Starbucks: Embarking On A Journey To The West

| About: Starbucks Corporation (SBUX)
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Summary

SBUX's flagship location in Chengdu is part of its aggressive China growth strategy.

Localization of menu and storefront will be important to attract traffic.

Maintaining supplier integrity and quality will be key priorities.

Starbucks (NASDAQ:SBUX) plans to open its flagship store in Chengdu, located in Sichuan province, in a move that is designed to expand SBUX's reach in the western part of the country, away from the populated eastern seaboard where SBUX already have a considerable presence. Recall that during SBUX's investor day, the company noted that China will be a key focus in the near-term as it wants to double its store count to 3,000. While on the surface this seems like an aggressive goal, it is actually highly achievable given the lack of competition that could counter SBUX's dominance in the high-end coffee segment. I would be a buyer of SBUX.

The company's growth prospect in North America lies in its focus on delivering higher value items such as juice, baked goods, alcoholic beverages and services such as wireless charging to encourage patrons to spend extra time in the stores given the maturity of the market. Growth in Asia will come from store expansion and places where disposable income is rising and population density support SBUX's store traffic growth. Given the lack of a serious competitor in China, particularly western China, SBUX should be able to deliver high revenue growth.

Highlights

Chengdu welcomes SBUX. After setting up stores in Chongqing to the east and Kunming to the south, Chengdu is the perfect place for SBUX to open its flagship store and use it as a staging ground for its western expansion. With a population of 14 million, average GDP per capita in the city is $10k compared to the national average of $6.5k, which means that most of the city's population should be able to afford SBUX price of >$3 for grande pike. Given that there are a dozen SBUX locations in Chongqing, a population of 30 million, I expect Chengdu to have at least six SBUX locations in the near-term.

Localization and focusing on quality. Chengdu SBUX features Sichuan-inspired tile, silk artwork by local craftsmen and a warm wood tone interior, which gives the patron a local feel. As I have stressed earlier, localization of the menu as well the as the storefront that caters to the local population is an important driver to growth. Overall, SBUX has been executing on this front with more green tea or red bean drinks than other parts of the world, per my observation. This will be particularly important as SBUX moves westward given the minority groups in that part of the country that will have different taste from the ethnic Hans residing in the middle and eastern part of the country.

Finally, maintaining quality amid an expansion phase will be critical in that low-quality suppliers could do damage to SBUX's brand and growth in the company. YUM's (NYSE:YUM) recent downgrade of its forecast due to China weakness is a classic example of this case, and this case will certainly be studied in business schools sometime in the future.

Conclusion

Maintain my bullish view on SBUX.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.