How Starbucks (SBUX) Is Getting Itself Back On Track In China In Wake of COVID-19

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Starbucks (SBUX) is at the cusp of turning 50 years old. Over the past five decades, it has redefined coffee by introducing the concept of “third place” and has delivered ethically sourced and high-quality coffee experience to its customers globally. Today, as the world fights a pandemic, here’s a look at how Starbucks is getting back on track in China and preparing itself for times ahead.

Starbucks in China

Starbucks entered China back in January 1999. Today, there are over 4,200 stores in 177 cities in mainland China, employing over 57,000 partners (employees are referred to as partners). However, its journey in China has not been an overnight success and involved many invisible investments towards its partners (such as flexible hours, covering preventive care and health premium premiums) as well as local farmers.

Starbucks has worked closely with China Farmer Support Center (FSC) and local coffee farmers in Yunnan Province since 2012. The first Starbucks Single-origin Yunnan Coffee was introduced in China in 2017. Starbucks called this an important milestone in the completion of “Starbucks China supply-chain, delivering premium coffee from bean to cup.” It continues to deepen its commitment in the forms of agronomy training and other measures to uplift farmers out of poverty.

During its first investor meeting in China in 2018, Starbucks unveiled its plans for expansion in the mainland, which included building 600 net new stores annually over a five year period (2017–2022). The company also announced plans “to more than triple revenue and more than double operating income in China by the end of FY2022, relative to FY2017 levels.”

China is the fastest-growing market for Starbucks outside the U.S. and the second-largest market overall. The country contributes approximately 10% to Starbucks’ revenue based on Q1 FY2020 data.

Amid COVID-19

Wuhan, a city in China, has been the original epicenter of COVID-19. Different outlets and factories in Wuhan along with other provinces were shut down to control the spread of the outbreak of coronavirus. Half of Starbucks stores were closed by January’s end. In early February, the closures peaked 80% as a result of coronavirus spread and Chinese New Year holidays.

China has fought COVID-19 hard and after weeks of disruption is slowly getting back to normalcy, and so are businesses like Starbucks. In its annual shareholder meeting (March 18), the company announced that 90% of its stores, which were temporarily shuttered, were opened in China and that the figure has now moved up to 95% with safety protocols being followed. While things will take time to get back to pre-coronavirus days, the process has begun.

Starbucks’ optimism and commitment to the long-term growth potential in China remained intact during the crisis period. And even before stores started to reopen, the company announced its plans to invest approximately $130 million in China to open a state-of-the-art roasting facility in 2022, as part of its new Coffee Innovation Park (CIP). This will be the company’s largest manufacturing investment outside of the U.S. and its first in Asia.

The CIP will incorporate “a roasting plant, warehouse, and distribution center, creating highly-skilled jobs and new career opportunities that will further drive smart and sustainable coffee manufacturing in China.”

Lessons from China

COVID-19 wasn’t just a crisis in China; it is now a pandemic. Starbucks has dealt with the coronavirus for almost ten weeks in China. As the recovery is unfolding in mainland, Starbucks is applying the lessons learned in China to the U.S. and Canadian markets. To encourage social distancing, Starbucks closed the majority of its cafés and moved to a “to go” model across the U.S. and Canada. As cafés are being closed, exemptions to those serving in or around hospitals and health care centers are being made.

Starbucks is serving its customers using drive-thru and delivery capabilities. Like in China, Starbucks will pay all partners for the next 30 days, whether they choose to come to work or not. In addition, Starbucks continues to offer mental health and sick pay benefits, childcare support, and more. The certainty about the economic future is huge in such hard times, and Starbucks is providing that comfort to its people.

Final Word

Starbucks expects a COVID-19-related headwinds of approximately $400 million to $430 million to China’s revenue in Q2 FY20 versus prior expectations, according to its special SEC filing. Likewise, the impact of closures in the U.S., Canada and other markets will impact the revenue. Having said that, these will be temporary setbacks. Starbucks is confident about its financial strength to manage this testing time. To boost investor confidence, a repurchase of up to 40 million shares of the company’s common stock was recently authorized (in addition to 16 million shares under an existing authorization as of December’s end).

Kevin Johnson, CEO of Starbucks, said, “We are a resilient and enduring company by staying true to our Mission and Values with a purpose that goes beyond the pursuit of profit.” He added, “Not every decision is a financial one.”

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