Over the years, Starbucks (SBUX -1.00%) has grown to become an iconic global brand. The company's over 30,000 locations are seemingly everywhere, and increasingly overseas.
That success outside North America -- and particularly in China -- is excellent news for shareholders. It expands Starbucks' market opportunity, allows a longer runway for growth, and has an additional benefit of expanding profit margins. Let's look at why China is a big part of Starbucks' success.
Image source: Getty Images.
The Chinese love Starbucks
Already, Starbucks' second-largest store concentration is in China. The U.S. is first with 15,500 locations, and China is next with 5,557 locations as of Jan. 2, 2022. During the first quarter (ended on Jan. 2), Starbucks opened 484 net new stores. Of that total, 197 were opened in China, a record high for any first quarter in the company's history.
One factor explaining Starbucks' increasing interest in China is the superior return on investment. At its shareholder meeting, Starbucks highlighted that stores opened in China delivered a 70% return on investment in their first year. That's in contrast to an ROI of 55% for stores opened in the U.S. Locations in the U.S. and China deliver roughly the same amount of sales, so the benefits are rising from lower operations costs in China. Indeed, labor shortages are more pronounced in the U.S., and Starbucks has had to raise wages multiple times to secure enough staffing.
These figures may not be specific to China, but they illustrate a similar point. As a percentage of revenue, store operating expenses totaled 51.8% for the quarter in North America. Meanwhile, that total was just 46.3% in its international segment. Note that China is included in the international segment. The figures highlight the substantially lower costs of doing business outside the U.S. for Starbucks.
Interestingly, an affinity for Starbucks is no less in China than it is here in the U.S. One proxy that measures that sentiment is Starbucks' active Rewards members, which reached nearly 18 million in China. That was up by 2.6 million from the same time last year. These members contributed to 70% of Starbucks' overall sales in the region.
To put that figure into context, Starbucks boasts 26.4 million active Rewards members in the U.S. More illustratively, I like to look at the ratio of active Rewards members to stores. According to that measurement, Starbucks has 1,703 active Rewards members per location in the U.S. Meanwhile, that figure is significantly higher in China, at 3,239. That gives a rough estimate of how many new, high-value customers Starbucks is adding with each new store opening in China vs. in the U.S.
An excellent time to buy Starbucks
Given the aforementioned favorable market conditions in China, it's no surprise that Starbucks is emphasizing store development in the region. Investors will want to see the positive trends continue for as long as possible, as the Chinese market presents massive potential for the iconic coffee brand.
Starbucks' stock is down 31% off its high reached last year as many factors, including inflation, geopolitical instability, and the pandemic are meaningful headwinds in the near term. That said, the company is trading at a price-to-earnings and a price-to-free cash flow of 23.8 and 23.4, respectively. That's certainly a fair valuation for a company with excellent long-term prospects.
