Starbucks Gets Ready to Go From Tall to Venti in China

A Starbucks in Shanghai Photograph by Tomohiro Ohsumi/Bloomberg

The last year, according to Starbucks Chief Executive Officer Howard Schultz, has been “without question the best year in its 42-year history.” Bullish numbers back up his triumphalism, even if quarterly results trailed analysts’ estimates: a 7 percent increase in global same-store sales, a 24.4 percent surge in profit, and 1,700 new stores around the world.

But Starbucks remains far from any finish line Schultz has in mind. “We’re just getting started,” he said on Wednesday’s earnings call. With more than 11,400 stores in the U.S. already, the coffee chain is looking more intently at overseas opportunities. It plans to open 1,500 stores next year—half of them in Asia. At some point next year, China will replace Canada as Starbucks’ second largest market by store count and sales, following a schedule the chain laid out in 2012.

Asia currently accounts for about one-fifth of Starbucks stores. There are 1,017 Starbucks in more than 60 Chinese cities, and while that’s far fewer than in the U.S. the latest total marks a 317-store expansion from a year ago. And sales in China are healthy: “The stores that we opened in 2012 are currently averaging sales in excess of $700,000, while our 2013 class of stores are on track to annualize with a very similar result,” said John Culver, Starbucks group president for China and Asia Pacific. China will be “the largest driver of the approximately 750 new stores we plan to open across the region in 2014,” according to Culver. By comparison, the entire hemisphere of the Americas will gain a total of only 600 stores next year.

Not that China’s market lacks challenges. Coffee rival Dunkin’ Donuts recently closed 40 locations in mainland China and Taiwan, and Starbucks was recently criticized by the Chinese media for charging more there than in other markets to earn higher margins. Culver reiterated on the call that “the prices that we charge for our products in China, the latte, are comparable to—and in some cases, lower than—the competition.” He insisted again that “the prices that we’re charging in the market actually reflect the cost of doing business in that market.”

Starbucks’s operating margin in Asia last quarter was 37.5 percent, vs. 21.8 percent in the Americas. Same-store sales in Asia were up 9 percent in fiscal 2013, the highest among the regions, though the rate has slowed over the year.

“We’re not immune to the challenges and complexities of building a large business in China,” Culver said this week. But, he noted, “we have tremendous confidence in our ability to continue to build a very strong business not only in 2014, but well into the future.”

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