Starbucks Execs on Growth Plans and Efforts to Avoid Becoming a Fad in China

From Starbucks' (SBUX) fiscal Q2 2007 earnings conference call last week:

James L. Donald - President, Chief Executive Officer

I’d like to turn to the International business, starting with some observations from my trip to China last week. During my trip, I attended the Boao Forum for Asia. This annual conference provides an opportunity for more than 1,300 official delegates from government leaders to top corporate executives to industry experts to discuss the economic growth and the development of Asia.

I’m happy to say that today, I am even more excited about our opportunities in China than I was in the past. I also participated in the opening celebrations for our first regional support center in Guangzhou and the opening of our 500th store in the Greater China Region.

The most striking observation to me was how well our stores in China are executing on the Starbucks experience. Our partners are doing a wonderful job delivering high quality beverages and providing legendary service. I was also impressed by the level of commitment our partners had to their local communities, really helping to make Starbucks not only a destination in the communities but an integral part of those communities.

Because of these factors, Starbucks is continuing to see strong acceptance from our customers in China....

John Ivankoe - Analyst, J.P. Morgan

Okay, and the final question, Howard, maybe this will take more than a couple of seconds to answer, is on China. Certainly we look at the overall consolidated results and they do speak for themselves in terms of what your revenue growth is and what have you, but what can you provide us with, either qualitatively or quantitatively, in terms of how the China market is going for you and how rapidly perhaps you can grow it in the future and how meaningful you might think it could be to the global business in the next -- pick the number of years, three to five years.

Howard Schultz - Chairman of the Board

I’ll start and Jim can pick up because he just returned last week from China. We have said almost very consistently throughout the last year or so that as we look around the world, like many other western companies and consumer brands, that China ultimately could potentially be the second-largest market in the world for Starbucks.

I think perhaps the main point that we can provide today is, which we couldn’t do three or four years ago, and maybe even 18 months ago for that matter, is just the level of acceptance and perhaps the right word would be the relevancy of the Starbucks experience in China.

Depending on what number you believe, there is north of 200 million Chinese people and that number’s growing, who we believe are the core customer today for Starbucks. I think what we’ve been able to do is make sure that as we enter China and continue to do business there that we do not become a fad that becomes hot and then all of a sudden is out of favor, but most importantly that we integrate our company, the experience, and Starbucks’ values into the lifestyle of the Chinese consumer and the behavior of how our customers are using the place.

I think what’s probably most important is that not only have we achieved relevancy and success in the two most important major cities in Beijing and China, but now in I think 17 provinces, we have demonstrated throughout China and South China that Starbucks is going to be successful throughout greater China, and that includes Hong Kong and Taiwan.

And so the foundation we are building in terms of infrastructure, the investments we’ve made, both in a Chinese-centric team based on China, as well as people with five and 10 and 15 years tenure from Starbucks U.S. that have moved to China, that we believe that this is going to be a big pay-off for the company at some point, and we are positioned as well as or perhaps better than most U.S. and western consumer brands that will be accepted and build a major business in China.

I can’t give you the numbers because I think over time, not unlike the mistake we made early on in America, we underestimated the size of the market. We are trying not to do that. We are dreaming very big in China. We are investing heavily ahead of the growth curve.

I think from a shareholder perspective, this is really going to pay off because this is a very, very big prize and we think we are going to achieve it.

John Ivankoe - Analyst, J.P. Morgan

How many stores are you opening a year now in China?

Howard Schultz - Chairman of the Board

I’m looking to Michael to see if he’s going to let me tell you the number. I think that the number that we have internally is about 100. If you look at the history of Starbucks, I think the one thing that you can really look at is that we have really under-promised and over-delivered when it’s come to store count.

James L. Donald - President, Chief Executive Officer

To that point, as I sat and talked to the Mayor of Guangzhou, and this is in southern China, and looked at that whole quarter of Shenzhen, Guangdong, and Guangzhou, I told the mayor that there is the potential of doubling those stores over the next 18 months to two years, and he said that’s not fast enough, and he told me areas that quite frankly surprised me, and we look at it.

And the only reason I bring that up from a shareholder perspective is that when we go to these countries, when the government is asking us to become more of a part of the communities, when the customers at this conference that I was at talk about the Starbucks experience and talk about the ability to customize a beverage, it’s the place to go. It tells me that we are well on our way.

But its’ the combination of, as Howard said, investing ahead of the curve not only in infrastructure and people, but also in the communities that we are in because now we’ve become “please come in and help us and we’ll in turn give back to you”, so it’s really a great formula and it’s a combination that’s working.

Michael Casey - Chief Financial Officer, Executive Vice President

Just one more point to make on that, in the last six months or so, we’ve gained operational control of the Beijing market, which will allow us to have greater influence over the growth rate in that market. And in the last 12 months, we’ve gained operational control in southern China and we have geared up both of those markets for more rapid growth than they’ve experienced just six or 12 months ago.

Howard Schultz - Chairman of the Board

Martin Coles, the President of Starbucks International, is in the room and I think he wanted to just add something to your question about China.

Martin Coles - President, Starbucks International

Just for perspective on the new store growth, in China currently we are opening for every, for all of our international store count, roughly 20% of that count is actually new stores being opened in China. We expect there to be around 200 stores open in China during fiscal 2008 and I think again, looking forward, roughly 20% of our new store count will be in China.

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