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Instant Analysis: Starbucks Corp. Expanding in China Despite Risks

By Rich Duprey - Jan 13, 2016 at 2:52PM

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The chain plans to open some 1,400 new stores over the next three years, but a slowing economy could derail those plans

What happened?
With its 2,000th store opening in China, Starbucks (SBUX -1.14%) on Tuesday announced it was committed to opening an average of nearly 500 more stores there every year for the next three years on its way to 3,400 stores by 2019.

Does it matter?
CEO Howard Schultz said that China is Starbucks' second-largest market globally, but also its fastest-growing, which may seem incongruous considering the country's purported affinity for tea. Yet following the opening of its first store there in 1999, Starbucks is seen as something of a status symbol, and China's growing middle class has flocked to its stores.

In 2015, Starbucks reported a 9% increase in comp sales in the China/Asia-Pacific region, ahead of the 7% gain recorded in the Americas and the 4% increase in Europe. Although it had more than 800 more stores open in the region compared to a year prior, an 18% increase, revenues more than doubled. It also explains why the region will see half of the 1,600 new stores Starbucks plans to open in 2016, with China itself apparently getting the lion's share.  

There is significant risk inherent in these expansion plans, as China's economy is appreciably slowing. While other countries look enviously on China's 6.9% GDP expansion in the fourth quarter, the slide has led to companies as diverse as mining and heavy equipment manufacturer Caterpillar and chocolatier Hershey pointing fingers at China for much of their earnings woes.

Consumer-oriented companies like McDonald's (MCD 0.23%) and Yum! Brands (YUM -0.08%), which operates thousands of KFC and Pizza Hut restaurants in China, are also reporting the effects of the slowdown. This has only added to the worries caused by a food scandal.

Schultz, though, has been quoted as saying he's fearless in the face of those questioning China's growth prospects. "People are looking for reasons not to believe. I'm on the ground and I see firsthand. I am bullish," he said this week.

Some analysts say luxury goods may be more insulated from the effects of a cooling economy, but fine European product manufacturers have been warning for months that China is hurting their results. From BMW and Ferrari to Burberry and Prada, the high-end retailers have blamed China's slowdown for their shortfalls.

Starbucks may not be in the same category as a race-car manufacturer, but the continued meteoric rise in sales that the coffee shop has enjoyed may not continue on the same trajectory.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$88.39 (-1.14%) $-1.01
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$266.89 (0.23%) $0.60
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$118.95 (-0.08%) $0.09

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