Starbucks Continues to Add a Lot of Stores in China

The company faces new competition and a slowing economy.

Motley Fool Staff
Motley Fool Staff
Feb 4, 2019 at 2:52PM
Consumer Goods

While Starbucks (NASDAQ:SBUX) has nearly saturated the United States, the nearly 30,000-store chain still has opportunity to grow. Much of that growth, however, will take place in China, where the economy has been slowing. That's a risk, but maybe not a major one, because the company's products are affordable luxuries that people consume even as they have less money.

In this segment from Industry Focus: Consumer Goods, host Shannon Jones and contributor Daniel Kline discuss the coffee titan's growth in its fiscal first quarter.

Check out the latest Starbucks earnings call transcript.

A full transcript follows the video.

This video was recorded on Jan. 29, 2019.

Shannon Jones: Let's also talk about the number of new stores they opened in this Q1. What was interesting to me, Dan, is that a significant portion of those new stores was actually outside of the U.S. What can you tell us about that?

Dan Kline: It's about one a day in China. They opened, I don't remember the exact number, 550 or so new stores. Right there, you're getting a big chunk in China. In the U.S., they're only doing strategic openings. About half the stores they've opened are not company-run stores, they're stores done with partnerships. So it's a very aggressive expansion plan, but for the most part, it's operating in markets where they've already figured out what the business is. In China, they already have thousands of stores. It's not a risk to move into a new city or expand their base. This is really China catching up to the U.S., the U.S. filling in holes, and -- I hate to say lesser markets, let's call them smaller markets for the company -- smaller markets building out the scale.

Jones: Dan, I want to pick your brain here. Certainly, expansion in China makes sense. You've got a growing middle class there. Going after and capitalizing on the Starbucks brand there in China makes 110% sense. But I think, as an investor, do you also worry about the slowdown in China impacting these aggressive expansion plans for Starbucks?

Kline: I don't that much. Starbucks is what you call an affordable indulgence. When everything goes bad, you might scale back on vacations, you might not go to a sporting event, not buy a new purse, a new outfit, whatever it is; but you're probably still going to have your $4 latte. In fact, that you might have your $4 latte more often because you can't go on vacation, you can't do some of the grander things. So, unless the economy truly collapses in China, to the point where people literally don't have the money to go to Starbucks, I actually feel they might benefit from a little bit of a slowdown.

Jones: It was interesting, looking at same-store sales. Of course, in the U.S., we saw 4%. It was only about 1% in China. It'll certainly be something to watch. I have to agree. I would say I'm mixed on China. You do have the economy there, I think slowing to the slowest pace in about three decades. There will be some slowdown. You've also got competition. I think there's a new start-up that just launched recently in China. So I'm a little tempered there in China, just given all of those factors. But, all in all, with that being said, it sounds like Starbucks overall had a good quarter. Looks like they grew their loyalty program to 16.3 million active members in the U.S. That's up 14% year over year. That led to some pretty impressive revenue numbers, Dan.

Kline: We're going to talk a lot about the loyalty program later in the show when we talk about dayparts and how they're trying to move traffic around. But there's two major pieces to their technology initiative. They added a million people to the loyalty program. That's just flat-out customers they can message regularly, people who have the app installed, they have mobile order and pay. Those are hardcore Starbucks customers. They've also collected millions of addresses through a new program where, if you log into wi-fi at Starbucks, it collects your email one time on that device, and then they have the ability to message you. They're not going to message you very often. Once a week, maybe even only twice a month. But once they start doing that, they'll have tens of millions of more people that they can try to, one, move to action, but also, try to get them to cross the hump to join the loyalty program.

Jones: It certainly make sense. What we actually saw was revenues hit $6.6 billion in Q1. I do think a lot of that is about building out this ecosystem within the rewards. Looking at the active users versus those that are simply registered, and being able to target them with the data, is a very smart move.