Starbucks Asia performance concerns

Starbucks’ latest overall figures look impressive- but this first set of results of its new fiscal year show a marked polarisation in performance around the globe.

In the Americas, the company’s largest market, sales and profits powered ahead. However, the same cannot be said of both Europe and China, where the results were far more subdued.

Turning first to China and Asia Pacific, at first glance the results do not look too bad, with revenues up by a very solid 32 per cent. However, most of this increase is attributable to incremental revenues from the acquisition of Starbucks Japan early in the last fiscal year.

A significant 885 net new store openings across the region also helped to boost top line growth.

Despite this there are two areas for concern. The first is underlying sales growth, which at 5 per cent has come in below expectations; the concern is that some of this is related to a general slowdown in China which, if part of a longer term trend, could harm company earnings.

The second is the margin position which has deteriorated because of higher wage costs and the change of ownership of the Japanese operation.

Turning to the Americas: Despite having been accused of “declaring war on Christmas”,  Starbucks’ results showed much more holiday cheer than its generic red cups. Across the region revenue rose by a very respectable 11 per cent, underpinned by 9 per cent comparable growth.

Operating income also rose by 14 per cent. Tweaks to the menu which saw the inclusion of some more expensive drinks options and an enhanced range of food helped to drive up average ticket across the period.

The American results were particularly impressive given the warmer weather across most of the holiday period. That this did not deplete sales underscores the habitual nature of Starbucks and its importance as a small indulgence for many of its regular customers. This loyalty has, in our view, been further strengthen by strong take-up of the mobile app which encourages and stimulates regular buying.

Within Europe and the wider EMEA region, the net addition of 79 stores did little to bolster overall revenue which declined by 6 per cent on a year-over-year basis. Admittedly much of this was related to unfavorable exchange rates but some is also attributable to weak underlying sales growth at existing shops. The impact on profits has been negative, something further exacerbated by the shift to developing more licensed stores which operate at a lower margin than company-owned outlets.

Looking ahead, initiatives such as the evening sale of alcoholic beverages and an enhanced food menu, will help to further drive productivity in US stores.

However, Starbucks will need to work harder to ensure that these gains are not diminished by the deteriorating environment in Asia and the lackluster performance in Europe.

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