Buying Starbucks On The 2016 Pullback (Part 3)

| About: Starbucks Corporation (SBUX)

Summary

Starbucks has been on a significant pullback with shares down by about 9% since the start of the year.

The international potential for Starbucks is enormous and it is just the beginning.

Net revenues for the China/Asia Pacific segment grew 14% over Q2 FY15.

Rising incomes and a rapidly growing middle class gives the China market the ability to become the company’s largest market.

Earlier this month I started writing a series of articles on Starbucks (NASDAQ:SBUX). In 2016, Starbucks shareholders have suffered from a serious pullback with shares down by about 9% since the start of the year. In the first part of my series, I praised Starbucks for its technology investment and Tea. And, I argued for Starbucks valuation in comparison to its peers. In part two, I highlighted the company's acquisition skills. And, I discussed how the company's successful acquisitions have helped Starbucks grow and diversify revenue streams.

What am I forgetting?

International growth. International expansion is a critical component to every bullish thesis. Starbucks is still in the very early stages of its international campaign. The international potential for Starbucks is enormous and it is just the beginning.

Over the last few years management has made it very clear that the company is committed to China. As of the most recent quarter, Starbucks reported that there are now over 2,000 locations in over 100 cities in China.

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Net revenues for the China/Asia Pacific segment grew 14% over Q2 FY15 to $677.9 million in Q2 FY16. The increase was primarily driven by incremental revenues from 884 net new store openings over the past 12 months.

Starbucks Chairman & Chief Executive Officer, Howard Schultz, was very positive when talking about China on the most recent conference call.

Our business in China remains very strong, and I personally have no doubt that the Chinese government's commitment to true economic reform is genuine and that its plan to double 2010 per capita income by 2021, resulting in a middle-class in China approaching 600 million people, almost twice the size of the entire current U.S. population, is achievable.

Starbucks is in the very early stages of building an empire in China. International coffee demand is on the rise and Starbucks is in the perfect position to become the dominant player in China. Rising incomes and a rapidly growing middle class gives the China market the ability to become the company's largest market. And, over the next decade Starbucks has the ability to expand into even more small and mid-sized cities.

Over time, Starbucks will be able to leverage its brand to sell ready-to-drink and at-home products too. In March, Starbucks announced a partnership with Chinese leading food and beverage producer Tingyi.

Together, Starbucks and Tingyi entered into an agreement to manufacture and expand the distribution of Starbucks ready-to-drink products throughout mainland China. For reference, the Chinese ready-to-drink coffee and energy drink market is worth a whopping $6 billion, and is projected to grow by 20% over the next three years.

James Wei, CEO of Tingyi Holding Corp. was very positive by saying:

As part of this cooperation, Tingyi will leverage its strength in production and distribution to increase the market share of Starbucks' RTD products in the Chinese market.

Already, consumers in China can purchase Starbucks bottled beverages in nearly 6,000 locations. And alongside Tingyi, we can expect much greater distribution. Ready-to-drink is a perfect complement to the company's retail store rollout. Together, retail store growth and ready-to-drink expansion will create a positive feedback loop of growth. Ultimately this feedback loop with strengthen the company's brand and market share.

Far down the road, I expect Starbucks to follow the menu diversification strategy which has worked so well in the U.S. market. I hope that management will go into greater depth when discussing the segmentation of China revenue.

Management has the experience and know-how to pace growth and to support a massive supply chain. Howard Schultz has learned from past expansion mistakes, and I trust him to throttle growth.

Disclosure: I am/we are long SBUX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.