The following article is about Starbucks in Asia and it will focus on Japan and China. I first submitted it to Seeking Alpha, but they wanted something more actionable. Since that’s not the goal for this article (I only want to broaden your understanding), I posted it here on Stockles.com instead.
- Providing overseas information which is often neglected by media and analysts.
- How Starbucks operates in Japan.
- How Starbucks wants to operate in China.
- My thoughts on Starbucks from now on.
This Article’s Goal
The goal of this article is to give information about Starbucks which normally might be neglected by media and analysts. For once, even though I’m a numbers guy, the focus this time will be solely on the Starbucks story. Not on classical investment analysis focusing on profitability, debt, and financial ratios.In doing so, I aim to make it easier for people to understand and create a justified opinion on Starbucks business around the world. Being based in Tokyo, I want to emphasize the situation in Japan and China. Hopefully, I can use some of my experience living in Japan and being fortunate to have traveled to 27 countries to highlight some interesting topics.
Starbucks Q2 Report
There have already been countless written articles on Starbucks after the Q2 report was released. The stock price fell 9% intraday and people were questioning if Starbucks amazing growth story is over. From the report, we could see that Starbucks changed its expectations in global same-store sales from 3% to 1% along with closing 150 stores in the US. Add flat growth in China which previously grew at double-digit numbers and you have a hard nut to crack.
Starbucks’ new CEO, Kevin Johnson, commented on the situation by saying the following:
“While certain demand headwinds are transitory, and some of our cost increases are appropriate investments for the future, our recent performance does not reflect the potential of our exceptional brand and is not acceptable.”
He also stated:
“We must move faster to address the more rapidly changing preferences and needs of our customers. Over the past year we have taken several actions to streamline the company, positioning us to increase our innovation agility as an organization and enhance focus on our core value drivers which serve as the foundation to re-accelerate growth and create long-term shareholder value.”
Starbucks Q3 Report
Starbucks Q3 Report fell in line with estimates and the general tone of the report was more positive.
Our first strategic priority is to accelerate growth in our targeted long-term growth markets – China and the U.S. Our success in each market will be driven by further elevation and modernization of the third-place experience we deliver to our customers and continued expansion of our digital advantage – Kevin Johnson
He continued by stating that he’s 100% confident in their growth strategy in China:
China represents an important part of our strategic growth agenda, and Belinda will share specific detail around the incredibly powerful long-term growth opportunities we are curating in China. While acknowledging a disappointing Q3, I want to be clear that we have 100% confidence in our growth strategy and the sustainability of the leadership position we have built-in the market. Having been in China since 1999, the strength of our brand, the trust we have built with our customers and partners, and our working knowledge of the many nuances of the China market uniquely positions us for continued long-term success.
I could go into detail on the $25 billion buyback program and other positive financial news, but I want this article to have a grander topic. Clearly, since Starbucks opens a new store every 15 hours in China, they have a long-term plan, but it might not always be so easy for foreign people to understand the situation overseas. Let’s try to explain how Starbucks operates in Asia, with a focus on Japan and China.
Starbucks in Japan
The Japanese culture is amazing, yet somewhat peculiar. There are many things to say about Japan which would be mind-blowing for most people, but there are three specific points which I think are very valuable with respect to thinking of the future outlook for Starbucks.
1. Acceptance of only buying one product.
The first being the acceptance for staying at a Starbucks for a very long time without buying more than one product. You see, in Japan, it’s very common to go to a café and buy one coffee and stay there for several hours. The staff will never ask you to buy multiple products and they are totally fine with people having empty cups occupying tables when there are new customers waiting.
At first, I thought this was very strange and being a shareholder of Starbucks, almost upsetting. Starbucks clearly lose a lot of customers operating this way, but it serves its purpose which point number two highlights.
2. Space is very limited.
Space in Japan is very limited. In Tokyo, there are more than 13 million people living in the main area. For the sake of comparing, there are 2.8 million people living in Rome which is about half the size of Tokyo. Most people live in very small houses without desks and several family members sharing a living space. It’s even common for students to live home even after they have found a job.
Finding space to work or study is often a difficult task and that’s why everyone appreciates and finds great value in Starbucks offer. You will often hear students saying that they never study at the school library but rather prefer to work at Starbucks. My initial thought was that they must spend tremendous amounts of money if they stay all day studying at a Starbucks store. Boy, was I wrong!
