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Starbucks' (SBUX) Strategic Efforts to Drive Long-Term Growth

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Starbucks Corporation’s (SBUX - Free Report) strategic initiatives in the United States and China along with best-in-class loyalty programs and digital offerings are expected to drive profits. However, dismal performance at the Europe, Middle East and Africa (EMEA) region and soft channel development sales are concerning.
 
Delving Deeper

China Asia Pacific or CAP has now become Starbucks’ fastest-growing segment. Improving customer experience via innovative new store designs, up-leveling product offerings and margin expansion through process and supply chain efficiencies are driving CAP’s performance. China has delivered comps growth of 1%, 3% and 6% in the first, second and third of fiscal 2019. Management believes that China and the Asia-Pacific region will drive much more meaningful business growth over the next five years supported by rapid unit growth, growing brand awareness and increased usage of the digital/mobile/loyalty platforms.

To drive growth in China, the company has announced a historic partnership with Alibaba for providing seamless Starbucks Experience. Starbucks began delivery services in Beijing and Shanghai via Alibaba's Ele.me platform. Starbucks Delivers program has been expanded to more than 2,900 stores in China across nearly 80 cities. By the end of 2019, the company expects to expand Starbucks Delivers to 3,000 stores.

Notably, Starbucks' business in China is rapidly growing due to innovative store designs, local product innovations and the success of the MSR program. The company has plans to build 600 net new stores annually over the next five years in Mainland China, which will double the market's store count from the end of fiscal 2017 to 6,000 across 230 cities. This speedy expansion in China is likely to triple its revenues and double its operating profit by the end of fiscal 2022 from fiscal 2017.

Moreover, Starbucks, which shares space with Dunkin' Brands Group, Inc. (DNKN - Free Report) , McDonald's Corporation (MCD - Free Report) and YUM! Brands, Inc. (YUM - Free Report) , holds a leading position in digital, card, loyalty and mobile capabilities.  

Meanwhile, Starbucks’ loyalty cards are gaining popularity. In the United States, the company’s membership increased 11% year over year under the My Starbucks Rewards (MSR) program in fiscal 2017 and rose 15% to 15.3 million active members in fiscal 2018. The momentum continued in third-quarter 2019, with the membership growing 14% year over year to 17.2 million active members. Customers in the United States are using the chain’s mobile app to order and pay for drinks.

Concerns

Sales from the EMEA region have disappointed investors for the third straight quarter. In third-quarter fiscal 2019 sales from the region dropped 11% year over year to $227.5 million at this segment, following a decline of 9% in the preceding quarter. This downside can be attributed to the conversion of the company’s France as well as the Netherlands’ retail businesses to fully-licensed operations and the shutdown of company-operated stores.

Channel Development is another segment that has annoyed investors. Sales at the segment have declined for the fourth straight quarter. In third-quarter fiscal 2019, net revenues at this segment decreased 6% to $533.3 million, following a decline of 21% in second-quarter fiscal 2019. The downturn was due to licensing of the company’s CPG as well as foodservice businesses to Nestlé, following completion of the deal on Aug 26, 2018. Moreover, operating margin contracted 690 bps to 34.1%. Sales have also declined 20% and 6% in first-quarter fiscal 2019 and fourth-quarter fiscal 2018, respectively.

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