Starbucks CEO says the company is ‘playing the long game in China’

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(CNN) — New competition and a slowing economy aren’t scaring Starbucks away from China.

“We are playing the long game,” said CEO Kevin Johnson on an earnings call Thursday. “We remain bullish on our path in China and the growth that lies ahead.”

China is Starbucks’ fastest-growing major market, and the company has expanded aggressively in the country. China poses unique risks to Starbucks: Customers may not want to pay for pricey coffees, considered a luxury product in a market with a nascent coffee culture, and local chains are gaining ground.

One, Luckin, has opened about 2,000 locations across China over the last year. It plans to have 4,500 outlets by the end of 2019, which would take it ahead of Starbucks to become China’s biggest coffee chain.

Starbucks isn’t too worried about the new competition.

“We respect all competitors,” said John Culver, group president of International, Channel Development and Global Coffee & Tea, told CNN Business. “As people enter the market, they help to bring awareness of overall coffee consumption into the market,” he noted. “That’s a positive thing.”

Rapid growth has been helping boost sales. In China, comparable store sales increased 1% in the last three months of 2018. Most of that growth was driven by new store openings: Starbucks now has about 3,700 stores in 158 cities in China, a growth rate of 18% over the past year.

The strategy has led to some store cannibalization, said Neil Saunders, managing director at GlobalData Retail, in a note. New Starbucks stores stealing sales from one another, plus competition from Luckin, “will inevitably weaken both the return on investment and productivity growth from Chinese stores,” he said. Still, “China remains a clear area of opportunity.”

To better compete in the region, Starbucks is also leveraging partnerships with Alibaba’s Hema supermarkets and digital platforms. It offers delivery in over 2,000 Chinese stores.

In the United States, Starbucks recently expanded its delivery partnership with Uber Eats. US comparable store sales increased 4% in the last quarter of 2018, and Starbucks Rewards membership grew to 16.3 million in the United States. Sales amounted to $6.6 billion in the quarter.

Other companies are expecting their businesses to suffer in China because of a weaker economy. Earlier this month, Apple CEO Tim Cook said in a recent letter to investors that the company had been blindsided by “the magnitude of the economic deceleration” there. The auto industry could also take a hit.

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