Food
Last week, I reasoned why Starbucks’ growth plans in China would lay the foundation for the company’s ultimate success in the long-term. Put simply, China will make you rich as a Starbucks shareholder.
The “long game,” as CEO Howard Schultz describes it, includes opening 500 locations per year for the rest of the decade, to build on the 2,000 stores the company has in 100 cities.
But growing its store base isn’t the only plan. While expansion is a driving factor for long-term growth, the company’s plans in the short-term should make shareholders very happy as well: digital growth.
In 2014, Starbucks really started to press forward with its mobile app ambitions. Schultz predicted the drop in mall traffic and strain felt by traditional retailers as a result. While he talked about the revolutionary features the app would bring, the stock price languished, trading sideways for much of the year.
But in 2015, we saw a rejuvenated stock, one that climbed almost 50% as its app-based payment method accelerated sales growth in the U.S. This year, look for Mobile Order and Pay to be the driver in the U.S., and for delivery to boost results next year. It’s why the Americas segment boasts such strong same-store sales growth, up another 7% last quarter despite growing comps 7% in fiscal 2015.
To say the company’s digital efforts have made an impact would be an understatement. It increases the brand strength, encourages higher spending, more loyalty and gift card loading. It was a total game-changer, and it remains that way today.
That’s why taking it over to China will make an enormous impact.
Several times, and most recently in the latest quarterly conference call, Schultz has referenced that the company is bringing its digital presence across the Pacific.
I am more convinced ever that… as we fully roll out our new partnerships with the leading digital companies and brands in China and leverage our unique digital, mobile, card, gifting, and loyalty programs across our business in China later this year and ultimately across CAP overall, we will perform at even higher levels of success and profitability in the future than we do today.
Although revenues respectfully climbed 18% and 14% in China/Asia-Pacific last quarter, I would look for a deeper mobile push in China to be like gasoline on the fire.
Taking a peek at the most recent conference call from Alibaba (NYSE:BABA) sheds some light on the mobile/online retail world of China (bold emphasis added):
So retail sales is going against the grain of what many consider to be a decelerating economy. And that’s because the shift of the Chinese economy is going from investment-driven to consumption-driven… e-commerce penetration continues to grow and that is largely because Alibaba is behind driving that penetration of online commerce. And we’ve seen a very massive shift of users going online, that’s because of the advent of the mobile device.
Starbucks is also a beneficiary of this move, even though sales aren’t done online necessarily, but through a mobile device. I know this doesn’t seem like a big deal to some, but when shares were trading sideways throughout 2014, that’s when the company was gearing up to unleash its mobile potential.
Despite the doubters, Schultz continued to stress the “flywheel effect” that Starbucks’ digital efforts would create, and boy was he right. It has propelled the Americas segment to new heights and it will continue to do so going forward.
There’s no reason China will be any different. Although recent comps in CAP have been disappointing by many analysts’ expectations, I think this will help to drive them higher later this year and throughout fiscal 2017. Given that CAP comps have been underwhelming this year, it should also be a low bar to hurdle next year.
So while increasing the store footprint in China is the right thing to do for the long-term, the digital expansion was absolutely necessary for the short and intermediate term. Especially for such a big and technologically-driven Chinese market.
