Coffee lovers in Mumbai have one more coffee shop to frequent as Starbucks (Nasdaq:SBUX) opened its first store in India on October 19. The coffee giant is opening two more locations in Mumbai and then a small number in New Delhi in early 2013. CEO Howard Schultz wouldn't elaborate as to how many stores it ultimately plans to open. Given how much it has on its plate right now, throttling back on expansion is probably a wise decision. Growth will come and when it does, it will be one more feather in the Starbucks earnings hat. Investors take heed.
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Since Starbucks hit 10-year lows in 2008, its stock has been on a tremendous climb; gaining 144% in 2009, 41% in 2010 and 45% in 2011. Year-to-date it's up just 4.2% due to concerns about its growth prospects and the fact it appears to be biting off more than it can chew, taking on too many projects all at once. The contrarian in me enjoys the uncertainty because where there are questions, there's also opportunity. Starbuck's stock has lost 26% of its value ($12.3 billion) since it hit its 5-year and 52-week high of $62 back on April 16. I don't know what your definition of a correction is, but mine includes a 26% drop over seven months. In fact, prior to hitting its high in April, its greatest high on a monthly basis, it had increased for eight consecutive months beginning in August 2011. It was bound to retreat. Going back a decade, the last time it went on a run like that was between May 2003 and February 2004 when its monthly high increased for nine consecutive months.
Having very little to do with the movement of its stock in the past, the company's recent tax disagreement with U.K. tax authorities could be a drag in the future. Reuters disclosed that Starbucks has paid £8.6 million in taxes since 1998 on £3 billion in revenue. As a result, British MPs are calling for an investigation because Starbucks' own financial personnel are on record stating it was profitable as far back as 2007. Schultz has indicated that it would cooperate in any formal investigation. Personally, I find it odd that anyone in the UK would focus on Starbucks when its worldwide tax rate is 31%, far higher than many U.K. multinationals. Speculation is that this is some sort of tax avoidance scheme perpetrated at the highest levels of Starbucks management. Personally, I think it's much ado about nothing. Maybe the Lords should focus on BP (NYSE:BP) or some other nefarious British corporation.
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Starbucks enters the Indian market in a 50/50 venture with Tata Global Beverages, one of the many tentacles of India's Tata Group, a conglomerate bigger than most. When the deal was originally announced in January the joint venture's plans called for 50 store openings in the first year alone and 3,000 within several years. Clearly the three stores it is opening in 2012 is a big step down, but that's not a bad thing. The competition in India is very intense, with Café Coffee Day leading the way with 1,360 stores throughout the country. Some estimates suggest it operates as many as two-thirds of the coffee outlets in India. Partnering with a company familiar with India was a wise decision even though new rules allow for 100% foreign ownership.
The big advantage for Starbucks in India is the experience gained in China over the past 13 years. China, like India, is a tea-drinking nation. It had to create a demand from nothing. In India, consumption is booming so education won't be as necessary. Helen Wang is an expert on China's middle class; she's written a good article in Forbes entitled, "Five Things Starbucks Did to Get China Right," in which she points out that Starbucks committed to China long-term, secured local partners and customized its product offering for Chinese tastes. It's doing the exact same thing here, including spending six months in Seattle coming up with a blend Indians would enjoy. I'm confident Indians will gravitate to its friendly customer experience. As a good Canadian, however, I'd like to see Tim Horton's (NYSE:THI) enter the Indian market at some point. But that's another matter altogether.
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The Bottom Line
With the exception of a short time in early August, Starbucks hasn't traded below $45 since late last year. If it dips below $45, I'd be buying, as it's cheaper than most of its competition, tax dodge or no tax dodge!
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.