Starbucks (SBUX) sees significant growth opportunity in China

Starbucks Corp. (NASDAQ: SBUX) had a bumpy year in FY2020 but it appears to be on the right path for FY2021. The company has a clear growth strategy for the year ahead and the China market forms a key part of this plan. The coffeehouse chain sees significant growth opportunity in this region and continues to invest meaningfully to drive growth here.

Q4 and FY2020 performance

Starbucks’ global comparable store sales declined 9% in the fourth quarter of 2020. Comp store sales in China fell 3%, with comparable transactions down 7%. This was partly offset by an increase of 5% in average ticket. For the full year of 2020, comp sales in China were down 17%, driven by a 21% drop in comparable transactions but slightly offset by a 5% growth in average ticket.

Starbucks ended Q4 with 32,660 stores globally, with stores in the US and China comprising 61% of this portfolio. At the end of Q4, the company had 4,706 stores in China.

Strategy

Starbucks’ store fleet forms a key part of its growth strategy in China. After opening 259 new stores in the fourth quarter of 2020, the company is working on opening 600 new stores in the region during the full fiscal year of 2021.

Starbucks has a strong presence in Tier 1 and Tier 2 cities and it plans on expanding further in these areas through its Reserve stores and Starbucks Now concepts. The company plans to roll out the Starbucks Now format in over 10% of its new stores in China in FY2021. Looking ahead, Starbucks aims to have 6,000 stores across 230 cities by the end of FY2022.

Starbucks’ investments in its digital capabilities such as mobile order and pay, and delivery offerings are also paying off. At the end of Q4, the company had 13.5 million 90-day active members across its 4,700 stores. Digital sales mix rose to 26% in the most recent quarter, more than double versus last year.

Starbucks continues to expand its product offerings through its plant-based GOOD GOOD menu and its Tea Cloud platform. These are also expected to help drive growth going forward.

Outlook

For fiscal year 2021, Starbucks expects comparable store sales growth of 27-32% in China. In FY2022, new store openings is expected to continue with a net unit growth rate in the low teens. Starting in FY2023, the company expects comp store sales to grow 2-4% annually, based on its belief that it can capture additional market share through investments in its digital capabilities and store fleet.  

Competition

Luckin Coffee (OTC: LKNCY), which was once seen as a formidable opponent to Starbucks in China, has had a nasty fall from grace. Following a round of allegations and investigations earlier this year, it was found that the company’s 2019 revenues were inflated by more than RMB2 billion. This led to a change in management and the company reaching an agreement with the SEC to pay penalties.

Even though Luckin’s shares have jumped massively in the past three months, the stock appears to have lost its charm and most analysts recommend staying away from it.

Click here to read the full transcript of Starbucks Q4 2020 earnings conference call