Can Tea REALLY Save Starbucks Corporation (SBUX) Stock?

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Starbucks Corporation (NASDAQ:SBUX) growth has slowed. The Seattle-based coffee roaster had been one of the current recovery’s big stars. You could have gotten Starbucks stock for under $10 per share in 2009. If you made that trade on SBUX stock, you’d have had two shares, each worth $60, at the start of 2016, plus a stream of dividends that now yield 1.5%.

But 2016 has been a different story for investors. Starbucks stock is down roughly 11% so far this year.

Year-over-year growth is down, and while it is squeezing out more profit on sales, debt levels are rising and traders are finding the price-to-earnings multiple of 30 a bit rich.

SBUX has been trying some things — it is rolling out huge stores called “roasteries”, it’s serving beer-and-wine at night, and there’s a “secret menu” of barista-created drinks.

But these are not moving the needle. Most stores are too small to handle an extensive line of food. The U.S. market seems saturated and Tim Horton’s is now joining the fray.

So as CEO Howard Schultz prepares to announce full-year earnings on Thursday — analysts are hoping for 56 cents per share of earnings for the fourth quarter on sales of $5.69 billion — he is rolling out a new growth story.

It’s in China.

SBUX Stock: The Story Is Tea

Starbucks is still considered exotic in China. The company has about 2,400 stores there which represent luxury, modernity and American values to Chinese consumers.

Now, under Belinda Wong, a former McDonald’s Corproation (NYSE:MCD) executive, SBUX plans to double its store count to 5,000 by 2021.

To make the new stores work, Starbucks must become more of a Chinese experience. For that, Wong is betting on tea, a product that originated in China but whose culture has been ailing lately.

The Chinese tea market is estimated to be 10 times bigger than its coffee market, but it’s a utilitarian drink, often plain leaves with water from a thermos. Wong plans to infuse fruit flavors in the product, bring in more modern tea-making products and integrate the Teavana brand, which began in Atlanta, into China’s SBUX stores.

The idea is to raise tea’s image, justifying a higher price. This is precisely what Starbucks did with coffee in America, where a drink that used to go for less than $1 can now cost over $5. Teavana will be going into all of the company’s 6,200 stores in the Asia-Pacific region with flavored tea-drinks, a variety of tea bags to take home. This includes one drink with both coffee and tea, separated by milk.

Bottom Line on Starbucks Stock

It is fitting that Wong is a former McDonald’s executive, because what Starbucks is attempting to do is precisely what the hamburger chain did after it began its own international expansion.

A McDonald’s in India, for instance, is now primarily a chicken sandwich chain. In Hong Kong, you might get a noodle bowl with a fried egg on top. In Malaysia, it’s a bowl of porridge, in Japan a pork burger with teriyaki sauce.

All these items, and others, evolved over time as McDonald’s learned to adapt to local tastes, through local franchisors. You can expect this to be the next step for SBUX as well. The company is already selling franchises in Europe and the company may get a new master franchisor to take over stores in China, having bought back control from a local operator in 2011.

It is, as Schultz is fond of saying, a “long game” for Starbucks stock. He now says that SBUX could eventually be bigger in China than it is in the U.S. If you’re looking to bet on Starbucks stock, then, know that you’re betting on China as much as you are the U.S.

Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in SBUX.

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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


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