Europe blots Starbucks' strong global growth.
A version of this article originally appeared on our US site, Fool.com.
Coffee purveyor Starbucks' (NASDAQ: SBUX.US) profits rose 18.5% as it got a boost from its operations in the Americas and China. In fact, the company's global same-store sales rose by 7% -- a combined effect of an increase in the number of customers as well as customers spending more per visit.
China powers on
The strongest returns came from China and the Asia-Pacific region, where same-store sales rose by a staggering 18%. It's interesting to note that McDonald's (NYSE: MCD.US) had recently raised some concerns that the sale of "discretionary items", as well as products such as desserts and snacks, were falling in China, with chief operating officer Don Thompson saying McDonald's expected "challenging economic conditions with slow growth in China".
But Starbucks didn't really feel this slowdown as it recorded its seventh straight quarter of growth at a higher-than-20% level. Interestingly, Starbucks chief financial officer Troy Alstead, while speaking about China, said that "we haven't seen any of the slowness that I've heard others talk about". China is the key to Starbucks' growth plans, with the company aiming to make it its second-biggest market after the US by as early as 2014.
The lag
Despite Starbucks witnessing strong growth globally, Europe has been weaker, with same-store sales declining by 1% from the Europe, the Middle East and Africa (EMEA) region. Europe has been a problem area for the world's largest coffee purveyor, as economic conditions in the region haven't been the best and this has taken its toll on consumer spending. The EMEA region accounted for nearly 10% of Starbucks' total revenue; however, it also reported an operating loss of $5.5 million.
The mission to overhaul its European business has been handed over to Michelle Gass, who was recently appointed president of the EMEA region. Though it will look to expand its business in the region, Starbucks will first try to win customers by catering to the region-specific needs of customers in Europe and focus on brand building in the region.
Serving it up
Starbucks' plans to enter the single-serve coffee market with its high-pressure brewer, the Verismo, could help. Many think the Verismo was designed to directly compete with Green Mountain Coffee Roasters' (NASDAQ: GMCR.US) popular Keurig brewer, which has dominated the single-serve coffee market for a while now.
However, Starbucks CEO Howard Schultz said the Verismo was instead intended to rival Nestle's coffee machine. Nestle's Nespresso coffee system, according to Euromonitor data, controls 35% of the global market. The single-serve coffee market is popular in Europe, especially Western Europe. Maybe tapping this market will help Starbucks revive its European business.
Though the situation in Europe isn't the best at present, Schultz hopes to emulate the way Starbucks turned around its business in the US. In fact, speaking on the condition in Europe, he said: "We've seen this movie before, and I'm proud to say it had a very good and positive ending."
Can he turnaround Starbucks' business in a tough European market? I'll wait on the sidelines and watch.
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