My English grandparents would often say “Not for all the tea in China” which is an old expression that equates to “all the money in the world.” Tea came to England from China and India back when Marco Polo had to carry it on a donkey but the country became addicted fast and for centuries England had a tea economy.
Now this didn’t happen all at once but, even in America, we have a passing familiarity with the East India Tea Company. Founded in 1600, the company gained a monopolistic control over India and the surrounding countries and eventually grew so large it had its own army! It was the East India Company’s tea that our patriots dumped in the river during the Boston Tea Party .
So love them or hate them, that East India Company made a lot of money for a couple of hundred years, that’s longer than most empires last. Like many empires the demise of the EIC was a result of overexpansion (in their case into being a quasi government).
But I titled this all the coffee in China for a reason. Sales of coffee in china is rising 50% per year and the vanguard of this expansion are two foreign companies: Manabe, a Japanese concern and Starbucks, our local boys made good. between 2000 and 2004 Starbucks China business increased 814% and they are just getting started with a little over 100 outlets out of their 10,241 worldwide total.
The big knock on Starbucks has been that people won’t keep paying that kind of premium for coffee but we have seen this year that they will. Gas can go to $3.50 a gallon but Starbucks will still have a record quarter. Frankly, it makes the coffee seem cheaper when it’s less than a gallon of gas!
But can Chinese customers afford that?
#1 – They pay less than we do. Employees are Starbucks’ largest expense and cheap Chinese labor allows them to sell much cheaper coffee over there. Don’t forget, Starbucks is in the business of exporting coffee, the shops are just bonus money for them.
#2 – It’s cool. Starbucks is the Al’s Diner (Happy Days) of China. Where the heck else are they gonna go? Heck, we go to Starbucks and we have our own cappuccino machines at home with 40″ TV’s in our living room and cool stereos and stuff, yet still we go there! China is like Happy Days with very few places for kids to get together so they all commune in the local hangout which is starting to be Starbucks.
#3 – Friends. On the TV show, those people spent their lives in the coffee shop. Chandler and Joey had money but Phoebe and Rachel were always broke but they could all hang out at the coffee shop all day long. China’s disparate economic classes need a common place to gather and Starbucks fits the bill as it’s cool enough for any yuppie but still cheap enough for everyone to hang out and spend whatever money they had.
If Starbucks pulls back to $28, I will consider it a gift and load up on Jan ’08 30s which should fetch around $6. I will hold that and sell the short calls for the next couple of years for a very nice income stream.
In Wall Mart’s case, I think this is as low as you will get it for a while so I am going to take the Jan ’08 45s for $9.90 and just let it ride. WMT is selling for less money that it was in 2000 when sales and earnings were 1/2 of what they are now.
So Starbucks has gone pretty much straight up from $2 in 1996 to $32 today. Although it did have a great run from $23 since Sept. 19th, it is just now trading at last December’s high and I think it has a little more to go, probably to a new high of about $34 before it pulls back.
It is the pullback I am waiting for to take a very long position as I think there is no stopping this stock from doubling in the next 3 years and that may be conservative.
I will save some time writing another article that would be almost identical by just giving you the title: All the Diapers in China. The biggest difference between Wall Mart and Starbucks is that Wall Mart already employs more people than the US Army!
