Starbucks Expands in China, but Profits Sink Below Expectations

Starbucks (SBUX -0.91%) has continued to grow its footprint in its second-largest market, China. While new store growth there in its first quarter of fiscal year 2022 was strong, overall profits came in lower than expected. In this episode of "Ask Us Anything" on Motley Fool Live, recorded on March 18, Fool.com contributor Matt Frankel discusses what is seen to be the biggest short-term risk to the coffee powerhouse's international business.

Matt Frankel: I don't think Starbucks has too much exposure to China, and I don't think that financial sanctions are the worst of their short-term risk factors in China. I actually think China's "zero-COVID" policy is the biggest short-term risk factor. Just looking at a quote from their conference call on China: "In our other lead market, China, the zero-COVID policy there contributed to significant disruption to store hours and transaction volume. Net new store growth remains strong, yet overall revenue and profitability comes in below expectations." I don't think unless China goes full on into a partnership with Russia to carry out their war, I really don't think that economic sanctions on China will occur to the point where Starbucks has to pause operations or anything like that. I think the zero-COVID policy is by far the biggest risk in the short term. A lot of people don't realize China is in the middle of the COVID wave right now. We don't realize that too much in the U.S., but their international business is really lagging the U.S. business in terms of growth, in terms of check averages, things like that. A big reason is that China is their second-largest market. and that zero-COVID policy is really just continuing to be a drag on the business. Think second quarter of 2020 here, that's where the Chinese businesses is still like.