Starbucks reports strong growth in China

Starbucks Corp, the dominant coffeehouse chain in China's growing coffee market, posted a 26 percent jump in fiscal second-quarter profit and raised its full-year earnings outlook, helped by strong sales growth in its China/Asia Pacific segment.

Sales at stores open at least a year rose 8 percent in the region. But operating earnings remained flat and the profit margin shrank as the US company, whose specialty coffee drinks are popular with China's increasingly wealthy upper and middle class, spent to step up new cafe openings in what has become one of its key segments.

As Starbucks faces more competition globally in coffee from fast food chains such as McDonald's, Burger King and Wendy's, it is trying to maintain its appeal to consumers and boost profit by expanding the line of products it can sell in its cafes. To that end, the Seattle, Washington retailer recently acquired the Teavana tea-shop chain, La Boulange bakery chain and Evolution bottled juice company. the new products combined with an international expansion plan have boosted profit and produced a string of quarters of doubledigit revenue growth.

Starbucks, which has about 61 percent of the coffee market in China, and expects the country known for its love of tea to become its largest market outside the US next year, opened 147 stores in China/Asia Pacific during the latest quarter, for a net increase of 64 stores compared with a year ago. Revenue in the segment surged 22 percent to $213.6 million, the result of 516 net new store openings in the past 12 months, Starbucks said. Operating income remained flat at $68.3 million. the operating profit margin fell to 32 percent from 39.1 percent a year ago amid increased investment spending to "support continued growth in China" and the company's effort to develop company-owned stores, Starbucks said.

Several chains now crowd the coffee market in China. Since Starbucks' arrival in the Chinese mainland in 1999, other cafe chains such as UK's Costa Coffee and Hong Kong's Pacific Coffee Co have tried to snatch market share away from the American leader. As the companies expand in China, the number of coffee cafes in the country has doubled to nearly 32,000 in the past five years, according to Mintel Group.

China's newly wealthy consumers see Starbucks and its pricey coffee drinks as a symbol of success, according to Paul French, chief China-market strategist at UK marketresearch firm Mintel Group. "Starbucks is the place where you go if you have cash and want to flash it," the analyst told Advertising Age. "The new middle class can sit there and look out the window and drink their Frappuccino and say, 'We've made it.'"

With 18,000 outlets worldwide, Starbucks currently has more than 800 stores in 58 cities in the Chinese mainland, or two-thirds its 12,000 US stores. It expects to open 300 stores in China this year as part of a plan to launch 1,500 cafes in 70 cities by 2015.

Although Starbucks has delivered strong growth in the Americas and Asia, where it has accelerated new cafe openings, Europe has remained a weak spot.