Starbucks flourishes in China

30 January 2012

BEIJING: Starbucks, the coffee house chain, is seeing returns double the investment made in its Chinese stores, and is also enjoying strengthening brand perceptions in the country.

The company's like-for-like sales climbed by 28% in China in the last quarter, and it has recorded growth topping 20% for six consecutive quarters, a process fuelled by organic expansion rather than price rises.

"We have not taken pricing in China. So what you're seeing is real. The comp growth is mainly being driven by transactions," John Culver, president of Starbucks China and Asia Pacific, said on a conference call.

"So what we see is continued acceptance of the Starbucks brand and the Starbucks experience."

In further evidence of this, the firm has seen success with its loyalty card programme, which already boasts nearly 250,000 members. To build on such progress, it is attempting to gain in-depth insights into shoppers.

"We've also added additional investment in China around research and development to really capture the consumer trends in China, and to drive innovation that really is going to be impactful for the Chinese consumer," said Culver.

In the last three months alone, Starbucks opened 48 branches in mainland China. It is currently present in 41 cities across the world's most populous nation.

While volume sales at its Chinese store network, now numbering over 500 outlets, are between half and two-thirds of the comparable figures in the US, this total has improved from roughly a third in the recent past.

Moreover, the company's margins are higher in China than America, partly as a result of the lower costs for labour, power and rent in the Asian market.

"We've made significant investment from a store development standpoint of shifting the resources back here in Seattle and pushing that out into China, into markets of the world much closer and much quicker in the market," Culver said.

Overall, the US multinational's sales-to-investment ratio in China has grown beyond 2.5:1, and the "cash-on-cash" returns yielded by its local branches in their first year of trading are the best in its global system.

"We are ramping up the investment around ... IT systems, as well as supply chain systems and distribution capabilities, and then also, continuing to accelerate the advancement around hiring ahead of the curve, particularly around store operations," said Culver.

Data sourced from Seeking Alpha; additional content by Warc staff