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Starbucks, China and Overdevelopment

Stocks in this article: SBUX

By Ash Bennington, Special to

As you may have read recently in the Wall Street Journal, Starbucks is planning to open 1,000 new stores in China.

In many ways, it's a heartwarming tale: Starbucks is a true American -- and now international -- business success story. After going public a little less than two decades ago, Starbucks (SBUX) now has a market capitalization of over $20 billion. And the success of Starbucks has been more than merely financial: Not only have they managed to reinvent coffeehouse culture, but they've maintained many of the core progressive values the company grew up around. (The best-known example of this is probably Starbucks commitment to providing health insurance to its employees -- even those who work only part-time -- a topic Starbucks Chairman Howard Schultz recently spoke of with justifiable pride in an interview with the New York Times.)

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Superimpose this inspiring narrative of financial and cultural success onto the hot Chinese emerging markets growth storyline and the results are sure to be something to anticipate with great expectations. Well, perhaps not.

Before analyzing the Asian storyline, it is useful to understand a bit of the domestic back story concerning Starbucks' retail growth.

In the summer of 2008, as the US economy ground into recession, Starbucks announced it would be closing 600 stores in the United States. The over-development of Starbucks retail locations was so great that, as the Seattle Times pointed out, "Most customers whose Starbucks stores close will be a short walk from a caffeine fix, the company said, because many of the unprofitable stores were being cannibalized by nearby Starbucks locations."

At the time, I was working at an investment bank on the corner of Lexington Avenue and 57th Street. When I would go to the Starbucks on the southwest corner of the intersection for my morning coffee, the view from the front window was -- as you may have guessed -- a building with yet another Starbucks, just across 57th street, on the northwest corner of the intersection.

(In the interest of full disclosure: Starbuck's coffee continues to fuel my daily scribblings.)

Some business writers had begun to question whether all the retail locations that Starbucks had opened had begun to dilute the brand. Others saw a connection to the housing bubble, as this New York Times article from July of 2008 points out:

"Another problem for Starbucks , according to analysts and brokers, was that many of the newer stores were in areas of potential but unrealized population growth. The housing crisis derailed much of that planned development, in many cases putting the company in the position of waiting for new traffic patterns that never materialized."

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