If you look at where we are, if you look at our store count and of course the stores there are different from here in so many ways, 65% of our stores today were not there pre-COVID. So clearly it is a different network. We have a digital business that we didn’t have before. We have a delivery business that we didn’t have before. We have that now. And so it is in fact a very different business.
Now we have a premium brand, actually we have two premium brands. We have Starbucks and we have Starbucks Reserve, both brands in China, and both extremely well-regarded as sort of premium propositions in China. And we haven’t fully penetrated where we could be, which we are now in 800 county cities out of 3,000. Shanghai, we have 1,150 stores. I have been to Shanghai. There are many parts of Shanghai we are not in yet. So there is even penetration in Shanghai, let alone Beijing and the other cities lower down in the place that we are in.
Now, the fact is, you have read all the press on China and about what’s going on with the economy and how it is. And we see it too. We see clearly that, the recovery that we are seeing is perhaps half the rate of what you would expect it to be, given what you saw in the fourth quarter last year. So it is recovering and normalizing, but our rate is slower than what you would expect. But the long-term is very clear. Once you see trying to work through its challenges, I think you will see in the long term it is a business that is very strong. It is a highly competitive market. Do not get me wrong. It is more promotional now than it has ever been. You see more discounting and all of it. But at the end of the day, we deliver a premium experience. And even the market hasn’t teared yet appreciate it is here.
Brian Harbour
Yes. I mean, is it fair to say that in the near-term that’s still sort of a choppy market for you?
Laxman Narasimhan
Yes. It will be choppy and the recovery will be choppy, but it is normalizing half the pace than what you would think it would.
Brian Harbour
Okay. Okay. Understood. International, outside of China, I think you have focused more on that in your time so far. In your view what was not appreciated there before? What are some of the markets that you are more excited about?
Laxman Narasimhan
I think what is underappreciated first of all is staff. Actually it is substantial. I mean, a lot of our business is the U.S, but I think we have talked about the fact that international and China are kind of in the same level in terms of the contributions over time. It wasn’t so before COVID, but it is so now. I think what is underappreciated was the unit economics in many of these markets. They are actually very strong. Now we have a different business model, so it is appreciated in a different way. But the unit economics were underappreciated. I fully recognize that we have got all these things going on and international geopolitics and some of the conflict, countries affected at this point in time. But if you look at the long-term, the brand is very strong. The unit economics are really strong. The partner and the culture that’s been built with our geographic partners who we have had for years is actually very strong. And the headroom we have in terms of what we could get to is extremely strong. And the headroom is large, pretty much across the board, Latin America, Continental Europe where it is still early.
I mean it is surprising to say this, but we still are not really fully where we need to be in Continental Europe. And then you get into of course Southeast Asia where there is a big growth play, the coffee culture grows there. India, where the coffee culture is growing, opportunity there too. And then you look at the Middle East and Africa and notwithstanding the near-term, but long-term there is real potential in play there too. So, I think what needs to be appreciated more is the fact that, it is in fact the third leg of the stool for us in many ways and we haven’t fully tapped into that yet. There’s still more play. Digital is a very big part of this.
Brian Harbour
Yes. It seems appreciate it’s still quite early relative to some other markets.
Laxman Narasimhan
Yes. And the platform we’re building, the Starbucks digital solutions will help us essentially build this global network across all our different businesses globally.
Brian Harbour
Before we finish up, I was going to do my lightning round questions that we’ve asked to everyone here. Demand backdrop for the year ahead relative to recent trends: expedite, hold, decelerate?
Laxman Narasimhan
Last year we grew at 14% without ForEx. I think the expectations we set in a month and a half ago were at the lower end of 10 to 12 if you ignored currency. So that will be slower than last year. And I think it’s more back end loaded in terms of the overall sort of stronger growth in the front end.
Brian Harbour
And then margins, we kind of know the answer to this, but up, down…?
Laxman Narasimhan
Progressively boost.
Brian Harbour
And then capital allocation, prioritization between CapEx, buybacks, dividends, debt pay down, any change in relative importance of those?
Laxman Narasimhan
We will invest in the business. OpEx, CapEx, as the needs are. Second, for a growth company, in a growth stock as you might call it, we’ve actually have a history over the years of maintaining a 50% dividend payout ratio. We intend to preserve that. Then the question of what do you do with the rest of the money, I think, it depends a bit on cost of capital and what’s really going on in the world out there as to whether we borrow to buy back stock or whether we pay down debt and that’s a calculation we always go.
Just so you know, stock buybacks at a very small portion of the EPS growth expectations that we said, little, appreciate less than 1% or 1% of the 15-plus percent that we’ve said in the long term.
Brian Harbour
Okay, great. We’ll end it there and very much appreciate it.
Laxman Narasimhan
Thank you. You didn’t tell me what your drink was.
Brian Harbour
My favorite drink is? I appreciate the iced shaken espresso.
Laxman Narasimhan
Iced shaken espresso. Great.
Brian Harbour
Yes, with oatmilk.
Laxman Narasimhan
Okay. 35 cal, the oatmilk is a little higher, but that’s okay. I mean, you can deal with. Thank you so much.
