Shares of Starbucks (SBUX) fell nearly 6% on Monday on fears that China could extend its zero Covid policy after President Xi Xi Jinping tightened his grip on power – a potential obstacle for the coffee giant then that he seeks to develop in the second world. greater economy. But we see that this is a short-term setback that actually presents a buying opportunity. To be sure, Starbucks is doing everything it can to increase margins in its US stores by upgrading equipment and redesigning its store formats. However, much of the growth of the coffee retailer’s footprint is tied to China. Management is targeting 9,000 stores nationwide by its 2025 fiscal year, up from around 6,000 today. Starbucks announces that it plans to open a new store every nine hours over the next three years. Why is the coffee chain so bullish on the region despite an uncertain macro environment? Several tailwinds are supporting investment in the region. Some of the most important include: a growing middle class with expanding discretionary budgets, urbanization and, in general, more people drinking coffee every year. About 10 years ago, the average Chinese consumer drank less than 3 cups of coffee per year, according to Starbucks. That number rose to about 10 cups in 2019, 12 this year, and is expected to rise to about 15 cups in 2025. Just 15 cups a year may seem tiny compared to the average American consumer, but it’s a steady increase for a population massive. who doesn’t have many other places to go for coffee. Coffee is a very under-penetrated market in China. It is also becoming increasingly popular with young people. Starbucks said at its recent Investor Day that “coffee is becoming the beverage of choice for young consumers in China.” Another key reason behind Starbucks’ aggressive expansion plans in China is the expected return on investment in its stores. The company estimates the payback period – the time it takes to recoup the cost of an investment – to be less than two years for its new stores. In other words, Starbucks will recoup the money it invests very quickly. While we can’t predict how the market will react to the daily headlines out of China, short-term concerns over Covid politics don’t take away from the company’s long-term ambitions in China. We would be bulls on SBUX weakness today if we weren’t trading restricted, and hope to be able to buy below our average cost base when our trading restrictions allow. (Jim Cramer’s Charitable Trust is long SBUX. See here for a full stock list.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS, OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
A Starbucks store is seen inside the Tom Bradley terminal at LAX airport in Los Angeles, California.
Lucy Nicholson | Reuters
Shares of Starbucks (SBUX) fell nearly 6% on Monday on fears China could extend its zero Covid policy after President Xi Xi Jinping tightened his grip on power – a potential hurdle for the coffee giant as it seeks to grow in the world’s second largest economy.
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