Starbucks will expand in China – and it looks like a smart idea

Over the next five years, the company will open 12,000 new stores worldwide, including 5,000 in China, where consumer culture is in vogue among a nascent middle class.

Jason Lee/Reuters
A sign with the Starbucks logo advertises one of the coffee shop's stores in front of Zhengyangmen Gate at Qianmen Commercial Street in central Beijing in 2012. The company on Wednesday announced plans to open 5,000 more locations across mainland China over the next five years.

Starbucks Corp. outlined a five-year plan Wednesday to increase its global footprint by nearly 50 percent, adding 12,000 new stores worldwide by 2021. The aggressive growth strategy includes a heavy focus on China, where the Seattle-based coffee chain looks to triple its current operation.

Starbucks, which has been doing business in China for 17 years, said it aims to add 5,000 new stores there in addition to the 2,500 already open. That's a smart move, investors and business experts say, given the size and trajectory of China's market. While the country has shown slowing economic growth overall in recent years, especially in its manufacturing sector, a burgeoning middle class is driving demand for consumer goods as the Communist Party has been liberalizing its economic policies.

"They have been talking-up for years now how China needs to rebalance its economy away from exports and investment, toward domestic consumption and services – that means, among other things, the kind of services that Starbucks provides," Linda Lim, professor of strategy at the University of Michigan Ross School of Business in Ann Arbor, tells The Christian Science Monitor.

Dr. Lim, whose research has focused on local and multinational companies in southeast Asia, says per-capita incomes have continued to rise in China, even as it suffers from a loss of manufacturing jobs to automation and cheaper foreign markets, such as neighboring Vietnam. Even so, Chinese factories have struggled amid a labor shortage to hire a sufficient number of workers.

"People have a preference for what I would call Starbucks-type jobs," she says. "People have been finding jobs in the services sector, in shopping malls and things like that. They prefer that kind of work than slogging away in a factory."

With so much interest on both the supply and demand sides, Starbucks is well positioned to capitalize on a clear market trend, Lim adds. Some observers wring their hands over the prospect that China's economy could suffer a major downturn – slowing growth has some global investors spooked, as the Monitor reported in February – but the majority say the only real question, Lim says, is as about the speed with which current positive trends will continue.

"Most people think China will continue to muddle along at reasonable, if not spectacular, growth," she adds.

Investors sounded optimistic this week, though some cautioned that a sound long-term strategy could come with short-term costs.

"Given near-term challenges across the consumer landscape, along with Starbucks’ recent sales performance, we remain cautious on shares," analysts with Deutsche Bank warned in a note published Monday, as MarketWatch reported.

Regardless, the expansion in China is the reason investors should own Starbucks stock, despite its relatively high price compared to the company's earnings, Lebenthal Asset Management CEO Jim Lebenthal told The Street.

Breaking into a market with such a rich history of tea consumption was no small feat for the coffee-centric enterprise, as the Monitor's Lonnie Shekhtman wrote in October.

"We had to educate and teach many Chinese about what coffee was – the coffee ritual, what a latte was," Starbucks CEO Howard Schultz told CNN Money at the time. "So in the early years, we did not make money."

Mr. Schultz announced last week that he would step down as the company's chief executive in order to build up the company's high-end business, as The Wall Street Journal reported. Along these lines, Starbucks opened its first Reserve coffee roastery and tasting room in Seattle in 2014, where it offers higher-end roasts in limited supply.

The company's plans include a similar store to open in Shanghai next year, followed by launches in Tokyo and New York City in 2018.

Material from The Associated Press and Reuters was included in this report.

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