Starbucks remains the big winner in China even though a domestic competitor sells more coffee there

By Waseem Akram On Nov 21, 2023

Starbucks (SBUX) will not lose its coffee crown in China to a domestic competitor, reducing the opportunity that the American company has in the world’s second largest economy. Despite a Wall Street Journal report that Starbucks is now No. 2 in China to Luckin Coffee in sales, Jim Cramer said Monday that he would buy Starbucks shares “hand over fist.” That’s because, Jim said, Starbucks is high quality. “You always want to be at a premium because premium means one thing – no price competition,” he explained. Bouncing back from the accounting scandal of 2020 and under new management, there are approximately 13,300 stores Luckin currently has – almost all of them in China, the Journal said. Starbucks, which has 6,800 locations in China, plans to grow its store footprint there to 9,000 by 2025. China is the Starbucks’ second largest market behind the US In its fiscal fourth quarter ending Oct. 1, Starbucks reported that Chinese revenue rose 8% year over year to nearly $841 million. In contrast, Luckin reported sales of $986.8 million for its third quarter ended Sept. 30. The Journal said the revenue turnaround first occurred in the previous quarter, with Luckin’s sales of $ 855 million in the period ending June 30 and Starbucks sales in China of $822 million in the period ending July 2. discounts that are more accessible to consumers with lower incomes. Starbucks on the other hand is more upscale, targeting more affluent customers. “What matters is how much money they make per cup, not how many stores there are,” said Jim. Mountain SBUX YTD Starbucks YTD Even though its economy and consumers are facing post-Covid headwinds, China remains a key growth market for Starbucks. Strong quarterly results on November 2, along with a supportive update on its Recovery Plan on the same day, gave investors, like us, confidence in the company’s long-term growth targets. The stock was up more than 15% from the market close on November 1 through Friday’s close. We also like that management is looking to cut costs and increase efficiency. Starbucks highlighted $3 billion in cost reductions over the next three years and called margin expansion ahead. For fiscal year 2024, Starbucks expects same-store sales in China to grow 5% to 7%. Given the brand’s success in China and continued strength in the US, these numbers seem a bit conservative. Laxman Narasimhan, the longtime consumer goods leader who succeeded Howard Schultz as CEO of Starbucks earlier this year, has revitalized the company, and we see the potential of the company over-delivering on those expectations. (SBUX is long Jim Cramer’s Charitable Trust. See here for a full list of stocks.) As a subscriber to the CNBC Investment Club with Jim Cramer, you will receive a trade alert before Jim trades. Jim waits 45 minutes after submitting a trade alert before buying or selling stocks in his charitable trust portfolio. If Jim has discussed a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE HOUSE CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND OUR PRIVACY POLICY, INCLUDING OUR DISCLAIMER. NO RESPONSIBILITY OR OBLIGATION EXISTS, OR IS CREATED, FOR ANY INFORMATION PROVIDED BY JOINING THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR SPECIFICATIONS ARE GUARANTEED.

An employee serves in a Starbucks coffee truck at Wuhan International Plaza on October 6, 2022 in Wuhan, Hubei province, China.

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Starbucks (SBUX) is losing its coffee crown in China to a domestic competitor reducing the American company’s chances in the world’s second largest economy.