- Starbucks is slowly skewing its store growth towards a new market - China.
- The move is intended to capitalize on their acceptance in that market.
- The blend of growth is ideal, and key metrics are showing signs of good health.
When Starbucks (NASDAQ:SBUX) was losing revenues back in 2008, they had to make a lot of changes. They had to cut new store openings, close loss-making ones and even had to bring back their founder Howard Schultz at the helm.
But in spite of being beaten down at the time, they subsequently recovered, almost doubling their revenues in the time between 2010 and 2015.
2016 seems to be the year of their second coming. With plans to grow more aggressively than ever, they seem to be focusing on the right things - keeping that home advantage safe, while identifying at least one lucrative outside market that can mirror the success they’ve had so far at home.
Over the past year, Starbucks has added 1,833 new stores, net. The point to note here is that only about 700+ of those units are in the Americas region. This is significant because they seem to have identified an outside market - and it appears to be China/APAC. For the next quarter, the company intends to open at least 50% of its new stores in this market.
Of course, they’ve also safeguarded their home position with over 15,000 stores that are showing positive average growth across several metrics. But the problem with this market is that it’s mature, and not easily amenable to aggressive expansion. That’s what happens when penetration is high - and Starbucks doesn’t want the same “overpopulation” problem that its stores had back in 2008.
So they’re hitting two birds with two stones, as it were: a calculated growth approach for their mature markets and an aggressive plan for a newer market where they’ve gained some measure of acceptance.
Kevin R. Johnson - President, Chief Operating Officer on the company’s Q3 Earnings Call:
“Despite moderated GDP growth in China, Starbucks China business was very strong, particularly in our largest cities. The acceleration of comp sales to 7% in the quarter was driven by 6% transaction growth, reinforcing that we are reaching new customers, as well as increasing the frequency of existing customer visits. Our newest China stores continue to deliver record-breaking volume and profit, and we remain committed, and on plan to increase our store count to over 3,400 in China and to over 10,000 in CAP overall by the end of fiscal 2019.”
Better Performance - The Ideal Setting for Growth
One significant background occurrence is that the group has been achieving positive comparable store sales for some time now.
The advantage of this particular metric - comparable store sales - is that it tells you if the company is growing too fast or too slow. At this point, a mature market comps figure of 4% is healthy. But the problem is: since the first quarter of this year their comparable sales have been sliding, and the company needs to break out of that spell at the earliest.
Unfortunately, the company revised its comparable sales growth estimates downwards, while holding on to their annual profit estimates. It’s good to see that the company still expects to stay on the positive side with respect to store sales during Q4, but performance in the next four quarters in the U.S. market will be crucial because Starbucks makes most of its money from this region.
“The company reiterated its forecast for annual profit, excluding certain items, saying it would be as much as $1.89 a share. That matches the average analyst estimate. But Starbucks pared back its expectations for same-store sales. They are now forecast to rise in the mid-single digits, compared with “somewhat above” that level in its earlier prediction.” - Bloomberg
The China/APAC Market
Starbucks already has a presence of close to 6,000 stores in this part of the world - the majority of which are growing, hence the positive comps. There’s no better “cue” for any company to ramp up its expansion in such a market, and Starbucks isn’t going to let the opportunity slip away.
But there’s one thing we need to remember. The stores in the U.S. and in China aren’t going to be bringing in the same kind of revenue. The 6,000 stores in China/APAC region only brought them a gross of $678 million during the second quarter; in comparison, their 15,000 stores in the Americas grossed them $3.5 billion in the same period.
That means they need to have at least 30,000 stores in China/APAC to match that $3.5 billion, and that could take some time. There’s definitely an opportunity for that to happen because the market itself is so massive, but even if they can continue to keep adding 2,000 new stores every year it’ll take them another 12 years to get there. My view is that they’re not even looking that far ahead. What they want right now is to optimize the opportunity in that market so they can show continued growth over the next five to ten years. With their most lucrative market reaching near-peak penetration, they necessarily need a secondary one to hand off the proverbial baton to.
I would recommend Starbucks as a long-term stock to hold in your portfolio. At a forward P/E Ratio of around 26, it’s neither too cheap nor out of this world. Returns aren’t going to come lightning-fast, but they will be consistent - ample reward for the patient investor looking at long-term total returns instead of immediate income.