On Friday February 1, 2013 Starbucks (SBUX) will commence operations in the country of Vietnam. This is probably something that you may have heard mentioned in the media a month ago, with little fanfare and attention; overshadowed no doubt by the company's quarterly earnings release. However, this launch in Vietnam's largest and biggest commercial city, Ho Chi Minh, will be an important portion of the company's long term growth prospects. The country boasts approximately 90 million people with nearly 60 million below the age of 35 due to post war demographics from the 1970s. Discretionary spending in the country is growing exponentially as the opening of a more free market began back in 1995. Additionally, Vietnamese people are notorious for their love of western brands. You cannot walk down the streets or frequent a fancy restaurant without seeing authentic Louis Vuitton handbags draped over women's shoulders getting in and out of the latest BWM X6 or Mercedes S-class. In the past two years, U.S.-based fast food franchises have invaded Vietnam at a furious pace, including Carl's Jr., Burger King, and Subway, which have all done very well. Pizza delivery king Domino's (DPZ) have 14 stores in Ho Chi Minh City alone.
Coffee has been here for centuries
Make no mistake; Vietnam is not like other Asian nations which notoriously love a traditional cup of tea over coffee. French influence is still widespread to this day from the countries' shared history since the 18th century and with that, among other things, comes a love for coffee. Cafes of all kinds are strewn about all over the city, often open until the late hours of the night. The size of the retail coffee market is something I would describe as "bottomless". That has not been lost on other international brands: Gloria Jeans, The Coffee Bean and Highlands Café -- a local "copy and paste" version of Starbucks -- have been operating in Vietnam for years. They provide a case study, proving that selling high priced, high quality beverages with a strong brand, sells well in Vietnam.
The Case -- by the numbers
Based on the size of Starbucks' flagship store opening in Ho Chi Minh City, approximately 150 seats will be available on multiple levels including an outdoor patio. Given this shop's location and the differences in Vietnamese consumption in retail coffee -- customers stay longer at the store, but hours of operation are longer than in the United States -- this one store could easily host more than 700 customers per day. At an average of $3.00 per person, that works out to just under $800,000 in revenue per year. For reference, Starbucks is expected by analysts to generate $15.0 billion on 20,300 stores worldwide -- an average of $730,000 in per store sales.
The difference lies not in the fact that this one store will generate more revenue for the company than others around the world, but in the risk that this store will achieve this average goal. When Starbucks was opening new locations all over the Midwest and more rural areas of the United States, revenues per store fell drastically and profit margins suffered along with the stock price. Founder Howard Schultz came back in as CEO and reorganized the company to begin closing a lot of these underperforming stores. Margins returned along with a phenomenal 5-year rally in the company's share price. I have lived and worked in Vietnam for over three years and I can tell you with great certainty, this location has little to zero risk of not performing better than any location Starbucks has opened in the last decade.
The scary part is this is the first location of what is sure to be many in the two major cities of Ho Chi Minh City and Hanoi. I doubt analysts have began to factor in the impact of opening up a market as dynamic and robust for retail coffee as Vietnam into their expectations for this and ongoing years. To date, Starbucks is trading at 24.5x forward twelve month earnings, not much higher than U.S. consumer discretionary stocks which in aggregate are trading at 19.3x forward twelve month earnings. Given the earnings growth potential for Starbucks, it is something worth paying up for. With this move into Vietnam I also feel Starbucks will begin to outperform the consumer discretionary ETFs like the SPDR Consumer Discretionary Index ETF (XLY) over the next year.