Starbucks’ (NASDAQ:SBUX) partnership with Ai Ni Group, a coffee growing and processing firm in Yunnan, will further strengthen its foothold in China. Starbucks strategy of stabilizing its raw material supply by getting involved in the coffee growing and processing supply chain in China is a smart move as the company will have operating control of the joint-venture company. It has about 450 stores in mainland China and 800 in the Greater China region. Starbucks’ competitors in the broader market for specialty coffee include McDonald’s (NYSE:MCD), Caribou Coffee (NASDAQ:CBOU) and Peet’s Coffee (NASDAQ:PEET).
Our price estimate for Starbucks stands at $37, which is in line with the market price.
Partnership to accelerate growth in China
In the past, Arabica coffee prices fluctuated dramatically putting cost pressures on specialty coffee sellers. As part of the joint venture, Starbucks will teach local farmers how to grow high-quality coffee beans through sustainable practices. It will not only sell coffee grown in Yunnan in its 450 stores across China but would also export to its 17,000 stores around the world.
The joint venture company will purchase and export high-quality Arabica Yunnan coffee beans and will operate dry mills in the region. It would help it to meet the growing demand for high-quality coffee from Chinese consumers. Starbucks entered China in 1999 and plans to operate more than 1,500 stores in China by 2015.
We believe this partnership would help Starbucks in diversifying its revenues and geographical reach.
