In light of Starbucks' (NASDAQ: SBUX) recent stock dive of over 9% to level off at around $54- a phenomenon that was mirrored about three years ago in August- questions are being raised about the coffee chain's potential future growth and profit forecasts. It seems that Starbucks' answer takes the form of an emerging industrial superpower: China.
After shutting down 379 "consistently underperforming" Teavana stores at the cost of affecting 3300 employees, Starbucks is looking towards cracking a growing Asian market by "spending $1.3 billion to buy up the remaining 50% stake of its Chinese business from its joint-venture partners."
In China, Starbucks has gone on a store-opening rampage, establishing more than a store a day. The strategy is simple: when one door closes, two others will open in its place. The American market for coffee may have become increasingly saturated as coffee becomes almost like a staple in the average person's diet, and consequently Starbuck's brand image doesn't quite hold the same shine it once did as a novel and trendy company selling a highly specialized, unique product. Starbucks made coffee cool in North America, but it's starting to feel the heat at home. So why not turn to other parts of the world like China, where the coffee culture is budding and holds greater scope for growth?
"The growth opportunity in China is unparalleled," Kevin Johnson, the company's chief executive officer, said in an interview. This is solidified by the fact that demand for coffee i n China has nearly tripled in the short 4 years between 2012 and 2016, perhaps as a result of globalization and increased foreign investment and influence. Before 2016, "China accounted for less than 2% of the world's coffee sales."
Johnson also said: "Unifying the Starbucks business under a full company-operated structure in China reinforces our commitment to the market and is a firm demonstration of our confidence in the current local leadership team as we aim to grow from 2,800 to more than 5,000 stores by 2021."
However, there is a caveat: The Chinese market does not by any means ape the American market as it was 18 years ago when Starbucks was first launched, and therefore also cannot be dealt in the same way that America was initially. The Chinese are big on tech, and apparently the way to their hearts is not through coffee mugs only but also through digital sharing. Starbucks recognizes this, and has thus partnered with Tencent, an internet behemoth in China. In the last six months, Starbucks has seen "more than 2 million social media gift transactions through Tencent-a number that far outpaces what is seen in the US," the company said.
While the Starbucks share price may be suffering now, if all goes well in China, there is sure to be a surge in its value in the near future that far outpaces its current decline. Yet, what's more important than a short-term success like this is the long-term impact it could have: if Starbucks is able to crack the Chinese market, it could open up a world (literally) of opportunity for it in the future, especially when the markets for coffee begin to saturate one by one.