Posted on: Saturday, November 1, 2003

Starbucks sees bright future in China, Japan

By Allen Wan
CBS MarketWatch

TOKYO — Starbucks Chairman Howard Schultz said today that China could be the global coffeehouse chain's biggest market outside of the United States in the future.

In an interview in Tokyo, Schultz also said he expects the company's loss-making Japanese operations to turn profitable in 2004 and thinks the U.S. market still has lots of potential, with growth being driven forward by its focus on Wi-Fi wireless computer technology as well as the introduction of a debit/credit card for loyal customers.

While Starbucks has 1,600 stores overseas and plans thousands more, China and Japan have become key, as the former is among the company's fastest-growing markets and the latter, while slumping, remains its second most important location.

The near-ubiquitous brand has 119 stores spread throughout China despite a very late start. And that's set to grow.

Schultz was upbeat about the company's prospects in China's booming economic growth.

"China will eventually be one of the largest markets, if not the largest market, for us," Schultz said.

Moreover, he said that Starbucks was "making money" in China, justifying the rush into the country by many American companies.

That's not to say the company isn't facing challenges trying to sell a cup of java for the equivalent of about three bucks in a tea-favoring country where the average weekly wage is less than $20.

"The challenges in China are no different from elsewhere," Schultz said, with issues that include "net pricing and general business practices."

Another problem Starbucks and many American companies face is copyright infringement, but Schultz said that was more of a worldwide concern.

Schultz said the coffee chain's Japanese business is getting better. "Things are improving," he said. "We will be profitable in '04."

In the past year, Starbucks Japan reported a net loss of $3.87 million, compared with a profit of $6.76 million in the previous year.

He blamed the Japanese economy and a "self-cannibalizing" cluster of shops in certain areas for the company's recent woes in Japan, along with high overhead costs.

Schultz downplayed the notion that Starbucks is reducing its exposure in this costly country, saying that it expanded the number of outlets during the recent downturn.

"We are ready to open Store No. 500," he said.

Schultz said that the U.S. market remains unsaturated and that Starbucks' emphasis on developing Wi-Fi sites for its customers as well as the launch of the credit/debit card can help drive growth.