More than 2000 Starbucks China stores have been closed to protect staff and customers from the coronavirus outbreak, including its giant Shanghai Roastery.
“We currently have over half our stores closed in the market,” said Starbucks Inc group president, international, channel development and global coffee & tea, during an earnings call on Tuesday.
“We are assessing this each and every day. We do have delivery available to customers from stores that are remaining open. But again, this is something that we continue to assess every day… This is a very complex situation.”
The unprecedented network closure comes as the deadly coronavirus spreads beyond its epicentre of Wuhan in the Hubei province across China. As at 9am ICT Thursday, there were 7892 confirmed cases of infection the vast majority in Mainland China. To date, there have been 170 deaths, all on the mainland.
Starbucks China’s widespread store closures coincided with the release of the parent company’s first-quarter figures which showed 5-per-cent global same-store-sales growth, including 3-per-cent growth in China. The company has more than 4100 stores on the mainland and 31,795 globally, adding a net 539 during the quarter to December 29, 167 of those in China. Consolidated net revenues of US$7.1 billion grew 7 per cent year on year.
“Taking care of our partners”
During the earnings call, Culver said the closures were ordered because the company was making sure it was taking care of its partners, their health and well being, as well as the customers.
“As the situation has accelerated, we’ve taken action to close stores, both working with the local government in the direction that they’ve given us, but then also proactively closing stores in the country.”
The stores will reopen when it is considered safe, but Culver indicated Starbucks was not yet sure about the potential impact of the closures on its second-quarter performance.
“It really is difficult to say at this juncture, what the impact to our business will be and how it will show up in our financials. Given the fluidity of the situation, the business impact is largely a function of two things – the number of stores closed and the duration of closure – and with respect to the duration, it’s not entirely in our control. We will need to move beyond the extended Chinese New Year holiday season to assess how the situation may be stabilising, and what the implications are. We’re probably looking at early March at the earliest to reasonably assess the implications for revenue operating income and EPS for our second quarter and for the full year at the very latest will provide an update in conjunction with our Q2 earnings release on April 28.
“As a company, we’ve navigated complex situations before and in China we feel there’s no other company that’s better positioned to navigate this given our relationship that we’ve been able to build with our partners, and the relationship and trust that they’ve been able to build with their customers.
“We will remain transparent as the events continue to unfold. But we do have complete confidence in the decisions that we’re making. We’ve been in the market for 20 years and we have built an admired and trusted brand. And we will continue to play the long game in China, as we navigate in the coming weeks and months.”
China growth focus shifts
Meanwhile, Starbucks executives say they are focusing on lower tier cities to maintain its Chinese market growth. Of the 167 stores opened in the December quarter, 46 per cent were in tier 1 and 2 cities, the balance in tier 3, 4 and 5 cities.
“We continue to make investments in those cities, playing the long game, clearly when we opened our first few stores, there’s a lot of demand for Starbucks coming into those cities, as we continue to build out the footprint,” said Culver. “What we’ve seen historically, is that the total transactions obviously continue to grow and volumes volumes show up as very similar to some of our outer tier one cities.”
Delivery services – available in 3500 stores, or about 80 per cent of its network there, were also paying dividends.
“We see it as an incremental for these existing customers as well as attracting new customers in total dollar profits, continue to increase because of it, and slightly margin diluted, but it does provide a higher ticket, as well as a higher food attach,” said Culver.
“And we also see stronger demand in the morning, and during the lunch [period].”