How Starbucks Is Brewing Profits In China

Starbucks Corp.

SBUX

is a company known for its coffee and growing like a weed, but when you add China into the equation, the possibilities are "foaming up" to be endless. The company announced this morning that it would be tripling the number of its coffee shops in China during the next four years and step up expansion elsewhere in Asia. Starbucks' Asia Pacific president Jinlong Wang said Starbucks wants to have 1,500 stores in the world's largest country by 2015. It currently has 470 stores. It also wants to have 700 coffee shops in South Korea by 2016. It currently has 370 stores now. "The coffee industry in China has huge potential," Wang told reporters today in Singapore. "China has 5,000 years as a tea-drinking country, but we've created a new coffee culture." "We've seen very strong same store sales across Asia, double digit growth in some markets," Wang went on to say. Starbucks expanding in China is humongous. If it can triple its presence in the world's most populous country in four years, Starbucks should continue to see record profits. In its latest quarter, Starbucks said its international revenues soared 20%. It now accounts for 23% of overall sales, at $2.93 billion. Starbucks shares have held up

very well recently,

in light of the recent market turmoil. With over 17,000 stores in 55 countries, and plans to introduce its Via Ready Brew instant coffee around Asia and Australia, Starbucks plan for brewing wealth appears to be well on its way. Howard Schultz has been one of the most influential and prescient CEO's, and that is reflected in the company's share price. With the deal with Green Mountain

GMCR

back in

March,

Starbucks has been able to move into the highest growing segment of coffee, the single cup market. Now with the continued expansion into China by tripling the number of stores, Starbucks' Schultz has proven to be "a rockstar CEO." Starbucks has crushed its other competitors, teamed up with Green Mountain to take on the single-cup market, and is able to generate higher returns on its products than competitors, which should boast well for the long-term. The company also proved prescient earlier this year, by holding off on buying coffee, as prices were at all time highs. Coffee prices have since fallen sharply, as evidenced by this chart. Shares are down less than 1% on this news, despite the broader markets plunging over 1.5% respectively. Starbucks is trading at 20 times 2012 earnings, and sports 1.4% dividend yield, so shares are not exactly cheap. If the Seattle-based company can execute its plan, shareholders could be brewing profits for years to come.

ACTION ITEMS:

Bullish:

Traders who believe that Starbucks will be successful in its China endeavors might want to consider the following trades:

Trading at 20 times 2012 earnings could prove to be cheap if Starbucks expands faster than expected in China. Consider the common stock or long-dated calls.

This is also bullish for coffee prices, as China is a tea-drinking society. With the potential for 1 billion new coffee drinkers, the only place for coffee prices to go is up. Consider iPath Dow Jones-UBS Coffee Subindex Total Return ETN JO.

Bearish:

Traders who believe that China will not change its ways may consider alternate positions:

Starbucks has 470 stores in the country, but the Chinese notoriously move slow on adapting to changing lifestyles. The massive expansion could fail if China decides to not take to coffee as Starbucks expects.

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