19 October 2018
Starbucks has 27,000 stores worldwide, up 12,000 from a decade ago. Photo: Bloomberg
Starbucks has 27,000 stores worldwide, up 12,000 from a decade ago. Photo: Bloomberg

Starbucks hits the wall after aggressive expansion

After growing into a cafe chain giant with a market value of over US$80 billion in the last four decades, Starbucks has apparently hit the limit of its expansion.

Its latest quarterly profit slumped 16.7 percent year on year, the biggest slide in almost a decade.

Starbucks reported its earnings dropped by less than 1 percent to US$5.7 billion in the fourth quarter ended October 1. However, its operating profit plunged by 16.7 percent to US$1.02 billion. This marks the company’s first decline since 2008 financial crisis, a result that is far worse than market expectations.

Starbucks had been enjoying a golden decade until recently. Its revenue doubled to US$22.4 billion in 2017 from US$10.4 billion in 2008, while operating profit jumped more than fivefold to US$4.35 billion from US$660 million. Its share price soared to US$56 from US$5 in 2008.

The weak quarterly result was due in part to Hurricanes Harvey and Irma, which forced Starbucks to close 1,100 locations for a period, according to chief executive Kevin Johnson.

The company is also facing increasing competition.

Starbucks has around 8,000 shops in the United States, its largest market. However, it struggles to deliver growth in the country amid fierce rivalry with Blue Bottle or other boutique and high-end coffee shops. Meanwhile, McDonald’s is stealing its market share in the low-end segment.

As a result, its US market revenue dropped 2 percent in the last quarter.

Meanwhile, Starbucks’ foray into the tea business backfired.

Trying to figure out new ways to sustain growth, the coffee chain acquired tea drink chain Teavana for US$620 million in 2012. However, the plan to replicate the success of its coffee business in the tea segment has failed to work.

It decided to sell its Tazo tea brand to Unilever and shutter all Teavana locations by early 2018.

China is supposed to a new growth engine, but it’s not an easy market. Starbucks owns 1,400 shops across China, its second-largest market, and is adding more than 200 outlets every year.

However, it’s always tricky for foreign multinational food companies to do business in China as they have to adapt to local tastes. Dealing with local partners and government officials are complicated tasks, too.

Its China-Asia Pacific division posted a mere 2 percent revenue growth in the latest quarter, contributing little to the bottom line despite the huge expansion costs.

Currently, Starbucks has 27,000 stores worldwide, up 12,000 from a decade ago, compared with 3,400 shops owned by its largest rival Costa Coffee.

Perhaps Starbucks has already reached a point where it does not make sense to keep growing bigger.

Despite the disappointing earnings report, Starbucks remains a dominant force in the trade and its current P/E of 28 times is not demanding.

But investors probably cannot regard it as a growth stock anymore.

This article appeared in the Hong Kong Economic Journal on Nov. 6

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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