Starbucks remains a big winner in China even if a domestic rival sells more coffee there

Published Mon, Nov 20 20233:34 PM EST

Starbucks (SBUX) losing its coffee crown in China to a domestic rival does not diminish the opportunity that the American company has in the world's second-largest economy. Despite a Wall Street Journal report that Starbucks is now No. 2 in China to Luckin Coffee in sales, Jim Cramer said Monday he would be buying Starbucks shares "hand over fist." That's because, Jim added, Starbucks is premium. "You want to be in premium at all times because premium means one thing — no price competition," he explained. Bouncing back from a 2020 accounting scandal and under new leadership, Luckin currently has about 13,300 stores — nearly of them all in China , the Journal reported. Starbucks, which has 6,800 locations in China, plans to grow its store footprint there to 9,000 by 2025. China is Starbucks' second-larget market behind the U.S. In its fiscal fourth quarter ending Oct. 1, Starbucks reported that China revenue increased 8% year-over-year to nearly $841 million. By comparison, Luckin reported sales of $986.8 million for its third quarter ended Sept. 30 . The Journal said the revenue flip first happened in the prior quarter, with Luckin sales of $855 million in the period ended June 30 and Starbucks sales in China of $822 million in the period ended July 2. Luckin, however, is more promotional, offering big discounts that are more affordable for lower-income consumers. Starbucks conversely is higher end, targeting a more affluent clientele. "What matters is how much money they make per cup, not how many stores there are," Jim said. SBUX YTD mountain Starbucks YTD Even though its economy and consumers face headwinds post-Covid, China remains a key growth market for Starbucks. Strong quarterly results on Nov. 2, alongside a bullish update on its Reinvention Plan on the same day, gave investors, like us, confidence in the company's long-term growth targets. The stock soared more than 15% since the market close on Nov. 1 through Friday's finish. We also like that management is looking to cut expenses and increase efficiencies. Starbucks identified $3 billion in cost reductions over the next three years and called out margin expansion ahead. For fiscal year 2024, Starbucks expects China same-store sales to grow 5% to 7%. Given the success of the brand in China and continued strength in the U.S., these numbers seem a bit conservative. Laxman Narasimhan, a longtime consumer products leader who succeeded Howard Schultz as Starbucks CEO earlier this year, has reinvigorated the company, and we see the possibility of the company overdelivering on these expectations. (Jim Cramer's Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

An employee services in a Starbucks coffee truck at Wuhan International Plaza on October 6, 2022 in Wuhan, Hubei province, China.

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Starbucks (SBUX) losing its coffee crown in China to a domestic rival does not diminish the opportunity that the American company has in the world's second-largest economy.