How Much Growth Awaits Starbucks in China?

Starbucks (NAS: SBUX) CEO Howard Schultz predicts that China will eventually be Starbucks' biggest overseas market. With more than 745 company-owned and licensed stores in Greater China, Starbucks plans to open thousands more over time. However, don't expect a Starbucks to pop up on every street corner in China anytime soon.

Starbucks' near-term growth in China will be more strategic than explosive. This is because paying near U.S. prices for a venti drip is currently not an option for most Chinese, but rather a luxury for a concentrated few. Before you decide to invest in Starbucks, do yourself a favor: Figure out how big the company's addressable market in China truly is and measure the company's growth prospects accordingly. Even the most simple back-of-the-napkin calculation can give you valuable perspective.

Roughly 1.3 billion people live in mainland China. The trend toward urban migration has left China's population roughly split 50/50 between urban and rural households, with urban workers earning 3.33 times more than rural workers on average. GDP per capita in 2010 on a purchasing power parity basis was the equivalent of $7,600 in Chinese yuan. Given these inputs, we can estimate that urban and rural per capita incomes in China average about $11,690 and $3,510, respectively, compared to U.S. GDP per capita in 2010 of $47,200.

Now here's the rub. A small cappuccino in Beijing costs 18 RMB, or about $2.20. That's close to the $2.75 I pay for my small cappuccino here in Alexandria, Va. Given that the average urbanite in Beijing earns approximately four times less than the average American, the cost of a cup of Seattle's finest is disproportionately higher for the average Beijing citizen. In other words, relative to their incomes, Beijing residents pay roughly four times more for their small cappuccino than we do here.

Ask yourself: Could you afford a $9 small cappuccino every time you visited Starbucks? Imagine the dread associated with taking your girlfriend out for a small cappuccino and her asking for a venti mocha Frappuccino instead! As for rural workers in China, they earn 13.5 times less than we do on a per capita basis. Suffice to say that they would have to take out a small bridge loan to finance their Starbucks experience.

Per Capita GDP: China

Per Capita GDP: U.S.

U.S. / China Income Multiplier

$ Price of a Small Cappuccino at Starbucks, Beijing

U.S. Relative Cost to Income Equivalent




6.21 times





4.04 times




13.45 times


Source: CIA World Factbook, YesChinaTour.Com, author's calculations.

Reconsidering what the market for Starbucks is in China? Good! Let's dive a little deeper.

The World Bank classifies countries or regions into four categories based on income and other requirements. To earn a spot in the World Bank's top "Developed With High Income" category, a country or region must have a 2010 gross national per capita income of $12,276 or higher. This high-class group includes Western European countries and the United States. According to the World Bank, only 2.2% of China's population (roughly 29.4 million people) concentrated around the urban centers of Beijing and Shanghai falls within this category.


Lower Bound

Upper Bound

Regions of Income Concentration

% of Pop.

Total Pop. (millions)

High income



Beijing and Shanghai



Upper middle



Coastal provinces (Tianjin, etc.)



Lower middle



Northeast and part of North China



Low income



Regions of Central and Western China





Source: World Bank China Report.

The tremendous income disparities that exist within these cities don't help Starbucks' growth prospects, either. According to statistics recently released by China's Ministry of Finance, the assets held by China's wealthiest 10% of families make up 45% of urban residents' total wealth. The majority of residents living in Beijing or Shanghai can't afford a Starbucks latte any better than their country cousins.

The above data suggest that the current market for Starbucks coffee is much smaller than some would have you believe. Proponents of growth point to Starbucks' strong gain in popularity among expatriates and a new breed of home-grown entrepreneurs. However, the allure of an exclusive luxury coffee shop by definition cannot translate to the masses. So unlike Yum! Brands (NYS: YUM) or McDonald's (NYS: MCD) , which have succeeded in appealing to families with children in China's urban centers, Starbucks seems to be pursuing a strategy destined to limit its customer base.

Even with these impediments, the rapid growth of China's middle class still points to a tremendous opportunity for the company in the next 20 years. International growth through China could also help reinforce its dominant position in the U.S. over competitors such as Peet's Coffee & Tea (NAS: PEET) , Caribou Coffee (NAS: CBOU) , Green Mountain Coffee Roasters (NAS: GMCR) , and Dunkin' Brands (NAS: DNKN) . However, beware of the shamans and witchdoctors who would have you believe that all of China's 1.3 billion residents represent the market for Starbucks coffee. This simply is not the case.

You can make many arguments for Starbucks' greatness as an investment: Howard Schultz's leadership, a globally recognized brand, strategic licensing agreements, and yes, of course, international expansion. All of these have already made Starbucks grow into a corporate giant. However, gone are the days where Starbucks can grow its top-line revenue at a compounded annual clip of 20%, lest it take over the world's economy in the not-so-distant future.

Judge this great company in the context of a corporate stalwart, and keep in mind that its Chinese growth may prove more lukewarm than it seems.

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At the time thisarticle was published Yervand Khoraniandoes not own shares in any of the companies mentioned in this article.The Motley Fool owns shares of Starbucks and Yum! Brands.Motley Fool newsletter serviceshave recommended buying shares of Starbucks, Yum! Brands, McDonald's, and Green Mountain Coffee Roasters.Motley Fool newsletter serviceshave recommended creating a lurking gator position in Green Mountain Coffee Roasters.Motley Fool newsletter serviceshave recommended shorting Peet's Coffee & Tea. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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