What's a company to do when it over-expanded in the U.S. and had to curtail growth? Step up expansion into huge markets like China, of course. That's one of Starbucks' (Nasdaq: SBUX ) big plans at the moment.
Starbucks' ultimate vision is to plant thousands of its cafes in China. Right now it only has 376 stores there, compared to 878 stores in its largest non-U.S. market, Japan. Clearly, the company is confident about its strategy, given its recent initiation of a dividend.
However, before donning the party hat, note that in a Wall Street Journal article on the topic, Starbucks CEO Howard Schultz admitted that China's also a tricky market to navigate. "The thing I am most interested in when I go to China is whether or not local Chinese are buying Starbucks coffee and sitting in our stores," said Schultz. Its own retreat from the Forbidden City several years ago is emblematic of the uncertainty of making a great success in China.
American companies covet the Chinese market due to its huge population and economic growth, creating a large pool of consumers with money to spend. One out of every five people on this planet is in China. It's no wonder that consumer-facing companies like Yum! Brands (NYSE: YUM ) , McDonald's (NYSE: MCD ) , and Starbucks have been making plans to seek their fortunes there.
Chinese expansion may be easier for companies like Starbucks than others. Internet firms have had some major difficulties due to its government's censorship policies; Yahoo! (Nasdaq: YHOO ) ran into problems when it turned in a dissident journalist to the government almost five years ago, and Google (Nasdaq: GOOG ) recently made a high-profile about-face in China that warranted a Walk of Fame.
I can understand American companies' desire to expand in China, but I try to curb my enthusiasm and hope for more up their sleeve. Cultural and governmental differences make it a tough nut to crack. Current rumblings about the possibility of a trade war put a damper on things, too. Starbucks has had to scramble to keep Japanese consumers loyal, so expansion momentum in a new culture and then keeping momentum there is a risk to any company.
Given the ubiquitous Starbucks-within-a-Starbucks joke, the coffee giants' plan to build lots of cafes in China is a no-brainer. As with McDonald's, successful future expansion in China could lead us to realize one day that Starbucks shares were cheap back in 2010. However, investors should realize it's a long and possibly tricky road, and keep an eye out for plenty of other innovative growth plans, too.