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Starbucks Corporation to Open 1,500 New Locations in China by 2019

By Motley Fool Staff - Jan 15, 2016 at 6:19PM

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With plans to open 500 stores annually in this massive new coffee market, Starbucks appeals to both employees and customers alike.

Recently, Starbucks (SBUX -1.14%) CEO Howard Schultz confirmed rumors of his company's massive expansion into the Chinese market.

In this clip, Sean O'Reily and Vincent Shen talk about where Starbucks is now in China, and where it plans to be in the next five years. They also discuss just how gargantuan the potential is in this relatively untapped market, how the company is trying to maintain its reputation as one of the best places to work in China, and how the stock has been performing during the past few years, particularly in 2015.

Listen to the full podcast by clicking here. A full transcript follows the video.


This podcast was recorded on Jan. 12, 2016.

Sean O'Reilly: Starbucks came out with their updated Chinese expansion plans, and it's quite large.

Vincent Shen: CEO Howard Schultz, he recently spoke with the Wall Street Journal, basically reconfirming his excitement and the opportunities that he sees in China. On the one hand, you have the broad markets really worried about China right now. Manufacturing's down, the stock market's been really tumultuous there. They've had their circuit breaker ...

O'Reilly: Trigger like eight times, and now they're just not using it. Which I think is a self-fulfilling prophecy, by the way. If the stock market's down 3.5%, and you know that there's a 7% circuit breaker, everybody's just going to sell down to the 7% thinking that it's going to happen anyway. It's a self-fulfilling ... anyway.

Shen: So the really volatile stock market, and the thing is there's only 2,000 Starbucks in China. That's a recent milestone that they hit.

O'Reilly: What is there, 10,000 here? Did you catch that?

Shen: Keep in mind, the U.S. itself has 12,500 locations.

O'Reilly: I was the closest without going over, by Price is Right rules.

Shen: (Laughs) And their growth plan right now is about 500 additional locations in China per year for the next five years.

O'Reilly: So that's 125% store growth in China by 2021?

Shen: I think the actual target is something ... They have 2,000 stores now. The target is ultimately to hit, like, 3,400 locations by 2019, or something along those lines.

O'Reilly: Oh my gosh.

Shen: Just to piggy back on that growth projection is, fourth-quarter revenue for the China/Asia Pacific segment more than doubled year over year, to $650 million.

O'Reilly: And they don't break out China.

Shen: They don't break out China specifically, but when you're looking at that overall segment ...

O'Reilly: ...but it's the biggest market there, so ...

Shen: Exactly. Euromonitor International had some really interesting data around coffee consumption, for example, that I think supports Shultz's enthusiasm for this opportunity. China's currently consuming about 4.5 billion cups of coffee a year. North America's at 134 billion cups.

O'Reilly: Oh my gosh. And China has four times the population, so ...

Shen: This is a big explosion for them, just because you're going from traditionally a tea-drinking culture, and now coffee's really taking off. But this is a place where the cups are selling ... they're not selling at reduced prices. We're talking about $5 a cup still for coffee in this market. Big opportunity.

O'Reilly: What's the GDP per capita these days? Because it's ...

Shen: I'm not really sure ...

O'Reilly: ... 35 here; I think it's like 10 or 12 in China. But obviously there's a huge variance, so ...

Shen: Another thing that bolsters the opportunity is, Chinese coffee consumption from Euromonitor, they expect it to rise 18% annually through 2019. Just to give you some context, the US is at 1%. So not even close... far, far outpacing that. I think, looking at this from the perspective of the reputation, too, that Starbucks has developed in China, it's really incredible. They've been voted best employer in China for several years running.

O'Reilly: I was going to say, the ways their health insurance benefits, if you work 20 or 30 hours ... I think it's 30 ... I would think that their hourly rate and their benefits would be really attractive in a lot of ways. Because it's attractive here, so...

Shen: They have two new initiatives, I think, that are furthering the company's desire to develop this community-focused, employee-focused image that they have. There's one thing I felt was really cool. They recently had their partner family form in Chengdu. This is basically an opportunity for employees and their families, because there's a really strong family focus there in that market, to come and speak with the company and learn about why working at Starbucks can be such a great experience. And they're offering a subsidy now to full-time baristas and shift supervisors. They'll cover about half their housing costs. The idea to help people who are starting their careers to pursue education or other opportunities, right?

O'Reilly: That helps in fast-booming cities where rents are crazy, and a lot of stuff, too.

Shen: They have about 30,000 employees now. This will cover about a third of them, so pretty substantial. And then another new initiative that they launched is called the Career Coffee Break. So if you have been working with them for 10 consecutive years or more, you can take 12-months sabbatical, and then be guaranteed a position when you come back that's the same, or at least has the same pay and benefits. So you can take that year off to travel or spend time with your family. Again, reinforcing that image that they have.

In terms of the stock itself, it did fantastic in 2015. Up 46%. I think that contributes to the fact that they're trading about 31 times forward earnings now. So a little bit higher.

O'Reilly: Oh how I wish I had bought them in the financial crisis. You realize how low they got?

Shen: Yes, they were very very low.

O'Reilly: It was like $8 or something.

Shen: People seemed to think at the time that nobody's going to pay that much for their coffee anymore, obviously.

O'Reilly: It's like Howard Schultz said one time, he's like, "People are willing to pay a high price for a really concentrated cup of caffeine."

Shen: Expected annual earnings growth of 18% over the next five years to pay a 1.4% dividend yield. Plus, I think this opportunity here with Schultz in a sense doubling down on China is ... he has proven time and again that he has the vision. They brought him back, and he has been a huge part of the Starbucks success. I think that focusing on China despite the fears people have -- it's the right idea.

Sean O'Reilly has no position in any stocks mentioned. Vincent Shen 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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