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Starbucks (NASDAQ: SBUX) is the quintessential American coffee brand. However, the company has shifted its focus toward growth overseas, most notably in China. While Starbucks has had a presence in China for 20 years, Starbucks CEO Kevin Johnson has made China central to the company's strategy, announcing plans to accelerate the coffee maker's growth in the country. This article will examine the moves Starbucks is making in China and distill why the company is betting big there.
Image source: Starbucks.
Change in Strategy from New CEO Kevin Johnson
Since becoming Starbucks' CEO in 2017, Kevin Johnson has reorganized the company to carry out a change in corporate strategy. First, Starbucks sold its Tazo brand and closed Teavana stores. Second, the company outsourced its grocery store packaged coffee business to Nestle in exchange for over $7 billion in cash and a licensing agreement. Finally, Starbucks reacquired its East China franchises, adding 1,300 company-operated stores in China.
Starbucks will continue growing in the U.S., but management has made it clear that their priority is international expansion. In May 2018, Starbucks held a China-focused investor day where it outlined its plan to nearly double its store count in China over the next four years. By 2022, Starbucks intends to have more than 6,000 stores in mainland China, with a plan to open 600 stores a year to get there. That's a pace of almost two new stores a day!
Starbucks is now more focused on its namesake stores, having divested or outsourced its other brands and operations. With these changes, CEO Kevin Johnson has realigned the company around his new vision for growth.
The Opportunity in China
The opportunity in China lies in a rising middle class, which is expected to double between 2018 and 2022 from 300 million to 600 million. This rising middle class provides a fertile market for Starbucks, with an ever-growing budget for discretionary spending and a taste for Western culture.
The conventional wisdom is that China is a nation of tea drinkers. However, mounting indications show a growing taste for Western coffee culture. Coffee consumption per capita currently ranks low at just three cups a year in China vs. 363 cups per capita in the U.S. However, consumption grew at a 16% annual rate in the last decade according to the International Coffee Organization.
For the younger generation of Chinese consumers, Western coffee culture is considered sophisticated and a sign of affluence. This cultural phenomena has been observed before in the tea-drinking nation of Japan which saw rapid growth in coffee consumption in the 1970's and 80's. Today, Japan is a relatively large coffee market.