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Starbucks' Secret Weapon
Posted by: mdhargrave (IP Logged)
Date: March 19, 2013 10:31AM
As many have wondered, how can Starbucks (SBUX) continue to grow if it's on every street corner in America? The answer lies in Asia. Try finding a Starbucks in Asia outside the major shopping malls and the major cities. It's very difficult, most likely impossible, to find one on every street corner like in the U.S.
Meanwhile, China has not been treating the likes of McDonald's (MCD) and Yum! Brands (YUM) very well. Chicken supply and food safety concerns have pressured both companies. China's state television CCTV reported that two poultry farms that supply chickens to Yum!'s KFC had fed chickens with unapproved levels of antibiotics. Although the issue really only impacted KFC, the pressure extended to McDonald's as consumer confidence in food quality at many restaurants was brought into question.
Yum! remains unsure about how long it will take to recover sales at KFC in China. Management expects continued weakness in China sales during the first quarter, with an expected drop of 25% in same store sales for the period. Yum! has taken steps to monitor its poultry suppliers in China and cut ties to questionable companies.
China still holds the key to both McDonald's and Yum's overseas expansion plans. For Yum, its China segment accounts for more than double its U.S. revenues, and the company has double the stores in China versus the U.S. However, McDonald's still has room to grow, with only 1,500 China-base stores, versus its 18,000 U.S. locations. McDonald's has increased its store openings in China, and Yum plans to continue opening stores. But with increased store openings comes margin compression. However, Starbucks is already enjoying 30% operating margins in China, versus the company-wide average of just over 11%.
But Don't Most People in Asia Prefer Tea over Coffee?
Typically the average drinker in Asia preferred tea over coffee. But as incomes have risen and palettes have changed, the transition is being made to coffee. Starbucks believes that China will be its second-largest market by 2014. In China alone, an estimated one-third of the population is now drinking coffee. That's 443 million people! For those that prefer tea, Starbucks last quarter completed the acquisition of Teavana for $620 million. Starbucks is going after the tea drinkers as well and wants to capture that segment of the market that it has been missing. The company will add this line to its existing Tazo tea products.
The Growth Is Evidenced by the Numbers
Last quarter Starbucks reported global revenues of $3.8 billion, a rise of over 11%. Inside those numbers was revenue of $214.1 million from the Asia-Pacific region, a jump of 28% from the previous year. These revenue numbers come from having only 700 stores in China. Compare that to over 11,000 in the U.S. and you get the picture of the growth potential for Starbucks in Asia.
In terms of employee headcount, Starbucks employs over 200,000 on a global basis. Of that, roughly 10%, or 19,500, are based in Asia. The best part about Starbucks is that it doesn't discount. The prices in China are the same as they are in the U.S., but margins are better because employee costs are much lower in the Asia Pacific region than in the U.S.
Growth Beyond China
India Is Next
At least the Chinese have over 700 Starbucks for their 1.34 billion people. People in India have a total of seven for their 1.24 billion people. Starbucks has been slow getting into India because it didn't have the right partners. Now Starbucks has a 50/50 joint venture with Tata Global Beverages to build stores in India. The first one opened in October 2012 and six more have followed.Starbucks Opens Its First Store in Vietnam
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