Can Fast Paced Growth In China Threaten Starbucks’ Premium Status?

+10.59%
Upside
91.01
Market
101
Trefis
SBUX: Starbucks logo
SBUX
Starbucks

Recently Starbucks Corporation‘s (NASDAQ:SBUX)  announced that it will bring its first International Starbucks Roastery and Reserve Tasting Room to China in 2017. The  30,000 square feet Roastery, which is to provide Chinese consumers with an immersive and instructive experience, will open in late 2017 in Shanghai. Inspired by its first such location that debuted in Seattle in 2014, the Roastery will allow Chinese consumers to better understand the craft of roasting and brewing a range of Starbucks coffees.  The company currently has 2,100 stores in China spread across 102 cities and is expanding rapidly in the region. It plans to open 500 new stores in the region in 2016.   Starbucks views China as its next growth opportunity and is looking at ways to exploit this potential to the fullest.  The company wants to take advantage of the growing urban middle class in the region, with its increasing disposable income.  Demand for luxury foreign products, including coffee, is thus set to increase.  This planned expansion will ensure that China is the next growth engine for the Starbucks.

See our full analysis for Starbucks Corportion

China’s Urban Middle Class Can Increase To The Size Of The Total U.S. Population

Relevant Articles
  1. Down 7% Since 2023, Can Starbucks’ Stock Reverse This Trend Post Q1 Results?
  2. Down 26% From Its Pre-Inflation Shock High, What Is Next For Starbucks Stock?
  3. After 6% Drop This Year, Pricing Growth To Bolster Starbucks’ Q4
  4. Can Starbucks Stock Return To Pre-Inflation Shock Highs?
  5. Starbucks’ Stock To See Little Movement Past Q3?
  6. Starbucks Stock To Likely Trade Lower Post Q2

China’s urban middle class is growing rapidly.  According to a report by McKinsey by 2022, 75% of China’s urban consumers will earn between $9,000 and $ 35,000 annually.  This will be up dramatically from the 4% level in the year 2000. The report also suggests that out of the 357 million estimated urban population in China for 2022, nearly 65% of this population will fall in the “upper middle class” and “affluent “category. This segment with higher disposable income is the primary market for Starbucks in China and based on McKinsey data this could be around 240 million consumers by 2022. Starbucks believes that, in the long term, China has the potential to become its biggest market, surpassing the U.S.   The figures in the McKinsey report indicate that this is a possibility.

Starbucks currently operates around 12,500 stores in the U.S., catering to its population of around 320 million. This roughly translates into one Starbucks stores for every 25,000 people in the U.S.  In comparison, its target to have around 3,400 stores in China by 2019 does not sound very aggressive, given that its market size in China will be around 240 million by 2022. Starbucks long term target to have 10,000 outlets in China will similarly translate into one store for about 25,000 urban Chinese consumers with the purchasing power to be a Starbucks loyalcustomer. However, with a total population of more than 1 billion people, Starbucks’ market size in the region has a huge growth potential.

Apart from promoting its premium beverages, Starbucks is also looking to offer value for money deals to attract consumers in the U.S. It can adopt a similar strategy in China in the long term. The company recently launched a limited period all day “Power Lunch” for $8 in its company operated stores in the U.S. and Canada, to attract consumers to its food items while they pick up their beverages. Given its vast presence in the U.S., the company is working on strategies to increase revenues from food items.  It can adapt a similar strategy in China, once it has a widespread presence.

We believe Starbucks’ expansion strategy in China is in line with the increasing urban population in the region. While this rapid expansion makes its stores more accessible to the Chinese consumers, its premium coffee and customer engagement will ensure that the company retains its premium status in the region.

 

More Trefis Research