24/7 Wall St. Insights

• The new Starbucks Corp. (NASDAQ: SBUX) CEO may fix many things.
• He cannot fix Starbucks’s difficult challenge in China.
• Also: Dividend legends to hold forever.

Starbucks Corp. (NASDAQ: SBUX) investors believe that when Chipotle Mexican Grill Inc. (NYSE: CMG) CEO Brian Niccol took the top job at their coffee chain company, their problems would be over. Earnings would suddenly improve, and the stock would make a miraculous recovery. Niccol may be able to restore better in-store service and improve the Starbucks loyalty program. He cannot fix Starbucks’s difficult challenge in China, which it once believed would be its largest market.

In 2022, Starbucks said much of its future expansion would come in China and that its goal was to have 9,000 locations in 2025. Today it has about 7,000. Rival Luckin Coffee has over 16,000 in over 240 cities. The market is highly fragmented. The World Coffee Portal puts the total number of coffee shop locations in China at just about 50,000.

For Starbucks to improve its China fortunes, it has to reverse a steep drop in sales there. In the most recent quarter, comparable store sales in the country dropped 14%, and revenue dropped 11%. Another Starbucks statement highlighted the importance of improvement: “At the end of Q3, stores in the U.S. and China comprised 61% of the company’s global portfolio.”

One of the things investors sometimes overlook when evaluating a company’s prospects is whether there are issues that management cannot overcome, no matter how great their strengths are. Starbucks China’s problems are likely to be among these. It has a much larger local competitor, improving its lock on the market every day.

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