Starbucks' (SBUX) China Plan Points to Further Growth

It is somewhat obvious but worth stating that once companies grow beyond a certain size, further growth becomes incrementally more difficult. Success spawns imitators and even the most widely purchased products have a limit to the number of people that will buy them. Starbucks (SBUX) has faced both of those problems and yet has continued to expand. The news today that they plan to open another 500 or more stores in China annually for the next few years indicates that they are still growth oriented, and that makes them a smart buy.

This focus on geographic growth has not, however, come without a false start. It wasn’t that long ago that, as part of an attempt to build a lifestyle brand, Starbucks entered the CD market...just before CDs were overtaken by the march of technology. Like a smart teenager though, CEO Howard Schultz was quick to learn from his mistakes. A renewed concentration on service and the human side of their business revitalized the brand much more efficiently than association with any pop star could have done, and the money that generated is now being used to pursue growth in a more traditional manner.

The five year stock chart above shows how well that has worked. Normally the value seeker in me would see a chart like that as a deterrent. It is only natural to look at that and think “ I should have bought at $20...I missed it” but as the China market opens up for the company there is still, at least potentially, room for much more appreciation. There may be some who see that commitment to that particular market as questionable given that it is worries about growth in China that have caused ructions in the stock market over the last few months, but that is to over simplify the situation there.

It is not a question of China falling into recession; the overall economy is still growing, albeit slower than most had anticipated. It is really about the economy there dealing with a natural and anticipated transition. Mature economies generally shift from manufacturing and commodity production to more of a consumption and service driven model, and that is the case in China.

With that comes a change in consumer behavior. People previously focused on value become more brand conscious and loyal, while paying more for better service. For evidence, look at Nike ((NKE)’s performance last year in a supposedly struggling Chinese market. All of that will benefit Starbucks as it expands, and doing so is unlikely to prove to be a financial stretch for the company. They have, after all levered free cash flow of over $2 billion.

Expansion into emerging markets and China in particular is therefore a logical step for Starbucks, and doing so now, as things cool off a little there, looks smart. If, however, that move was the result of declining domestic sales, suggesting that Starbucks’ popularity at home was declining, then it would have a sniff of desperation to it. That is not the case: 2015 comps showed an 8 percent increase which was driven, significantly, by a 4 percent increase in traffic. There is no sign that domestic consumers are tiring of Starbucks. If anything, they are showing a preference for the original rather than the host of competitors.

Most of the above comes under the category of the blindingly obvious, but that doesn’t mean that it shouldn’t be pointed out. Investors can be cynical at times and tend to overlook things that are not complicated. In this case, investing in SBUX is obvious, but also smart.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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