At first glance, it seems like coffee giant Starbucks (SBUX: Charts, News, Offers) has overwhelming odds stacked against it. Lowered discretionary spending, rising coffee bean prices and stiff competition from McDonald’s (MCD: Charts, News, Offers) have all weighed heavily on the world’s largest coffee chain, which has seen its shares more than quadruple since its 2008 low of less than $8 per share. However, the company still has aces up its sleeve, unveiling an aggressive expansion into China, where it plans to triple its stores by 2015. Its increased focus on Asia mirrors many of its peers in the casual dining industry – such as Yum! Brands (YUM: Charts, News, Offers) and McDonald’s, which both operate extensive operations in China.
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Starbucks plans to increase its number of Chinese stores from 470 to 1,500 in the next four years, and increase its number in South Korea from 370 to 700 within the next five. Starbucks Asian Pacific President Jinlong Wang stated, “China has 5,000 years as a tea-drinking country, but we’ve created a new coffee culture.” This year, Starbucks expanded into ten new Chinese cities, bringing its total covered cities to 42. Last quarter, Starbucks – which operates 17,000 stores in 55 countries – earned 23% of its total revenue ($2.93 billion) from international sales, a 20% growth over the previous year. Despite the slowdown in the global economy, which has hit tech-heavy Asia particularly hard, Wang stated that Starbucks’ Asian sales have remained relatively recession proof. “We’ve seen very strong same store sales across Asia, (with) double digit growth in some markets,” Wang stated. In addition, Starbucks is preparing to open its first stores in Vietnam and India in 2013, furthering increasing its presence in lucrative emerging markets.
To further solidify its Chinese presence, Starbucks also announced a joint venture with Ai Ni Group, one of Yunnan Province’s most established coffee operators. The contract is intended to create a new business focused on importing high quality Yunnan Arabica beans for its chain. The contract will also give Starbucks access to several dry mills within the Yunnan Province. Starbucks is also planning to set up a Farmer Support Center in Pu’er, Yunnan Province, which is designed to support local coffee farmers and to advise them on the growth of “Starbucks-recommended” coffee varietals. This will give Starbucks, which will maintain direct control of both businesses, an arching reach over the entire Yunnan Province and direct access to cheaper coffee beans, strengthening its supply chain.
The price of coffee beans, which has soared over 40% from the prior year – peaking near $5.55 per pound in July – has remained the company’s biggest headache. Although recent coffee futures have shown signs of easing – the price has decreased approximately 1.7% in the past six months – prices remain precariously high and the biggest threat to the company’s margins. Expensive coffee beans haven’t slowed down Starbucks, though – for the third quarter the company posted a sales increase of 12% with an earnings increase of 24% over the previous year, despite a 17% beverage price hike back in May. Canaccord Genuity analyst Scott Van Winkle stated of the coffee industry – “You have an industry that’s been very capable of passing through rising commodity prices. They’ve probably been more successful at passing them through than the broader basket of food companies.” In addition, Starbucks’ first line of defense against rising commodity prices – its successful Via Ready Brew line – will soon be available in South Korea, Indonesia, Malaysia, Singapore, Thailand and Australia. Back at home, Starbucks is also offering single-serving K-Cups for Green Mountain Coffee Roasters’ (GMCR: Charts, News, Offers) best-selling Keurig K-Cup Brewers, which increases its lower-end sales volume.
Despite the current market madness, Starbucks shares have held relatively steady, and currently trade at approximately 20 times forward earnings. The company, which was dogged for years by that dirty word – “market saturation” – has shown that its has evolved into a new beast altogether, with aggressive expansion strategies for expansion markets as well as lower-end instant coffee product lines.
Other News About SBUX
Starbucks reaches out to Keurig customers.
Starbucks Seeks to Triple Presence in China through FY15
Starbucks takes the long-brewing fight with McDonald’s deep into China.
Other Stocks in the News
GMCR: Starbucks Timetable Could Lift Brewer Sales
Green Mountain Coffee Roasters could jump higher on Starbucks’ support.
Kraft is spending more on lobbying than ever, but why?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
