Starbucks Is Counting on China

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

Is it possible to turn world’s largest tea drinking nation into a coffee country? Sounds a little far-fetched, doesn’t it? But that is exactly what Starbucks (NASDAQ: SBUX) has resolved to do. The young Chinese population is increasingly adopting Western ways and want to grab a bite at the neighborhood McDonald’s (NYSE: MCD), or have a steaming cup of coffee at the Starbucks around the block. Thus, China has become the hottest destination for a lot of big names in the quick service restaurants, or QSR, space. Starbucks is investing heavily in China. 

Evolution of the Chinese coffee market
Chinese coffee market is growing rapidly with most of the young people preferring coffee over the traditional tea. The statistics compiled by UK-based research company, Mintel Group Limited, reveal that during the period 2007 to 2012 the number of cafes in China almost doubled from 15,898 to 31,783. This compares to a mere 4% growth clocked by tea houses.

Thus, many of the world’s leading coffee chains are targeting the Chinese markets. This includes UK-based Costa Coffee and Italy-based Luigi Lavazza. The former is planning to have 500 cafes by 2016 while the latter will open around 200 by 2014. But Starbucks is already way ahead with over 800 outlets spanning across 58 cities on the Chinese mainland. The company has done its homework well.

Starbucks in China
Starbucks has spent years studying consumer behavior in China and was quick to understand that strategies would have to be tailor made for specific regions and localities. To understand individual preferences in different parts of China it struck alliances with local partners like the joint venture with Beijing Mei Da coffee company in Northern China, Taiwan-based Uni-President in Eastern China, and Hong Kong-based Maxim's Caterers in Southern China.

What has emerged is a right blend of traditional Starbucks culture with an assembly of impeccably English speaking staff in signature green coats and coffee that tastes just the way the Chinese like it. It is no surprise that since it opened its first Cafe in 1999, Starbucks has within a short time span emerged as the largest coffeehouse chain in China. According to Euromonitor International, the company has 61-62% market share in the coffee shop segment.

Current goals
Starbucks has now declared that it sees China as its second largest market after the US and it plans to open as many as 1,500 Starbucks stores in 70 cities by 2015. This is a tremendous growth opportunity for the company especially in the lesser developed cities that are mostly untapped.

Peer comps
It may be noted that Starbucks by no means is lacking company in the middle kingdom. Its peers from back home – McDonald’s and Dunkin Brands (NASDAQ: DNKN) – also have their eyes set on China.

Mickey D which is currently looking for consolidation and restructuring in the US and Europe have a very different strategy for China. The company plans to open more than 300 restaurants here with the intent to reach its targeted 2,000 restaurants in China by the end of 2013. In the coffeehouse sector McDonald’s share is pegged at below 10% by analysts. Adjusting for seasonality, same store sales in the company's Asia Pacific Middle East and Africa segment grew 1.5% in February driven by China and Australia.

Meanwhile, Dunkin’ Brands is planning to increase its doughnut and coffee chain in China by three times through the next ten years. The company has over 1,450 outlets in Southeast Asia. However Dunkin’ is more popular in China for its Baskin Robbins ice cream rather than its doughnuts and coffee. The company has recently entered into new franchise agreements through which it will open around 250 new Baskin Robbins outlets in China over the next ten years.

Last word
I will conclude by saying that Starbucks is a tremendous brand. The company is doing well globally with fiscal 2013 first quarter net revenue growth of 11% to $3.8 billion and EPS growth of 14% to $0.57 per share. Globally it witnessed healthy same store sales growth of 6%. It has also made the strategic acquisition of Teavana Holdings for growing in the tea business. The company’s strategy in China further augments its growth potential manifold.

Eshna De has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and 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!

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