Coffee "too much water": what is Starbucks' profit margin?

Following McDonald's and Yum, Starbucks plans to triple the number of its stores in China over the next three years, as the domestic market begins to saturate.

The move suggests that Starbucks needs to keep its revenues growing if it wants its shares to maintain relatively high valuations. Starbucks' price-to-earnings ratio is now much higher than that of McDonald's and Yum!

Starbucks shares are relatively highly valued, but its revenue growth is not that much higher than that of McDonald's and Yum.

Another worry: so far, Starbucks' profit margins in its overseas operations are much lower than those in its domestic operations.

Overseas expansion is indeed difficult. Of course, the chief executives (CEO) of all large multinational companies like to think of themselves and their companies as global market participants. But the long-standing reality is that companies that enter foreign markets often fail to achieve the level of profitability they enjoy at home. Their prospects may seem global, but they are still outsiders in overseas markets and often enter overseas markets late. Of course, sometimes companies only need to be large enough in overseas markets. But companies often face more serious obstacles if they want to make handsome profit margins overseas.

WMT, for example, currently derives all of its growth from its international operations, but the profit margins of its overseas operations are poor compared with those of its domestic operations in the US.

McDonald's and Parkson have been operating in China for many years. Yum's KFC is far better than its competitors: KFC has 3701 stores in China, compared with 1500 at McDonald's.

Yum, which has a total of 4500 KFC and Pizza Hut stores in China, has an operating margin of 16 per cent, slightly lower than the 20 per cent of its international business, excluding China, and roughly the same as that of its US operations.

For Parkson, same-store sales at Chinese stores jumped 19 per cent in the 2011 fiscal year to December 31, compared with a 1 per cent decline for US stores. Why did Yum's KFC become a big brand in China and decline in the United States? Bloomberg Businessweek explains this rare situation.

McDonald's does not separately list the profit margins of its China operations. The operating margin of the company's direct stores, which includes Asia, the Pacific, the Middle East and Africa, is lower than that of its direct stores in the United States, with 17.3% for the former and 20.6% for the latter. McDonald's stores in China are mainly directly operated by the company.

Starbucks now has about 500 stores in China and plans to increase to 1500 by 2015, according to the Wall Street Journal.

In its 2011 fiscal year ended Oct. 2, 2011, Starbucks'US business had an operating margin of 19.4 per cent, dwarfing the 13.3 per cent operating margin for its international operations. Starbucks also did not separately list the profit margins of its China operations.