Starbucks (SBUX 0.29%) is the quintessential American coffee brand. However, the company has shifted its focus toward growth overseas, most notably in China. While Starbucks has had a presence in China for 20 years, Starbucks CEO Kevin Johnson has made China central to the company's strategy, announcing plans to accelerate the coffee maker's growth in the country. This article will examine the moves Starbucks is making in China and distill why the company is betting big there.
Image source: Starbucks.
Change in strategy from new CEO Kevin Johnson
Since becoming Starbucks' CEO in 2017, Kevin Johnson has reorganized the company to carry out a change in corporate strategy. First, Starbucks sold its Tazo brand and closed Teavana stores. Second, the company outsourced its grocery store packaged coffee business to Nestle in exchange for over $7 billion in cash and a licensing agreement. Finally, Starbucks reacquired its East China franchises, adding 1,300 company-operated stores in China.
Starbucks will continue growing in the U.S., but management has made it clear that their priority is international expansion. In May 2018, Starbucks held a China-focused investor day where it outlined its plan to nearly double its store count in China over the next four years. By 2022, Starbucks intends to have more than 6,000 stores in mainland China, with a plan to open 600 stores a year to get there. That's a pace of almost two new stores a day!
Starbucks is now more focused on its namesake stores, having divested or outsourced its other brands and operations. With these changes, CEO Kevin Johnson has realigned the company around his new vision for growth.
Check out the latest Starbucks earnings call transcript.
The opportunity in China
The opportunity in China lies in a rising middle class, which is expected to double between 2018 and 2022 from 300 million to 600 million. This rising middle class provides a fertile market for Starbucks, with an ever-growing budget for discretionary spending and a taste for Western culture.
The conventional wisdom is that China is a nation of tea drinkers. However, mounting indications show a growing taste for Western coffee culture. Coffee consumption per capita currently ranks low at just three cups a year in China vs. 363 cups per capita in the U.S. However, consumption grew at a 16% annual rate in the last decade according to the International Coffee Organization.
For the younger generation of Chinese consumers, Western coffee culture is considered sophisticated and a sign of affluence. This cultural phenomena has been observed before in the tea-drinking nation of Japan which saw rapid growth in coffee consumption in the 1970's and 80's. Today, Japan is a relatively large coffee market.
Investors should be familiar with the Chinese consumer growth story. The bottom line is that Starbucks is uniquely positioned to capture Chinese discretionary spending growth in a niche brand-driven category.
Starbucks is not alone in tackling the Chinese coffee market
Starbucks is not without competition in the Chinese coffee market. Luckin Coffee is a home-grown success that has been rapidly expanding its store count. Costa Coffee, which was recently acquired by Coca-Cola, has also seen success in China and has announced plans to open 1,200 stores in the country by 2022.
There is plenty of room for competition, and Starbucks is well positioned to compete. Starbucks has been in China for 20 years and has 3,400 stores in the country. This makes Starbucks' China store count more than 3x Luckin's and more than 7x Costa's.
Rather than viewing competition as a negative indicator, increased competitive interest validates Starbucks' thesis that China is ready for more stores. Furthermore, Starbucks is poised to benefit the most from an uptick in Chinese coffee demand due to its larger footprint.
What to expect from here
Investors should expect to see Starbucks' Chinese store count rise at a rapid clip over the next few years. This will result in the company's sales mix continuing to shift away from its US segment and more toward international. We can also expect to see management dedicate more time in earnings calls and presentations to their efforts in China and perhaps disclose some additional China-specific operating metrics.
Most importantly, if the company executes well on the opportunity in China, expect Starbucks to report strong revenue and earnings growth. The Chinese growth opportunity is bullish for the stock which in recent years has been thought of as a decelerating growth story. CEO Kevin Johnson has a vision for growth in China. Starbucks investors will do well to closely follow Starbucks' expansion into the Chinese market.
