Starbucks shares crashed 7% on Friday in line with a host of other stocks. Not only were sales lower than expected, but Starbucks announced that is was closing all its Teavana stores. It decided to close all 379 Teavana stores due largely to sales being lower than expected. While planning to shut down the majority of Teavana locations by spring 2018, Starbucks is looking to China.
While still selling the bottled Teavana products, Starbucks plans to purchase the 50% stake of its Chinese business from its JV partners. This involves the expenditure of $1.3 billion, the largest acquisition the firm has ever purchased. The underlying reason for this is the rapid growth of online shopping.
Most Teavana stores are situated in shopping malls, one of the reasons why back in 2012 it seemed a good acquisition for $620 million. Things have changed now! Increasing numbers of people are shying away from shopping malls, and looking to online firms such as Amazon. With Amazon’s purchase of Whole Foods, grocery shopping will also tend towards the internet rather than shopping malls. Starbucks feels that sales will drop even more, China seeming the best bet for growth.
An indication of how Starbucks strength is waning is its rating reduction by Stifel from ‘hold’ to ‘buy.’ Another warning to the company was the poor Starbucks shares performance over the past year. A 2% increase in Starbucks shares in the year to Thursday 27th July compares badly to the S&P 500 14%. In fact, a number of analysts have downgraded Starbucks, and the company has taken action to reverse this trend by offloading Teavana.
China has been a lucrative investment for many different types of companies. It is regarded as a frontier for companies seeking rapid growth. China is a country that has only relatively recently opened its borders to western firms. Nevertheless, it is also one with massive potential for consumer goods, particularly coffee and tea!
However, China may also be a risk for Starbucks, but one that it is prepared to take. Starbucks shares crashed partially because of the Teavana closures and low sales figures. It appears to be taking the right steps to resolve these issues. Time will tell.
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