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In 1982, a 29-year-old American entrepreneur was traveling in Milan, Italy. It was during that trip that he had an idea -- an inspiration that would ultimately grow into a global corporation worth more than $25 billion. You see, ever since the 1773 Boston Tea Party, Americans have had a love affair with coffee. But up until the 1980's, for the most part, coffee was brewed and consumed in the home. Coffee retailing was more or less a regional or localized business -- a handful of mom-and-pop locations serving one or two types of brewed java. There were only a few regional chains of coffeehouses with more than one location. But this intrepid entrepreneur, Howard Schultz, sought to change all that. He noticed the popularity of cafes in Europe -- Italian cafes served several types of coffee and charged a good deal more than your average American coffeehouse for their specialty concoctions. In 1985, Schultz started his business, dubbed Il Giornale, with a handful of locations in the Seattle area. Schultz offered a more European-style cafe experience and a greater selection of specialty coffees than most other coffeehouses. His concept proved popular and profitable; he soon began a steady pace of expansion, buying up smaller cafes and chains and re-branding them to fit his concept. By 1987, this small chain of coffeehouses had taken the name by which we all know it today -- Starbucks. And by 1992, Starbucks had already become a public company with 165 locations in the U.S. Starbucks' initial expansion came from buying up smaller chains and integrating them into the Starbucks model. And, of course, there was plenty of organic expansion too -- Schultz opened up coffeehouses wherever he though they would be popular. Yet despite his early success, Schultz's Starbucks stores were still a small part of a much larger market for coffee retailers. In fact, even by 1992, Starbucks was still a small fish in a big pond. Most of the company's locations were still based relatively close to its original Seattle headquarters. And according to the Specialty Coffee Association of America (SCAA), there were around 2,250 coffee shops in the U.S. in 1992 -- Starbucks, at best, sported a 7% market share. It was only after going public that Starbucks really started to dominate the U.S. coffee retail industry. The company bought up small chains such as Seattle's Best Coffee and Torrefazione Italia, and it also opened hundreds of new locations annually. Schultz' brand began to gain recognition all over the country, quickly moving from a Seattle retailer into a nationally recognized name. By the end of 2005, Starbucks had more than 7,300 U.S. locations and a total of 10,500 globally. Meanwhile, the firm now boasts annual domestic sales in excess of $5 billion. But what's really impressive is just how dominant Starbucks has become in the U.S. coffee retail industry. According to figures published by the SCAA, the U.S. coffee cafe industry generated a total of $7.7 billion in sales last year out of 13,900 locations. That gives Starbucks a whopping 70% market share in terms of revenues and 52% share in terms of locations.
Other Examples of Market
Share Gains And Dell (DELL) started in 1984 as just one computer retailer among many; Michael Dell founded the company with just $1,000. By the end of the 1990's Dell was one of the world's largest computer retailers, selling computers from the U.S. to China. Meanwhile, shares of DELL also vastly outperformed the broader market as the company built up its market share. Outpacing the Industry With these points in mind, my staff and I recently spent countless hours looking for "the next Starbucks." In the process, we searched for companies with small current operations but with tremendous long-term growth potential. In the text that follows, we'll highlight a few stocks that fit the bill . . . Editor's Note: Throughout the remainder of this article, StreetAuthority.com founder Paul Tracy and his staff provide an in-depth analysis of several individual companies with enormous market share potential. To view the remainder of this article, you'll need to subscribe to our premium Market Advisor newsletter. Please visit one of the following links to continue . . . Good investing!
Paul Tracy founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators. Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S. Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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Of
course, Starbucks' rapid expansion and market share gains generated
enormous wealth for shareholders. As you can see in my chart, if you had
invested $10,000 in Starbucks on its first day of trading in 1992, then
you'd now be sitting on an investment worth more than half a million
dollars. That's 16 times more than the $31,690 that a similar-sized
investment in the S&P 500 has yielded over the same time period.
