Starbucks' New Opportunity May be Worth All the Tea in China

Could China be a bigger opportunity than the United States?

Jun 25, 2014 at 9:00AM

The average person in China  drinks just four cups of coffee per year but Starbucks (NASDAQ:SBUX) is in the process of changing that. And we probably should have guessed -- it's having an easier time than you think doing so. Although God's gift to caffeine junkies has been in China for more than 15 years already, Starbucks is just barely getting started.

Source:  Starbucks

Growing like a coffee bean
While Starbucks is on a 17-straight quarter winning streak at home in terms of 5%-plus domestic same-store sales growth, the international picture is starting to look even better. For several years now, international same-store sales have come in between 6% and 8%.

The result to the bottom line has been double-digit adjusted earnings-per-share percentage growth along with guidance for another 20% to 22% growth for this year. Long term Starbucks is targeting steady growth of between 15% and 20% on earnings.

Starbucks recently crossed the 20,000 store mark and plans to add 1,500 stores this year alone around the world. Its largest market is of course the United States, but its second-largest market is now China, with 1,100 stores. Seven hundred of them came from the last 12 months alone.

Howard Schultz, CEO of Starbucks, on the most recent quarterly earnings conference call, mentioned that China and the Asia Pacific segment had 7% growth in same-store sales, which was "particularly noteworthy." He said that China, among other countries, is "significantly understored."

Source:  Starbucks

Upping the jolt
Starbucks plans to have 400 more stores in China by the end of next year, or a 36% increase over the next year and a half. The obvious reason is the growing middle class and the growing opportunity for American restaurants to increase their footprint and make sales in China.

The less obvious reason came from Scott Maw, CFO of Starbucks, at the William Blair Growth Stock Conference on June 11. There he stated, "We're seeing a growing adoption of a coffee experience and a coffee culture."

Starbucks is seeing coffee become part of a daily routine for more and more citizens in China with increased frequency. What began as an occasional beverage there has become more of a hook -- just like us hopelessly addicted Americans.

To add fuel to the temptation fire, Starbucks is luring patrons in by adding local tastes to the menu. For example, at some locations you can find a Chestnut Macchiato or a Green Tea Red Bean Frappuccino. Some locations even have something called "mood cakes." Even the designs of the stores themselves are done with a locally relevant theme.

Belinda Wong President Ofstarbucks China Passing Coffee To Beijing Customers

Source: Starbucks

From tall to grande to venti
Last quarter alone, total net revenue soared 24% in the region. It was the 14th consecutive quarter of revenue growth greater than 20%. In 2010, revenue was only $410 million there. This year, Starbucks expects that figure to be more than $1 billion, or nearly two and a half times larger.

Foolish final thoughts
While I'm sure putting up each new store in China involves complex and careful planning, time, and a strategy, from an investment perspective, it will seem like a walk in the park as they pop up everywhere. The name of the game from an investor's point of view is just a matter of how fast we will see Starbucks roll out in China and how big the potential market really is in the country. It sounds like the company is literally creating the market as it goes along. At this pace, perhaps the China market will even dwarf the United States market someday.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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