Starbucks Gets Ready to Go From Tall to Venti in China

Starbucks Gets Ready to Go From Tall to Venti in China

By Venessa Wong November 01, 2013

The last year, according to Starbucks (SBUX) Chief Executive Officer Howard Schultz, has been “without question the best year in its 42-year history.” Bullish numbers back up his triumphalism, even if quarterly results trailed analysts’ estimates: a 7 percent increase in global same-store sales, a 24.4 percent surge in profit, and 1,700 new stores around the world.

But Starbucks remains far from any finish line Schultz has in mind. “We’re just getting started,” he said on Wednesday’s earnings call. With more than 11,400 stores in the U.S. already, the coffee chain is looking more intently at overseas opportunities. It plans to open 1,500 stores next year—half of them in Asia. At some point next year, China will replace Canada as Starbucks’ second largest market by store count and sales, following a schedule the chain laid out in 2012.

Asia currently accounts for about one-fifth of Starbucks stores. There are 1,017 Starbucks in more than 60 Chinese cities, and while that’s far fewer than in the U.S. the latest total marks a 317-store expansion from a year ago. And sales in China are healthy: “The stores that we opened in 2012 are currently averaging sales in excess of $700,000, while our 2013 class of stores are on track to annualize with a very similar result,” said John Culver, Starbucks group president for China and Asia Pacific. China will be “the largest driver of the approximately 750 new stores we plan to open across the region in 2014,” according to Culver. By comparison, the entire hemisphere of the Americas will gain a total of only 600 stores next year.

Not that China’s market lacks challenges. Coffee rival Dunkin’ Donuts (DNKN) recently closed 40 locations in mainland China and Taiwan, and Starbucks was recently criticized by the Chinese media for charging more there than in other markets to earn higher margins. Culver reiterated on the call that “the prices that we charge for our products in China, the latte, are comparable to—and in some cases, lower than—the competition.” He insisted again that “the prices that we’re charging in the market actually reflect the cost of doing business in that market.”

Starbucks’s operating margin in Asia last quarter was 37.5 percent, vs. 21.8 percent in the Americas. Same-store sales in Asia were up 9 percent in fiscal 2013, the highest among the regions, though the rate has slowed over the year.

“We’re not immune to the challenges and complexities of building a large business in China,” Culver said this week. But, he noted, “we have tremendous confidence in our ability to continue to build a very strong business not only in 2014, but well into the future.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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