It's not that business hasn't been booming for Starbucks'
With the U.S. market nearing full saturation, Starbucks has needed to look globally to expand its revenue, and China looks like its primary answer. The company recently announced that it has arranged a deal with its joint-venture partner in China, Maxim's Caterers, to retake full responsibility of 250 locations in five provinces and one municipality. For Starbucks, this move isn't about its partner's inability to operate its locations so much as it is about stamping its name brand across a wide swath of a nation that has thus far seen very little competition from coffee retailers.
According to a Wall Street Journal report, single-store sales in China average 40% lower than in the United States. This is the stark reality of the struggle Starbucks will face in getting the Chinese to drink more coffee, but it also speaks to the huge opportunity that awaits if Starbucks can attract those consumers into its stores more frequently.
One ploy Starbucks is using to attract new consumers in China is its recently introduced instant-coffee line, Via. Although it's pricier than other instant-coffee alternatives, Starbucks is hoping that consumers will take to the on-the-go craze as rapidly as American consumers did.
Starbucks has taken a rather unorthodox approach to tackling China, focusing on smaller cities and less affluent areas rather than diving right into the country's major cities. The company eventually hopes to accomplish a mind-numbing blitzkrieg that could push its primary instant-coffee competitor, Nescafe, right out of the picture.
But Starbucks' strategy has two pitfalls it needs to avoid if the company is to be successful.
First, it needs to be able to pass along rapidly rising coffee prices to consumers, locally as well as globally. By focusing on third-tier cities instead of primary metropolitan centers, Starbucks runs the risk of alienating a vast majority of its customer base by pricing them out of its stores. Starbucks will need to be prudent with its pricing strategy while also keeping its bottom line in check.
The company will also have to make certain that it doesn't follow the path that luxury retailer Burberry took in China. After a joint venture in China some years ago, Burberry -- much as Starbucks is doing now -- took over the daily operations of its stores last year and has since effectively burned its bridges with former joint-venture partner Kwok Hang Holdings. Since that time, Burberry has tried to expand too quickly in China and may have spread itself too thin in the region.
Starbucks has plans for approximately 1,500 stores in China by 2015, and it had better make darn sure it stays on good terms with Maxim's Caterers. Otherwise, it may find its growth rates in China slowing dramatically.
It remains to be seen whether Via will be a successful product in China, especially since it was just introduced three months ago, but signs so far indicate that Starbucks' aggressive move into China will be a success. Starbucks has the cash flow to be successful, and history is on its side. The real question is, can anything stop Starbucks from growing?
What do you think? Can anything slow down Starbucks in China? Share your thoughts in the comments section below, and consider adding Starbucks to our free watchlist service to keep up on the latest news in the coffee sector.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Starbucks and Wal-Mart. Motley Fool newsletter services have recommended buying shares of McDonalds, Starbucks and Wal-Mart, as well as creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.