Starbucks Earnings Analysis: Our projections and insights on a new Chinese competitor, looking to take over.

  • Starbucks reported $6,633 million revenue and $1,016 million operating income in 1Q19.

  • Starbucks has expanded to 3,684 stores in China (163 net new stores opened in Q1) while native competitor, Luckin Coffee is trying to takeover Starbucks.

  • The coffee shop market in China is predicted to double the size in the coming 6 years.

1Q19 result

Starbucks reported $6,633 million in revenue and $1,016 million in operating income in 1Q19. Operating margin ration was at 15.3%.

Starbucks’s sales grew by 9.2% in 1Q19. The sales from franchise stores have contributed to the company’s sales growth rate around 10%. In Q1, the sales of company-operated stores increased 13.3% versus the prior quarter.

North America is the biggest business segment of the company, which gained $4,606 million in revenue in 1Q19. However revenues from China/Asia Pacific segment grew 59.7% over Q1 FY17 to $1.2 billion in 19Q1, primarily driven by the ownership change in East China at the end of 18Q1. The company switched all of the licensed stores in China, which East China used to manage, to own-operated stores.

Business Situation in China

Same store sales in China dropped to 1.0% in 1Q19 versus 6.0% in 1Q18, but sales were increased by 91.2 % to $651.8 million.

Starbucks opened 163 new stores in 19Q1, bringing the total number of stores to 3,684. In the last 4years and 3months, the company added 2,317 stores in China.

In the meantime, Luckin Coffee, a Chinese fast growing chain coffee shop, has opened more than 2,000 stores in China since the company started their business from Jan 2018 challenging to takeover Starbucks.

Starbucks’ Primary China Competitor: Luckin Coffee

Luckin Coffee obtained over 125 million customers in just one year by huge amount of campaigns, such as first cup of free coffee, buy 5 cups for 5 cups free coffee.

The company already opened 2,073 stores by the end of 2018, which is more than half of all the Starbucks’s chain stores in China. CEO of Luckin coffee said they are aiming to have more than 4,500 stores by the end of 2019 and challenge to become the largest coffee chain company in China.

Currently, the company is heavily burning money fast. It is said the cost per cup of coffee for Starbucks is around 20 RMB, and this number is supposed to be around 30 RMB for Luckin.

Luckin reduced their price in the range of 21 RMB to 27 RMB, and it is assumed the average price is around of 10 RMB because of their free coffee and other campaigns, which means Luckin would lose about 10 RMB every cup of coffee they sell.

The company says it is not worried about profits as it moves to challenge US rival Starbucks’s dominant position in the country’s fast-growing market. Luckin had their second round of fund raising and raised $200 million in December 2018. The company now has a valuation of over $2 billion.

Partnership with Alibaba

Starbucks announced the strategic partnership with Alibaba in August 2018. Starbucks is planning to provide services using the Alibaba’s customer-facing mobile apps, including Taobao, Alipay and Tmall. Also Starbucks started the delivery service using, an UberEATS-style delivery platform of Alibaba Group.

Starbucks opened the world’s biggest store in Shanghai. This store is the first Starbucks in the world to offer an augmented reality (AR) experience to customers and they can get the detail information of the products.

Cost structure

Looking into the company-wide cost structure, there are no big in the past few years. The company spent approximately 70% of revenue to cover cost of sales and store operating expenses. However, specifically in China/Asia Pacific segment, the company’s sales cost ratio was increased to 26.7% in 1Q19 from 17.9% in 1Q18.

Balance Sheet

Starbucks valued total asset at $24,156 million (+$9,790 million compared to Sep 2017). It is primarily due to the increase of long-term debt and deferred revenue.

The market size of the coffee shop in China is predicted to double the size in 6years; grow to 47.9 billion RMB by 2023 versus 20.9 billion RMB in 2017.

According to Starbucks’s forecast, annual revenue of FY2019 will be between $25,955 million and $26,450 million. By the end of 19Q1, the company achieved 25.6% of the forecast assuming the target as $25,955 million.

The company is planning to open approximately 2,100 new Starbucks stores globally, nearly 600 in China, in FY2019 while Luckin Coffee is planning to expand to 4,500 stores in total by the end of 2019.

The original article was published by Stockclip, Inc. on 25/01/2019.

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