The International Taste for Starbucks

Starbucks (Nasdaq: SBUX  ) is trying really hard to succeed in Europe. As detailed in an article in The New York Times, more than a few of the company's shops on that continent are done up in swanky decor, the better to compete with the lavish old coffee houses still occasionally found there. The question is, though, whether the mighty American chain actually needs to make such an effort to succeed abroad.

Slow boat to China
Historically, Starbucks has been cautious about expanding overseas. It took the company 25 years after its founding, and four years after its IPO, to finally open its first international coffee shop (in Tokyo, for you trivia buffs). Foreign expansion was slow. In 2002, more than half a decade after that first store in Japan opened, Starbucks' international revenue was barely the foam in the cappuccino: Less than 8% of the company's overall revenue for that fiscal year came from abroad.

Over the years, that number has crept upwards. For fiscal 2011, more than one-fourth of the firm's revenue came from countries outside the U.S. Asia continues to see strong demand: The company now directly operates or licenses more than 2,700 stores in the region, making it the second-largest geographic market by store count for the coffee purveyor. This is no surprise, as Asia is growing fast, and its inhabitants are generally more eager for famous American product than their European counterparts.

Comparable store sales abroad aren't quite at the level of their American counterparts -- 5% vs. 8% year-on-year in fiscal 2011. This may have owed to the thinner menus and more limited food and snack offerings at the company's international outlets, though.

Growth to go
The company's success abroad is only partially due to robust economies and a desire to consume a U.S. brand still (occasionally) perceived as cool. What Starbucks offers that's different is convenience. This is an obvious draw in busy Asia, but it represents an attractive and relatively new quality in old-world coffee cultures like Europe. Traditionally, cafes there have been sit-and-sip places, cozy establishments where a customer can spend hours working a steady caffeine buzz while reading a few newspapers.

The average Starbucks has few seats and, for the most part, pours its signature product into paper cups. It's "pay, grab, and go," which is more in tune with the demands of modern society, even in slower-paced nations.

Staying at home
Among its publicly traded rivals, Starbucks is the only one with a significant presence abroad -- actually, make that any presence. Peet's (Nasdaq: PEET  ) has a thriving business in the few select U.S. states where it operates, but has zero stores abroad. Ditto for Minnesota-based Caribou Coffee (Nasdaq: CBOU  ) .

Both firms are fairly successful in their regions. However, their potential is more limited; even if they were to go nationwide, they'd be competing against the power and presence of Starbucks. And that problem is particularly compounded abroad, where their big rival has a highly defensible and recognizable brand.

The nearest compatible firm (i.e., a dedicated coffee house) that approaches Starbucks in the international arena is Dunkin' Brands' (Nasdaq: DNKN  ) Dunkin' Donuts. On the surface, it appears that not only America runs on Dunkin': The company drew nearly 20% of its 2011 revenue from operations abroad.

However, a closer look reveals that 88% of those foreign sales were affected by subsidiary Baskin-Robbins, which sells ice cream.

Far ahead in the race
So perhaps it's sensible for Starbucks to expand abroad only steadily, as per its habit. It's got no significant domestic competition operating overseas at the moment, and none on the horizon, so what's the rush?

And why the fancy shops? Not many people who visit Starbucks are there to sink into a plush chair and read a few chapters of War and Peace. No, they're popping in for a coffee to go on their way to work or the next shopping destination. The company has its formula down cold and makes lots of money from the thousands and thousands of drinks it pumps out, both in the States and abroad. Those fancy pseudo-classical cafes are nice places to down a Frappucino, but they're not going to be the reason for the company's success in foreign lands.

Starbucks is one of many American companies successfully exporting its wares, and so is a troika of firms detailed in our free report, "3 American Companies Set to Dominate the World."

Fool contributor Eric Volkman owns none of the stocks mentioned above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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