So far this year, the market is filled with uncertainty. Slowing Chinese economic growth has many investors afraid the global economy is headed into recession. At the same time, Starbucks (NASDAQ:SBUX) is doubling down on China, planning to grow its store base there from around 2,000 through last quarter to 3,400 by 2019, opening 500 new locations per year.
With so much concern about China's ability to continue growing at the pace of recent years, is Starbucks' strategy going to pay off, or come up flat? And just as important, will the company's other growth initiatives continue paying off? Let's take a closer look.
China fueling growth along with rest of Asia
China may be the single largest growth country, but it's only part of the Starbucks' expansion plans. The company plans to open 1,800 net new stores in fiscal 2016, and 70% of them -- about 1,300 -- will be in Asia. For some context on just how much Starbucks has shifted its focus to Asia, more than 70% of the stores the company opened in 2007 were located in the United States.
Of course, the domestic market is getting relatively mature, while the tea-centric culture of much of Asia is only just starting to get its coffee fix. Coffee consumption is growing around 1% annually in the U.S., while it's projected to grow at double-digit rates in China over the next half-decade or so. The Chinese market will consume less than 5 billion cups of coffee in 2016, while more than 130 billion cups of joe were drunk in North America over the past year.
And China has roughly 3 times the population of North America, and one of the fastest-growing middle classes in the world.
It's about more than just Starbucks coffee shops, too. The company's partnership with Tingyi is expected to be a multibillion-dollar business, with the Chinese ready-to-drink coffee and energy market worth more than $6 billion in annual sales.
Outside China, the opportunity could be just as lucrative. While the company will open 500 stores in the middle kingdom in 2016, it will open another 800 or so in the rest of Asia.
Big plans in core markets
Just because American coffee consumption is growing at a slow pace doesn't mean Starbucks won't be able to continue expanding its domestic business. In a recent presentation, the company noted that more than 80% of coffee occasions in the U.S. occur outside of coffee shops. The company is working to grow its share of this market as well, with dozens of products in thousands of retail grocery locations, and more than 500 "signature" aisles in select grocery stores, featuring only the company's products.
It's also about more than just coffee. Starbucks' business has been historically heaviest early in the day, when coffee is most often consumed. Finding ways to expand customer interest during other time periods has been a major focus over the past several years.
As you can see, Starbucks has grown sales faster in the middle of the day over the past five years in its U.S. stores than any other time, at least in part because of its expanded menu, including more and better-quality food items as well as an expanded selection of cold and non-coffee beverages.
Starbucks' management has a lot going on, with expanding in Asia, growing its daytime traffic, selling more coffee outside of its coffee shops being only three of the bigger initiatives. There is also a heavy focus on digital, including apps, its loyalty program, cards, and mobile ordering to increase awareness and convenience.
So far, the company has consistently grown sales and profits well above a double-digit rate over the past five years, and management is convinced that the opportunities in Asia, expanding business during afternoon and evening hours, and growing non-Starbucks retail business can combine to keep the growth rate high.
Are they right? We'll get a better idea how things are working out when the company reports this week.