1 Reason to Worry About Starbucks Stock This Week

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It's no secret that a major part of Starbucks'  (NASDAQ: SBUX  ) success is its impeccable brand image. Consumers around the world know and trust the company as a high-quality coffee retailer. Starbucks stock is off to a strong start this year, up more than 18% year-to-date. However, negative headlines out of China this week could hurt Starbucks' brand.

A not-so-spotless reputation
The world's favorite coffee chain is being accused of using "toilet water" to brew its coffee at a location in Hong Kong, according to The Huffington Post. When asked about allegations that the company's Bank of China location was using water from a spout in a nearby public bathroom, a Starbucks spokeswoman confirmed the rumors, saying:

"There is no direct water supply to that particular store, that's why we need to obtain the drinking water from the nearest source in the building." 

While this is just one Starbucks location out of roughly 18,000 stores worldwide, it could be potentially damaging to Starbucks' reputation in China. Customers of the Hong Kong store have already responded with angry posts to Starbucks' Facebook page. The company responded on Facebook with this post, according to the Daily Apple, a Hong Kong-based publication:

Please kindly accept our apologies for the concerns raised by the coverage on the water source at the Bank of China Tower store. While the water used at that store was drinking water and certified as safe, we would like to clarify any misperceptions, as quality and safety have always been our top priority. We are now using distilled water to serve that store while we work with all parties on acceptable options.

Editors Note: Starbucks has since responded with an official apology from Asia-Pacific Region Head Jinlong Wang. The apology can be viewed by clicking here.

When it comes to the food and beverage industry in China, even a scandal as innocent as this can blow up in a company's face. Just look at what happened to Yum! Brands (NYSE: YUM  ) in December. The parent company of fast-food chain KFC is still trying to recover from a food-safety scare nearly six months ago at its Chinese locations.

In January, Yum! Brand's same-store sales plummeted by as much as 41% in China, after it was discovered that some of its KFC brand's chicken contained high levels of antibiotics. Moreover, it hasn't gotten much better for KFC's China segment, with comps still down 29% in April as customers opt for chicken elsewhere.

Similarly, if Starbucks isn't able to contain the bad press from this water scandal, it could be bad news for the brand, as well as Starbucks stock. The coffee giant has a lot invested in China, which is currently its second-largest market. In fact, Starbucks opened 516 new stores in China last year, with plans to open 1,500 locations there in the next two years.

Ultimately, winning over the Chinese market is essential to Starbucks' long-term growth and continued global success.

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9/29/2016 12:57 PM
SBUX $53.47 Down -0.52 -0.95%
Starbucks CAPS Rating: ****
YUM $89.99 Down -0.23 -0.25%
Yum! Brands CAPS Rating: ****