Starbucks SBUX is opening its largest shop ever with the new Reserve Roastery in Shanghai, on Dec 5, in a bid to counter sluggish U.S. sales. Starbucks is testing its upscale and super-sized cafe concept in its fastest-growing market of China.
The 30,000-square-feet store has more than 100 beverages on the menu, and allows customers to participate in the first AR (augmented reality) experience from Starbucks. This is the second-ever Starbucks Roastery while its first was opened in Seattle in 2014. The coffee chain giant also has plans to bring this Roastery concept to New York in 2018 and another to Chicago in 2019.
Expansion in China
The Starbucks brand is gaining popularity across Asia with increasing investments in Asian markets. Particularly, China is the fastest-growing market for Starbucks. Management believes that China and the Asia-Pacific region will drive more meaningful business growth over the next five years supported by rapid unit expansion, wider brand awareness, and increased usage of digital/mobile/loyalty platforms. Starbucks currently (as of Oct 1, 2017) operates 7,479 stores across China-Asia-Pacific or CAP. The company remains on track to have roughly 11,000 locations in CAP (600 in China alone) in fiscal 2018.
Revenues from the CAP region, accounting for 14% of Starbucks’ revenues for fiscal 2017, were up 10% in fiscal 2017. Same-store sales grew 8% in China during the last-reported quarter (its strongest in nine quarters), compared with 2% globally.
Even in July 2017, the company announced its plans of acquiring the remaining 50% share of its East China business from Uni-President Enterprises Corporation and President Chain Store Corporation. The deal, which is the largest acquisition made by Starbucks to date, is valued at $1.3 billion.
Following the deal, the company will own 1,300 stores in three Chinese provinces. The transaction, which is slated to close by early calendar year 2018, is expected to add $1 billion to the top line in the first year and see a breakeven to slightly accretive earnings in the first year. Importantly, the company believes that joining its China business will lead to acceleration in its East China business.
Starbucks' business in China is growing rapidly due to innovative store designs, local product innovations and the success of the My Starbucks Rewards program. Beyond China, the company is facilitating growth in countries like Japan, Korea, Thailand and Indonesia. Starbucks expects to triple its profits in the CAP and Europe, Middle East and Africa business over the next five years.
Increasing revenues in the Americas segment (accounting for 70% of total revenues) have been a big challenge for Starbucks for the last few quarters. The company has been experiencing tepid comps growth in the United States for quite a while now amid persistent decline in the country’s restaurant sales. Starbucks reported only 3% comps growth in fiscal 2017 against 6% in the year-ago period in the Americas segment.
Evidently, the company’s shares have underperformed the Zacks Restaurant Industry on a year-to-date basis. The stock has returned 5.8% while its industry has gained 13.5%.
Nonetheless, increased investments in the company’s fastest growing market, successful innovations, best-in-class loyalty program and digital offerings will likely help this Zacks Rank #4 (Sell) company to offset the soft sales trend in the United States.
Stocks Worth a Look
A few better-ranked stocks in the same space are Arcos Dorados Holdings Inc. ARCO, The Home Depot, Inc. HD and RH RH, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Arcos Dorados is expected to register 16.2% EPS growth this year.
Current-year earnings for Home Depot are expected to grow 14.2%.
RH’s current-year earnings are projected to grow 130.2%.
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