Starbucks Stock and China Plan

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I mean the stocks (SBUX), not the latte. I believe the “so-so” same store sales number for the Q1 is the main reason for the recent drop. The stock is still not cheap by looking at PE (37), with projected rev/earning growth at about 20%. But this is Starbucks, normally they don’t go on sale. Near term, I believe SBUX is very much relying on the developed countries (a.k.a, US) for most of its revenue. For instance, in last 6 months I saw they opening up some new stores (some with drive through) in St. Louis and other midwest cities.

But long term, they are looking at international (see this article at seeking alpha). They have been in China for a few years and it appears they are acclerating now that they got more experience. Lately Howard Schultz the chairman talked about China (again from seeking alpha).

“…We have said almost very consistently throughout the last year or so that as we look around the world, like many other western companies and consumer brands, that China ultimately could potentially be the second-largest market in the world for Starbucks.

I think perhaps the main point that we can provide today is, which we couldn’t do three or four years ago, and maybe even 18 months ago for that matter, is just the level of acceptance and perhaps the right word would be the relevancy of the Starbucks experience in China.

Depending on what number you believe, there is north of 200 million Chinese people and that number’s growing, who we believe are the core customer today for Starbucks. I think what we’ve been able to do is make sure that as we enter China and continue to do business there that we do not become a fad that becomes hot and then all of a sudden is out of favor, but most importantly that we integrate our company, the experience, and Starbucks’ values into the lifestyle of the Chinese consumer and the behavior of how our customers are using the place.

I think what’s probably most important is that not only have we achieved relevancy and success in the two most important major cities in Beijing and Shanghai, but now in I think 17 provinces, we have demonstrated throughout China and South China that Starbucks is going to be successful throughout greater China, and that includes Hong Kong and Taiwan…” 

My comments: Starbucks is still at early stage of its China expansion. If I could use baseball as analogy, it’s like second inning of a 9 innings game. It’s popular in first tier cities at this time (Beijing, Shanghai, Guangzhou and Shenzhen); it started entering into second tier cities such as Qingdao. It’s at where KFC in China 10 years ago. I remember KFC is considered as “luxury” in 1990s when I was in Shanghai. At that time I never imagine my hometown (Ningbo Beilun) will have KFC. Nowadays my 12 years old niece will ask her partents to take her to KFC as a treat 🙂

As you may know, Yum Brand (YUM), the parent company of KFC and Pizza hut, is making more money in China than in US nowadays.

Disclosure: I own SBUX at this time.

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