Starbucks CEO Howard Schultz confident in China bet despite turmoil

Worries about the Chinese economy are rocking markets the world over, but Starbucks CEO Howard Schultz says he’s confident in Beijing’s policymaking – and that his coffee empire is still betting big on the Asian superpower.

“China is here to stay,” Schultz said during a conference call with analysts after the company’s earnings report, which showed a slowdown in growth for Starbucks’ hitherto red-hot China-Asia Pacific segment. “The buffeting the Chinese economy is taking during today’s period of transition is necessary for it to move into its next stage of development.”

Analysts and market movers have been either befuddled or unimpressed by recent Chinese government moves to stabilize its volatile stock market, stimulate faltering growth and nudge the economy from manufacturing toward consumption and services.

But Schultz, who visited China for a big employee event last week, disagrees. “I strongly believe the Chinese government’s commitment to true economic reform is genuine,” he said.

His comments underscore how Starbucks – still largely reliant on its North American home base – sees its future as a global company with a deep investment in Asia, where it plans to double its number of stores to more than 10,000 by 2019.

In China alone, Starbucks’ second-largest market after the U.S., it plans to have 3,400 stores by that year, versus about 2,000 now. Schultz has said he believes China could one day be larger than the U.S. for Starbucks.

Nevertheless, the company’s quarterly results also show how the business runs at different speeds in various locations, especially in times of global turmoil.

At home things were pretty good – so-called comparable sales, which measure stores that were open a year ago, jumped 9 percent in the Americas, outpacing global growth.

But in the China-Asia Pacific sector sales rose only 5 percent, driven by a 4 percent increase in traffic. That’s down from the 8 percent increase seen during last year’s holidays.

In Europe, comp sales were up a tepid 1 percent, also much lower than the 4 percent seen last year.

Part of the reason is the strengthening of the U.S. dollar versus foreign currencies as Europe and China deal with economic issues. But political instability also plays a role. Chief Operating Officer Kevin Johnson said in an interview that the November terrorist attacks in Paris had a chilling effect on traffic for a time.

“In some of Western Europe’s largest cities we saw some declines in transaction during that period,” Johnson said.

This month Starbucks also found itself in the midst of a terrorist attack, when a bomb injured four customers and a security guard at a Starbucks in Jakarta, Indonesia.

Starbucks’ results “show a marked polarization in performance across the globe,” said Carter Harrison, an analyst at Conlumino, a retail-research firm. The company, which has had a stellar performance since the recession, “will need to work harder to ensure that these gains are not diminished by the deteriorating environment in Asia and the lackluster performance in Europe,” Harrison said.

Starbucks brought home $5.37 billion in sales, up 12 percent from the same period last year, and a record, and 46 cents per share in earnings (down from 65 cents in the previous year, a period that had posted a strong gain from the purchase of a joint venture in Japan.) Analysts had forecast revenues of $5.39 billion and profits of 45 cents per share.

Comparable sales rose an eye-popping 8 percent across Starbucks’ global empire. About half of that increase came from additional store visits.

Despite the relative weakening of international growth, the results show continued momentum for the company, which has bet big on online efforts such as a mobile ordering and payment tool, and reward deals with partners such as Spotify and the New York Times, in order to keep drawing in new customers.

When talking about digital initiatives, Schultz once again brought up China. When the company rolls out its mobile-ordering pay and initiatives there, “The adoption we believe we’re going to have in China is going to be more significant and quicker than in the U.S.,” the executive said.

In North America the company got a big boost from holiday giving. The company said 1 in 6 American adults received Starbucks gift cards during the holiday quarter, versus 1 in 7 last year. In total, $1.9 billion were loaded onto the cards in the U.S. and Canada, an 18 percent bump.

That revenue is not recognized instantly, only as it’s spent. But it is a signal of future consumption, and also draws new members into Starbucks’ loyalty program as the recipients of these gift cards load them onto their mobile apps. Active Starbucks rewards customers rose 23 percent to 11.1 million, Johnson said.