The truth is that Starbucks is more like a second home for many young people. And I totally understand this. Before I moved to Japan, I knew little about Starbucks other than that I would greatly overpay for my coffee if I went there. Now, when I have tons of emails to answer, Starbucks is one of my first choices to work or just hang out with friends.
So What’s Starbuck’s secret?
So What’s Starbucks’ secret, you ask? Silence. Total silence. It’s almost insane how little noise there is in a Starbucks store. Even in McDonald’s, it’s total silence and in so, it’s a great place to work in or read a book. In many ways, those shops have replaced libraries which offers the same possibilities, but the stores are much easily accessible.
So, how much value should one put on the customer to client relationship? What about the power of branding? The increased value in intangible assets? Surely, Starbucks is playing the long game by creating a great customer relationship which they hope to harness from in the future.
Since I mentioned intangible assets, I thought I could explain it a bit more. Starbucks is a brand company. As the company described themselves:
“Starbucks is a passionate purveyor of coffee—and everything that goes with the coffee shop experience—rooted in connections, and aiming to inspire the human spirit”
And the brand value has increased year after year:
In Starbucks’ annual report for 2017, we can see that their total assets are worth $14.366B as of 1sh of October. Further, Starbucks Corp’s intangible assets for the quarter that ended in Mar 2018 was $5.022B. My takeaway from this is Starbucks has enormous values in intangible assets and I even find it likely that the number is too low. The academic measurement for finding a “correct” value of intangible assets are still in the early days and will most likely be of greater importance in the future.
3. Starbucks is more than just coffee.
Thirdly, Starbucks isn’t just about coffee. In most stores, you can buy a variety of bagels, sandwiches and even bacon pies for around $3 or $5. What that means is that people go to Starbucks, drink a coffee for $4, eat lunch and take a second coffee without feeling that they have spent too much money. If I did the same in Norway, my budget would easily be broken but here in Japan, it’s quite affordable. The total package means that Starbucks in Japan is a place you can go to escape the daily life while getting your work done and enjoying a warm cup of coffee with a tasty sandwich.
The takeaway from Japan
In total, Starbucks stores are packed in Japan and the amount of people buying different products from the Starbucks product pipeline is huge. Starbucks offers a total package which is in high demand: A space to hang out and work from, tasty and affordable food, and a variety of drinks which is highly needed in a country were both space and time is limited. In many ways, one could argue that Starbucks in Japan sets the norm for how the future will look like when one considered a growing global population.
Starbucks in China
The second country I want to mention is China. As we know, the growth in China is currently slowing down. However, some of the troubles will most likely be solved when Starbucks established a partnership with a new large tech company which should be placed by the end of 2018. Management is also positive and maintains the goal of at least 20% revenue growth in China.
So, what about China?
We all know that the macro points at increased BNP in the future means there will be an increased amount of richer people in China.
One should note that there’s talk about a potential bubble in China, but according to the article “A Real Estate Boom with Chinese Characteristics. Journal of Economic Perspectives”, it’s not very highly likely. They conclude that a housing price crisis might happen, but Chinese invest for the long run and are not heavily leveraged.
China seems somewhat safe, but what about expenditure?
Some people argue that they don’t drink coffee in China. Well, I think people will demand Starbucks coffee because it shows status and wealth. My understanding, after watching rich Chinese people buy luxury brand after luxury brand, is they deeply care about status and that the neighbors know you’re rich. I don’t see this stopping in the future.
Starbucks uses the same strategy in China as in Japan
One of the reasons why I talked about Japan was that Starbucks uses some of the same strategies in China as in Japan. Let’s just recap quickly:
- Acceptance for only buying one product and staying at the store
- People need a place to do work or engage in meetings
- Starbucks pipeline is far more than just coffee
That Starbucks uses the same strategy as in Japan is especially true when we talk about space and creating an environment for working and socializing with friends. Starbucks wants to build huge café where people can hang out and relax. They know that customers will do this while drinking only maybe one or two coffees a day, but they will return day after day. Starbucks knows this because they know that customers demand it and need a place to stay during the day. If you though Tokyo was crowded, wait until you see Beijing or Shanghai.
I know this wasn’t the traditional Seeking Alpha article where we talk about valuation metrics and financial statements. However, sometimes, it’s the story that’s important. I believe most people don’t understand Starbucks’ long-term plan and I will continue to hold this great company in my portfolio for a long time. If you enjoyed this article, please feel free to follow this blog and hit me up on Seeking Alpha to start discussing with me!