During the fiasco of 2008-2009 – a period in which we witnessed Starbucks’ (SBUX, Financial) revenues slide – the company had to scale back on its ambitious growth plans, shut down a number of stores and reinvent itself with the return of its founder CEO Howard Shultz.
Despite the crisis, the company nearly doubled its revenues between 2010 and 2015.
If you are a large restaurant chain, the best way to keep moving forward is to do two things: Hold on to your home market advantage to thwart local competition and keep improving your presence and sales outside the home market.
In the last 12 months alone, Starbucks had 1,833 net new store openings with less than half -– 707 units – coming from the Americas division. The company plans to repeat that store growth rate this year as it is targeting 1,800 store openings for fiscal 2016 with half of the new openings expected to be in the China/APAC region, 40% from the Americas region and 10% from the EMEA segment.
With more than 15,000 stores in the Americas, Starbucks draws a major portion of its revenues from this segment. The higher the penetration, the lower the chances of adding more stores so Starbucks will be moving at a calculated pace at home while things are set to accelerate outside the country.
The other big piece of good news for Starbucks investors is that the company’s comparable store sales have been growing globally – a significant achievement for a company that has more than 23,000 stores around the world.
So it’s not just store growth but another very important metric – same store sales – has been kept moving upward. This is the right time for Starbucks to expand its footprint into markets where the brand is known but not yet fully exploited.
Starbucks is betting big on China
From Q2 Earnings Call, CEO Howard Shultz
“Starbucks has committed to China, and we now have over 2,000 stores in 100 cities in China and are adding over 10 new stores every week. Our business in China remains very strong, and I personally have no doubt that the Chinese government's commitment to true economic reform is genuine and that its plan to double 2010 per capita income by 2021, resulting in a middle-class in China approaching 600 million people, almost twice the size of the entire current U.S. population, is achievable.”
The China/APAC region is the second largest for Starbucks with 5,918 stores, and there’s no doubt the company wants to push as hard as possible here, thus giving itself a huge runway for revenue growth for the next 10 years.
Fortunately, there is acceptance for Starbucks in this region, which grossed $678 million during the second quarter. Even if this segment stays No. 2 spot in earnings for the company, it’s going to stick around for a while. And that’s what the company is counting on.
International expansion: Not a piece of cake
It’s not an easy proposition for any company to step out of its home market and be successful, and things get even more tricky if the home market is a developed country. First of all, there needs to be validation for the offering in the new market. Second, the company must be prepared for lower-than-average earnings per user or per store, which means you need more users or more stores to offset that.
For example, the 15,106 stores in the Americas brought in $3.455 billion during the second quarter while 5,918 stores in the China/Apac region brought in only $678 million. Extrapolating that, Starbucks might need more than 30,000 stores in the region to match its revenues in the Americas. Branding does bring in a measure of value, but it is store growth that will ultimately bring in the results Starbucks is looking for.
The biggest advantage for Starbucks, however, is that it's gained so much traction in a country that’s been prohibitive even for deep-pocketed companies like Amazon (AMZN, Financial) or Facebook (FB, Financial). Starbucks has crossed the first hurdle, and the rest now depends on execution and careful monitoring.
Positive comps will help
Comparable store sales have remained positive on the backs of ticket size and number of transactions in China/APAC units even as the company kept expanding over the past two quarters. That’s a good thing when you’re trying to add 50% of your net openings in those regions because it shows both demand and growth potential.
Starbucks needs to avoid repeating the indiscriminate expansion of the last decade when stores were cannibalizing each other and the whole group was affected to the extent that it led to mass closures. It's passed that hurdle, but let’s hope it's learned the lessons the experience taught.
So what we have now is a clear secondary market on which Starbucks can focus, one that can provide the momentum it needs to once again keep expansions at a clip. The China plan will give it breathing space to look at other possibly lucrative markets to keep growing its footprint.
With a forward P/E of 25.7, Starbucks seems neither expensive nor cheap, but when you factor in its global growth possibilities, it looks like a solid stock to own for the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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