Starbucks Starts the Year of Asian Expansion

Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Starbucks (NASDAQ: SBUX), the world’s leading coffee chain, is now entering Vietnam, opening its first store in Ho Chi Minh City in February. The company has been investing heavily in the Asia Pacific region by opening up thousands of new stores across the continent. It currently has 3,300 stores in 11 Asia Pacific nations, but by the end of the current year Starbucks will have 2,500 stores in its three biggest markets (China, Japan, and South Korea), which will increase its total Asian store numbers to 4,000.

Starbucks is quickly gaining ground in mainland China and operates in collaboration with the Hong-Kong-based Maxim’s Group. It currently has 700 stores there, and by 2014 the store count is scheduled to more than double to 1,500, making China the second biggest market for Starbucks behind the U.S.  Three months ago, Starbucks entered India by partnering with Tata Global beverages. Coffee earns Vietnam billions through export, as it is the second biggest coffee producer of the world.

While Vietnam is known for its Robusta – the more bitter and higher caffeine variety found in espresso grinds and instant coffee --large quantities of its high-quality Arabica beans end up in Starbucks’ cafés.  Arabica can only be grown well in very limited areas of the country whose climate and geography is more suited to Robusta.  In 2012 Vietnam will produce 1.73 million tons of coffee, more than 95% of which will be Robusta.  In 2011 the split was 97% Robusta/3% Arabica.  Arabica fetches a higher price on the international market, but Vietnam will likely never produce more than 10% Arabica.

Coffee is growing quickly in popularity among the country’s rising middle class. This is evident with the success of the local coffee chain called ‘Café Coffee Day,’ whose store count has exceeded 1,400.  Coffee is extremely popular in Vietnam, and dozens of coffee shops can be found in all the major cities. There are several coffee chains operating here, such as the very popular Highlands Coffee brand, but there are no firms operating at the size or scale of even Café Coffee Day.  Coffee is a major part of daily life here in Vietnam. 

Besides Starbucks, other notable Western companies such as Yum! Brands’ (NYSE: YUM) Pizza Hut and KFC, along with Domino’s (NYSE: DPZ), have gained a toehold in the country. If Yum! spends the time in Vietnam to build its local menu and supply chain like it did in China for KFC they will have a good chance of replicating that success.  Like India, Vietnam also has a growing middle class that is eager to try new foreign products.  For a company like Domino’s, which already specializes in delivery, Vietnam is an interesting market because you can literally get anything delivered to you – electronics, legal documents, you name it. It will have to distinguish itself on some other factor to be truly successful.  Yum!’s got a lot of competition here, from firms like Korea’s Lotteria and a culture built around eating at home, so it will be a longer sell cycle for them. 

Although Starbucks earned $2.5 billion (75%) of its revenues from the Americas in its previous quarter and just $198 million from the China/Asia Pacific (CAP) region, the latter is growing quickly and offers a higher operating margin. 

In most of the Asia Pacific markets, such as India and China as well as in Middle East, tea is generally more popular than coffee and is considered the more traditional drink. With its Asian expansion plans Starbucks cannot avoid this, prompting them to spend $620 million acquiring Teavana Holdings (NYSE: TEA), an acquisition which was completed on Dec. 31. Teavana has now become a wholly owned subsidiary of Starbucks. The acquisition is expected to increase Starbucks’s EPS by $0.01 in the current fiscal year on its own, but provide a pathway to broaden its appeal in their target expansion markets. 

This is not an issue in Vietnam, but Vietnam is not a major expansion point for Starbucks, and the competition they will face here will be formidable.  I see this move as more of a validation of the growing importance of the Vietnamese presence in international commerce than I see it as particularly important for Starbucks itself.  It’s more of a knock-on effect of having a presence everywhere as the region’s economy becomes more integrated.

Starbucks is following the right strategy of expanding into emerging markets. The only cause of concern is the European segment, which is not reporting any profits with falling revenues. Starbucks is also embroiled in a corporate tax row in the U.K. Nonetheless, the EMEA region (Europe, Middle East, Russia and Africa) contributes just $283 million in quarterly revenues and nets an operating loss of $6.5 million. The issues in Europe will continue, but it’s the success in places like India and China that will more than offset difficulties in Europe.

PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus