Starbucks Committed to China Expansion

From Starbucks' (SBUX) fiscal Q3 2006 earnings conference call transcript:

Howard Schultz - Chairman

We have spoken many times about our excitement for the growth opportunities China presents, and you know of our investment in the infrastructure there to prepare for capturing those opportunities. At the end of the quarter, we had 246 stores in mainland China, including Hong Kong, and 177 locations in Taiwan, for a total of 423 stores in greater China.

Question-and-Answer Session

David Palmer - UBS

Thank you. A big question on international and a quick one on warming. This is the third year in a row you have had great contributions from international in terms of profitability. I think it is contributing 20% to 25% of your profit growth each of the last three years.

Assuming the fourth quarter has a decent margin, it looks like your margin for international will be approaching about 10%. That is obviously up from 0 in '03. My question is about the incremental profit contributions in the future. What should we expect here? You are going to be making a lot of investments for growth, going for big growth in China -- how should we think about the contribution of profit in China?

Howard Schultz - Chairman

Let me start on the international side, at first on the qualitative response to your question and then give it to Michael on the economic response.

I think the big headline here, if you go back three years ago where we had not made money and where we are today, is the level of acceptance, and most specifically the relevancy, of the Starbucks experience in which we have been able to land so softly and so easily in so many different types of markets.

When you look at the countries that we are in and the level of coffee education from a market as mature as France and Spain, and then you look at China and Malaysia and Singapore and even Japan, for that matter, it is really remarkable.

That speaks to the fact that the third-place experience, Starbucks is a place between home and work, is as relevant in these countries as they have been in the U.S. That has given us the ability to ramp up and also create the kind of unit economics that, candidly, we did not expect.

I think that, going away from this call, I know many of you will probably focus on 4% comps, but for me the headline is we have just announced an increase in stores for '06, an increase in stores for '07 and, most importantly, the fact that our international business is firing on all cylinders and we just announced the interest in Russia and India on top of the way in which we are being embraced all over the world, and specifically with now over 400 stores in greater China.

With that, I will let Michael take the economic side, but we could not be more enthused and excited about what is happening internationally, which complements, obviously, the growth in development that we have had over the last 30 years in the U.S.

Michael Casey - Chief Financial Officer, Executive Vice President, Chief Administrative Officer

I have received the question about the international margins pretty frequently, and I try to be very consistent with the answer. International margins are a difficult balancing act for us. We would like to get continuous improvement in the margins but we also recognize the tremendous opportunity the international marketplaces provide for us.

If we were to be just looking at a steady state, I think I could predict pretty regular increases in the international margins in the direction of the U.S. margins, but not getting there for quite a while just because of the difference in scale.

You have to layer on to that the fact that we see an opportunity for five or 10 times the number of stores in places like China that we have today. We want to build the type of organization and infrastructure that will support that.

The bigger the opportunity, the more we are going to invest and we will also be layering in investments in some of the countries that Howard just mentioned that will not contribute any sales or profitability in the short term but will be laying the groundwork to be able to continue this high level of growth, not just in the next five years, but in 2012 through 2017.

It is a balancing act between investment in great potential for the long-term and the fact that we do want to be mindful of short-term profitability.

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Comments

[saud ibn abdulaziz]

Chairman Shultz, founder and Chairman should forecast same operations shortcomings present in USA. Trade offs in preparation time per "candy drinks" vs standard coffee drinks, Standrd coffe drinks allow self service. While trained staff intensive drinks for prep allow fewer beverages served per hour. During extremly hot to extremely cold output per hour will increase, multiphase/multiproces... will cause customers losses. Fewer served though demand high. Therein retail prices will be increased, in china, and fewer stores will be opened. Competitiors will chaarge in. Solutions: more Starbucks built side by side. More in advance preped drink, grind ice in advance, more blenders per store, liquified "expresso" sooner. Seperate lines by category of beverage. Chinese orders for "candy drinks" will voluntary wait longer, while other categories will be served seperately and faster. No additional cost for anyh of this, and allow appointments for drinks to be made in advance if paid in advance via credit cards or internet payments facilities. Then ready when arrive. Contaact at my site.