Starbucks wants to be big in China, and even bigger in the United States. To do that, the coffee company is making some changes.
After years of aggressive growth, the coffee company has locations all over the world. But now, CEO Kevin Johnson wants to focus on growing in the two coffee-loving countries where it thinks its efforts will pay off the most.
To drive that growth, Starbucks freed up cash and resources by closing its Teavana retail stores, partnering with Nestle to create a “global coffee alliance” and reorganizing its corporate team.
“I tend to bring a much more disciplined approach to picking the priorities,” Johnson said during the Oppenheimer Consumer Conference in June. “If you pick the right priorities and you put the resources and energy behind them, you move the needle.”
Since taking over from Howard Schultz in April of last year, Johnson has outlined a plan to trim fat and bolster the company in its two largest markets. So far, it’s working.
Starbucks (SBUX) beat Wall Street’s expectations for its fourth-quarter earnings. Revenue grew to $6.3 billion in the quarter that ended in September, up 11% from the same time last year. In the three months ending in September, comparable store sales grew by 4% in the United States and 1% in China. The good results sent shares of the company soaring.
Recently, Starbucks announced that it is handing over the ownership and management of its stores in the Netherlands, France, Belgium and Luxembourg to its partner Alsea, which operates restaurants in Latin America.
The decision to step back from those markets in Western Europe may have been driven by how competitive the market is there, said Robert Salomon, a professor of international management at NYU’s Stern business school.
“It’s very difficult for them to enter with a proposition to say ‘Hey, we’re the espresso coffee company,’” he noted. But in China, Starbucks can set itself up as a coffee destination.
Starbucks opened its first store in China in 1999. “They are certainly ahead of the curve,” he said.
But Starbucks has only recently decided to lean into the Chinese market. That may be because now, Chinese customers may be more amenable to what Starbucks has to offer, Saloman said. Today, consumers in China have an “increasing affinity for Western goods, especially more luxury goods,” said Saloman. “Starbucks has that high-end appeal, so they’re capitalizing on that trend.”
To build up its presence in China, Starbucks is opening stores at a rapid pace. The company said in May that it plans to nearly double its number of coffee shops to 6,000 before the end of 2022. And it’s making sure that people who don’t come into stores have easy access to Starbucks coffee: Over the past few months, Starbucks has been steadily building up its delivery capabilities in the country.
Johnson said during the Oppenheimer conference that he plans to introduce Starbucks coffee to a whole new generation of coffee drinkers in China.
The efforts are paying off. “Results in China are extraordinary,” noted Nick Setyan, a restaurant analyst with Wedbush.
But China isn’t a sure bet, Saloman said. If political ties worsen, or if China’s economy takes a hit and people have less disposable income, customers may take their business elsewhere.
“China presents a tremendous amount of risk, but also a lot of upside potential,” Saloman said. Expanding in the United States, on the other hand, is a lot less risky, in part because Starbucks already knows what US consumers like.
In the United States, Starbucks is growing at a slower pace than it has in the past. But it’s still going after new markets.
“All of the space in middle America, in the Midwest and down through the South, is wide open,” Johnson said during the conference. “A large proportion of our new store growth are going in the areas where we are under-penetrated.”
And it’s opening more drive-thrus, which tend to perform better than regular Starbucks cafes.
Starbucks has also been tweaking its menu to entice more health-conscious customers with lower-sugar Frappuccinos and more non-blended alternatives like cold brew and iced teas.
The company has also focused on connecting with more customers through its digital platforms. More than 15 million people are now active US members in its loyalty program. Starbucks says that those members offer helpful feedback on what they want — like really Christmasy holiday cups.