Starbucks Bets Big on Tea-Centric China

China will be coffee chain's second-largest market by 2014

   

By the end of the year, Starbucks (SBUX) expects to have launched its Chinese store count above 1,000, making China the coffee chain’s second-largest market — a title currently held by Canada.

That rapid expansion still will put China’s tally at less than 10% of America’s — but there’s still a long way to go, so that discrepancy could easily change.

Currently, the coffee chain’s huge domestic presence leaves little room for growth in the U.S. — and might even make future expansion a bad thing as stores can cannibalize each other’s sales or water down the brand.

It’s a problem that blue-chip rivals like Walmart (WMT) and McDonald’s (MCD) have faced as well, and one Starbucks is far too familiar with. Remember, in the late 2000s, Starbucks was struggling to the extent that CEO Howard Schultz had to retake the reins and close U.S. stores to get the company back in order. Plus, competition for coffee in the states is heating up, as doughnut-first chains like Dunkin Brands (DNKN) and Krispy Kreme (KKD) have been pushing heavily into the beverage business.

More recently, SBUX has been focusing on expanding its product line and even moving into supermarkets like Whole Foods (WFM) — but Chinese expansion is a much more natural growth path considering the nation’s size. China is home to more than 1.2 billion people, making the market more than three times the size of America’s.

In a different light, Chinese expansion makes a little less sense. Specifically, China’s affinity for tea — the nation consumes more tea than any in the world, and its per capita consumption is more than double that of the U.S.

Also, the beverage consumption culture overall in China is very different from that in the states. USA Today reports that “unlike U.S. locations, which do about 70% of their business before 10 a.m., the stores in China do just the opposite — with more than 70% of their business in the afternoon and evening.”

However, Starbucks has been trying to become more than just coffee, and more than just a morning destination. Here in the states, SBUX has made corporate acquisitions to add juice, tea and baked goods to SBUX’s arsenal, as well as added beer and wine in “evening stores.”

Starbucks also has been working hard specifically to catch Chinese consumers’ attention. Its locations have new, eye-catching interior and exterior designs, while two “iconic” flagships stores were recently opened to spark more interest.

And another thing to note is that Starbucks’ expansion aspirations don’t end in China. Schultz also sees the rest of the Pacific Rim and Latin America — particularly Mexico — as huge growth opportunities, along with Vietnam and India.

However, before you go piling into SBUX thinking there’s a giant growth push coming from China, be warned that said optimism might already be baked in. Starbucks stock has soared 40% year-to-date to double the broader market, and currently trades at 28 times next year’s expected earnings — significantly more than forecasts for its annualized five-year growth rate, which sit at 20%.

The push to China looks great on paper, but coffee had better catch on in a big way to justify the premium investors must pay for shares of the stock right now.

As of this writing, Alyssa Oursler was long MCD. Follow her on Twitter: @alyssaoursler.


Article printed from InvestorPlace Media, http://investorplace.com/2013/09/starbucks-to-open-1000th-store-in-tea-centric-china/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.