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Starbucks Reveals New Expansion Plan to Boost China Business

Zacks Equity Research

Starbucks Corporation SBUX has chalked out an ambitious plan to open a new store in every 15 hours (or 600 net new Starbucks a year) in China for the next five years, during its first-ever China Investor Conference in Shanghai on Tuesday, May 15.

The Seattle-based coffee giant announced its plans to build 600 net new stores annually over the next five years in Mainland China, which will double the market's store count from the end of fiscal 2017 to 6,000 across 230 cities. Currently, the company operates approximately 3,300 stores in 141 cities in China. This intended speedy expansion in China is likely to triple its revenues and double its operating profit by the end of fiscal 2022 from fiscal 2017.

Starbucks’ China Story

China has been the fastest-growing market for Starbucks. Management has a strong belief that China will drive more meaningful business growth over the next five years supported by rapid unit expansion, wider brand awareness and increased usage of digital/mobile/loyalty platforms, while respecting local heritage.

Starbucks has been an integral part of the local community in China for nearly 20 years and expects “to mindfully evolve a coffee culture in China where the reward will be healthy, long-term, profitable growth for decades to come”. The coffee-chain giant built its first Starbucks Reserve Bar in 2014 to deepen customer coffee engagement. With more than 150 locations currently, the company aims to reach 200 Reserve Bar stores by the end of fiscal 2018.

Earlier this month, Starbucks and the Swiss-based food giant Nestle SA have joined hands to revitalize their coffee domains. Starbucks and Nestle announced a global marketing deal that gives the latter "perpetual rights" to market Starbucks’ products globally outside its coffee shops. The deal is aimed at expanding the global reach of Starbucks brands in the consumer packaged goods (“CPG’) and foodservice categories to nearly 190 countries around the world from the present count of 28.

The deal requires Nestle to pay Starbucks $7.15 billion (€5.97 billion) upfront in cash for the rights to sell Starbucks coffee products in retail and food-service channels. Meanwhile, as part of the deal, around 500 Starbucks staff will join Nestle. The agreement is subject to customary regulatory approval and expected to close by the end of 2018.

Meanwhile, the company intends to expand the Starbucks Ready-to-Drink (RTD) business in the country to more than 400 major cities, across more than 125,000 premium points of distribution over the next five years. This is intended to be in alliance with Tingyi, a leader in China’s RTD beverage category.

Starbucks also has plans to launch the Starbucks chilled cup platform with four flavors in June, introducing a new beverage platform mainly for on-the-go consumers of coffee and tea in China.

A Look at Starbucks’ China-Asia-Pacific (CAP) Performance

Net revenues increased 54% year over year to $1.2 billion in the last reported quarter on the back of higher revenues from the acquisition of East China operations, new store openings and comps growth. Starbucks' business in China is rapidly growing due to innovative store designs, local product innovations and the success of My Starbucks Rewards program.

In comparison, net revenues in the company’s flagship Americas segment were up 8% from the prior-year quarter to $4 billion in the fiscal second quarter.

Share Price Performance

Starbucks’ shares have gained 0.3% in the past three months, while its industry has gained 3.5%. Recently, the company reported second-quarter fiscal 2018 results, wherein earnings met the Zacks Consensus Estimate while revenues surpassed the same. Notably, Starbucks reported in-line earnings in three of the last four quarters. That said, adjusted earnings per share of 53 cents grew 17.8% year over year. The company’s results benefited from an improved performance in the Americas segment (mainly in the United States), the ongoing positive momentum in China (following the takeover of East China) and strongest comps growth in Japan in five quarters.

Meanwhile, earnings estimates remained unchanged for the current fiscal, while the same moved 0.4% north for fiscal 2019, over the past seven days, depicting analysts’ confidence on the this Zacks Rank #3 (Hold) stock’s earnings prospect.



 

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