Starbucks’ Asian Growth Faces A Tough Road Ahead

It would be wrong to assume that Starbucks Corporation‘s (NASDAQ:SBUX) expansion in Asia would be a runaway success without any obstacles as pricing issues combined with intense competition can pose a threat to the company’s long term profitability. Moreover, these factors will impact long term trends for the business, which we rely on to make long term estimates for its valuation. Starbucks has outperformed the markets in 2012 but has lost more than 10% since reaching its record high in April. Starbucks’ competitors in the broader market for coffee include McDonald’s (NYSE:MCD), Caribou Coffee (NASDAQ:CBOU) and Dunkin’ Brands (NASDAQ:DNKN).

We have a Trefis price estimate of $55 for Starbucks, which is in line with the market price.

See full analysis for Starbucks here

Pricing Issues

In South Korea, Starbucks increased the prices of its 32 drinks by 300 Won or $0.27 from May 7. The move was unpopular in the country and it has faced consumer backlash. ^[1]

The company also plans to double the number of restaurants in the country to 700 by the end of 2016. Unlike most of its western counterparts, the menu prices of Starbucks in developing markets are on par with (or sometimes even more expensive) those in the U.S. Pricing is a major issue, especially in developing markets, since they exhibit a higher negative price elasticity. In other words, a slight price increase will deter a significant number of customers. With prices of its drinks already higher than most of its competitors, there isn’t much scope to raise prices.

Competition Heats Up

In India, Dunkin’ Brands opened its first Dunkin’ Donuts outlet recently and plans to add another 100 in the next five years. Apart from possessing the first mover advantage, Dunkin’ Donuts also benefits from its relatively lower priced menu. The coffee chain has also added items such as mango milkshakes and mango doughnuts to cater to the tastes of local Indian population. ^[2] It will be interesting to see what amendments Starbucks makes to its menu when it opens its first restaurant in the country in August this year. Besides Dunkin’ Donuts, Starbucks has to compete against the already established players such as Costa Coffee, Cafe Coffee Day and Barista. Starbucks plans to add around 50 restaurants in India in the next few years.

We recently wrote an article on areas where Starbucks can potentially falter in China.

Understand how a company’s products impact its stock price at Trefis

1. Starbucks under fire for price hikes, koreatimes.co.kr, May 7, 2012 [↩]
2. Dunkin’ Takes the Lead in a Crucial Race Against Starbucks, dailyfinance.com, 5 May 2012 [↩]