China's sales boost Starbucks' Q2 results

Starbucks Corp — the dominant coffeehouse chain in China's growing coffee market — posted a 26 percent jump in second-quarter profits and raised its full-year earnings outlook, helped by strong sales growth in China and Asia Pacific.

Sales at stores open at least a year rose 8 percent in the region. However, operating earnings remained flat and the profit margin shrank as the United States-based company, whose specialty coffee drinks are popular with China's increasingly wealthy upper and middle class, spent to step up new cafe openings in what has become one of its key segments.

As Starbucks faces more competition globally in the coffee market from fast food chains such as McDonald's, Burger King and Wendy's, it is trying to maintain its appeal to consumers and boost profits by expanding the line of products it sells in its cafes.

To that end, the Seattle, Washington retailer recently acquired the Teavana tea-shop chain, the La Boulange bakery chain and the Evolution bottled juice company. The new products combined with an international expansion plan have boosted profits and produced a string of quarters of double-digit revenue growth.

Starbucks recently opened a food-experience store in Beijing's Oriental Plaza, a premium location. The store serves freshly made food, including beef lasagna, cream of mushroom soup and smoked chicken salad.

"The new store, decorated as a coffee shop in Paris, is targeting Chinese high-end consumers who work nearby and would like to have a nice lunch, afternoon tea or just for a coffee break," said Lory Lu, manager of the store.

Lu added that the company has opened several similar shops in Hong Kong.

Starbucks, which has about 61 percent of the coffee market in China, and expects the country — known for its love of tea — to become its largest market outside the US next year, opened 147 stores in China and Asia Pacific during the latest quarter, a net increase of 64 stores compared with the previous year.

The company's revenue in the region surged 22 percent to $213.6 million, the result of 516 net new store openings in the past 12 months.

Operating income in the region remained flat at $68.3 million, while the operating profit margin fell to 32 percent from 39.1 percent a year ago amid increased investment to "support continued growth in China" and the company's efforts to develop company-owned stores, Starbucks said.

Several chains now crowd the coffee market in China. Since Starbucks' arrival on the Chinese mainland in 1999, other cafe chains such as the United Kingdom's Costa Coffee and Hong Kong's Pacific Coffee Co have tried to snatch market share away from the American leader.

As it expand in China, the number of cafes in the country has doubled to nearly 32,000 in the past five years, according to Mintel Group.