Can Starbucks Win in China?

Starbucks Corp. (NASDAQ: SBUX) announced it would double down in China. It will join other U.S. restaurants, like McDonald’s and KFC, as it hopes the people in the world’s most populous nation have a growing taste for its products. The path will certainly not be easy.

Starbucks announced mediocre earnings. Revenue for its fiscal third quarter rose 8% to $5.7 billion, compared to the same quarter last year. Earnings dropped 8% to $0.47 per share. Same-store sales worldwide rose 4%. In the United States they were up 5%. In Starbucks China region, same-store sales rose 7%, which is modest based on the size of the market.

At the core of the Starbucks earnings release, it announced its China plans:

Starbucks earlier today announced plans to consolidate its business operations across Mainland China by acquiring the 50% of Shanghai Starbucks Coffee Corporation that it didn’t already own from JV partners Uni-President Enterprises Corporation (“UPEC”) and President Chain Store Corporation (“PCSC”). Customers in China have embraced the Starbucks brand and customer experience since the company opened its first store in the market 18 years ago. Starbucks stores in China are among the most innovative, coffee-forward Starbucks stores in the world, consistently generating strong revenue and same-store sales growth, record AUV’s and world-leading returns on investment. Mainland China is Starbucks largest and fastest growing international market with 2,800 stores in 130 cities, employing nearly 40,000 partners. Through this acquisition, the largest single acquisition in the company’s history, Starbucks will assume 100% ownership of approximately 1,300 Starbucks stores in 25 cities in the Shanghai, Jiangsu and Zhejiang Provinces. Also as announced earlier today, concurrently with the purchase of the East China JV, UPEC and PCSC will acquire Starbucks 50% interest in President Starbucks Coffee Taiwan Limited, and assume 100% ownership of Starbucks operations in Taiwan. Founded in 1997, the Taiwan JV currently operates approximately 410 Starbucks stores in Taiwan.

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In 2014, both McDonald’s and KFC were hit by tainted food scandals, which in some ways resemble Chipotle Mexican Grill’s trouble in the United States. The food problem in China may have been real. However, no matter what the scale of the trouble, the two companies were at the mercy of Chinese regulators. Regulators have shown biases against U.S. companies before. This adds to the risk of U.S. companies with China operations.

And then there is the matter of whether Starbucks can cater to Chinese tastes. So far, it has been able to. Whether that will continue on a larger scale depends on both its menu and the amount of local competition. Chinese companies will not give up their business without a difficult fight.

Of all the American companies that have relied on China as their new growth engine, many have been disappointed. Starbucks could find itself in that line.

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