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Starbucks' tepid results boost pressure to go big in China

Friday, July 28, 2017 - 09:18

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Starbucks Corp's latest quarterly sales missed Wall Street's projections in much of the world, putting new pressure on the company's plan to turn China into its biggest growth engine.

[NEW YORK] Starbucks Corp's latest quarterly sales missed Wall Street's projections in much of the world, putting new pressure on the company's plan to turn China into its biggest growth engine.

Same-store sales increased 4 per cent last quarter, missing the 4.8 per cent estimate of analysts, and the company cut its profit guidance for the full year. Starbucks also admitted defeat in its effort to run a chain of tea shops, saying it will shutter its Teavana stores, a move that will eliminate 3,300 jobs.

The tepid results sent shares plunging and followed Starbucks' agreement earlier Thursday to buy out its East China joint venture for US$1.3 billion, the biggest deal in the company's history. This will allow it to take full control of 1,300 cafes in the world's most populous country, where it sees a nascent coffee culture becoming a huge market.

With Starbucks reaching a saturation point in many places, China looms larger than ever as key to the chain's prosperity.

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"The growth opportunity in China is unparalleled," Kevin Johnson, the company's chief executive officer, said in an interview.

Excluding some items, earnings amounted to 55 cents in the in the third quarter, which ended July 2. That matched analysts' estimates. Revenue climbed to US$5.66 billion, short of the US$5.76 billion projection. Starbucks sees profit for the full year at US$2.05 to US$2.06 a share, down from previous guidance range of US$2.09 to US$2.12, because of slower growth in the US.

The earnings report sent Starbucks shares down as much as 6.8 per cent to US$55.45 in extended trading. The stock had gained 7.2 per cent this year through Thursday's close.

Tea remains more popular than coffee in China, but Starbucks is making inroads. Same-store sales - a key benchmark - rose 7 per cent in the country last quarter.

Starbucks currently operates about 2,800 locations in China, with plans to hit 5,000 by 2021. And the business there will eventually be bigger that its operation in the US, Johnson said.

Mobile-App Snags Starbucks' same-store sales have risen for seven straight years, but slowing growth has put Johnson under pressure. The former technology executive, who took over from longtime CEO Howard Schultz in April, also has been contending with other headaches.

The company's popular mobile app has created traffic jams at its cafes, with customers bunching up in pickup areas. Mr Johnson said on Thursday that Starbucks has added "digital order managers" to 1,000 stores and has improved its ability to quickly serve customers who order and pay through their phones.

The sales gain in the US was 5 per cent, which Mr Johnson said was fueled in part by customers ordering more food. The coffee purveyor has been making a push to sell more edibles for years, with meals and snacks now accounting for about 21 per cent of US sales. But the effort has been marked by stumbles, including menu misfires and complaints that food was too pricey or the portions were too small. The growth in food sales in primarily coming at lunch, Mr Johnson said.

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