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How Starbucks Is Preparing to Boost Growth in Its Second-Biggest Market

By Adria Cimino – May 2, 2020 at 6:00AM

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China sales may suffer this year -- but Starbucks has a plan to capture growth well beyond.

Starbucks (SBUX 1.82%) says it's on the road to recovery in China after the coronavirus outbreak led to a 50% drop in same-store sales in the second quarter of fiscal 2020. Revenue also fell by $325 million there amid the temporary halt to business.

Starbucks' shares are down 13% so far this year amid this setback in the company's second-biggest and fastest-growing market and elsewhere.

But Starbucks remains optimistic, and so do I.

Starbucks is preparing to open at least 500 new stores in China this fiscal year -- that's more than 80% of its original plan. The company already opened 59 new shops there during the second quarter and added seven new locations during April. As of last September, Starbucks had 4,123 company-operated stores in China. The company's goal is to have 6,000 stores there by 2022.

A Starbucks employee, wearing a mask, prepares a beverage at the counter.

Image source: Starbucks.

A growing coffeeshop industry

The motivation to expand quickly in China is wise. The country's coffeeshop industry is expected to reach $6.8 billion in 2023 from about $3 billion in 2017, Statista research shows. And according to Direct China Chamber of Commerce, 75% of China's coffee spending by 2023 will happen outside the home -- in places like restaurants or cafes. The trend will be driven by younger consumers with higher income, interest in Western culture, and comfort using digital platforms.

Beyond shops, Starbucks will also expand local production with the opening of its coffee innovation park outside of Shanghai in 2022. The $130 million facility will become Starbucks' biggest manufacturing investment outside of the U.S. and its first in Asia. The park will include a roasting space, a warehouse, and a distribution center. Starbucks currently has five roasting operations in the U.S. and one in Amsterdam to serve European locations.

Starbucks is also tailoring its offerings to suit the Chinese market. Though most Chinese participants in a Good Food Institute survey didn't identify as vegetarian, more than 85% had tried plant-based alternatives. Starbucks recently launched a new marketing campaign featuring plant-based alternatives. The coffee retailer introduced a plant-based milk alternative and is including Beyond Meat's products on its menu. Even some packaging will be made with plant-based material.

The current situation

Let's take a step back to the present. What's the current situation at Starbucks in China? Almost all Starbucks stores in the country are open, with only shops in entertainment or travel hubs remaining closed. In April, same-store sales were down 35% year over year, compared with a 90% drop at the low point in February.

Starbucks is counting on the development of a new to-go trend in China as recovery continues. Unlike the U.S. market, where most orders are on the go, the China market has traditionally been the opposite. About 80% of customers enjoy their orders on site. But Starbucks said that, after the coronavirus pandemic, there's been a shift to to-go orders even though limited seating is available in stores.

We can't expect an overnight recovery for Starbucks in China considering the length and depth of the coronavirus crisis. The company predicts full-year fiscal 2020 same-store sales growth there will be down 15% to 25%. But Starbucks' long-term growth plans should bear fruit later -- for the company and for investors.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Beyond Meat, Inc. The Motley Fool has a disclosure policy.

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