Tags: starbucks | china | stock

Starbucks Basically a China Stock Now

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Friday, 25 January 2019 08:12 AM

As China goes, so goes Starbucks.

The chain, which helped introduce Americans to European coffee culture, is under pressure from Wall Street to do the same in China. It’s opening stores at a rate of nearly 600 a year, but an economic slowdown there, exacerbated by the trade war with the U.S., have curbed its previously breakneck sales growth.

The coffee giant same-store sales in the country were up just 1 percent last quarter, according to an earnings report late Thursday. That was better than the surprise drop reported early last summer but a far cry from the 8 percent growth it was logging just a few quarters prior. Transactions in China, where Starbucks Corp. has about 3,700 stores and is opening a new one roughly every 15 hours, were down 2 percent, meaning higher prices -- not more foot traffic -- are propping up results.

Its shares rose about 3.4 percent in early trading Friday, suggesting the results were good enough -- for now. It helped that global sales and earnings beat analysts’ estimates for the quarter. But investors are eventually going to want more out of China, especially as new locations draw customers away from older ones.

Starbucks (SBUX) is betting on a massive expansion in the country to drive growth amid concerns it’s already saturated the U.S. The China push comes at a challenging time. Apple Inc. spooked the market earlier this month by warning Chinese demand was waning, and Alibaba Group Holding Ltd. is said to be cutting its spending on travel and postponing some new hiring as China’s largest e-commerce company braces for a slowing economy.

Meanwhile local coffee competition is heating up. Chinese startup Luckin Coffee is spending millions of dollars a year opening outlets to unseat Starbucks. Luckin is relying on its convenient pick-up and delivery -- as opposed to Starbucks’ investment in plush spaces to hang out -- to put it more in sync with Chinese office workers.

The company’s banking on its ability to “continue to navigate a rapidly changing consumer, economic and competitive environment” in China, John Culver, who runs the Seattle-based company’s international unit, said in an interview after results were released Thursday.

Starbucks -- which celebrated its 20th anniversary in China this month -- is on its way to having 6,000 sites there by 2023. It’s counting on delivery to help it crack the market, and it’s now offering the service at 2,000 of its locations in the country.

If Friday's stock gains hold, the shares will reach a one-month high and inch closer to the all-time record they hit in November. That shows that after a rocky start, shareholders are buying into the vision of Chief Executive Officer Kevin Johnson, who has jettisoned non-coffee businesses and focused relentlessly on China since taking over for longtime CEO Howard Schultz in 2017.

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As China goes, so goes Starbucks.The chain, which helped introduce Americans to European coffee culture, is under pressure from Wall Street to do the same in China.
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Friday, 25 January 2019 08:12 AM
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