SBUX » Topics » • Starbucks is increasingly dependent on the success of its International operating segment in order to achieve its growth targets.

This excerpt taken from the SBUX 10-K filed Dec 14, 2006.
• Starbucks is increasingly dependent on the success of its International operating segment in order to achieve its growth targets.
The Company’s future growth depends increasingly on the growth and operations of its International operating segment. Some or all of the Company’s International market business units (“MBUs”), which Starbucks generally defines by the countries or regions in which they operate, may not be successful in their operations or in achieving expected growth. Starbucks may find business partners who do not share its cultural, marketing or operating philosophies or who are unable to operate the MBU profitably. Some factors that will be critical to the success of International MBUs are different than those affecting the Company’s U.S. stores and licensees. Tastes naturally vary by region, and consumers in new international markets into which Starbucks and its licensees expand may not embrace Starbucks products to the same extent as consumers in the Company’s existing markets. Occupancy costs and store operating expenses are also sometimes higher internationally than in the United States due to higher rents for prime store locations or costs of compliance with country-specific regulatory requirements. Because many of the Company’s International operations are in an early phase of development, operating expenses as a percentage of related revenues are often higher, compared to U.S. operations. The Company’s International operations are also subject to additional inherent risks of conducting business abroad, such as:
  •  foreign currency exchange rate fluctuations;
  •  changes or uncertainties in economic, social and political conditions in the Company’s markets;
  •  interpretation and application of laws and regulations;
  •  restrictive actions of foreign or United States governmental authorities affecting trade and foreign investment, including protective measures such as export and customs duties and tariffs and restrictions on the level of foreign ownership;
  •  import or other business licensing requirements;
  •  the enforceability of intellectual property and contract rights;
  •  limitations on the repatriation of funds and foreign currency exchange restrictions;
  •  lower levels of consumer spending on a per capita basis than in the United States;
  •  difficulty in staffing, developing and managing foreign operations due to distance, language and cultural differences; and
  •  local laws that make it more expensive and complex to negotiate with, retain or terminate employees.
•  The China market is important to the Company’s long-term growth prospects — doing business there and in other developing countries can be challenging.
Starbucks expects the People’s Republic of China to be its largest market outside of the United States. Any significant or prolonged deterioration in U.S.-China relations might adversely affect the Company’s China business. The Company’s growing investments in its China operations will increase the Company’s exposure in this market.

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Many of the risks and uncertainties of doing business in China are solely within the control of the Chinese government. China’s government regulates the business conducted by Starbucks through its subsidiaries, joint ventures and authorized licensees by restricting the scope of the Company’s foreign investments within China and the food and beverage, retail, wholesale and distribution business conducted within China. Although management believes it has structured the Company’s China operations to comply with local laws, there are substantial uncertainties regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights in China. If China’s governmental authorities were ultimately to conclude that Starbucks has not complied with one or more existing or future laws or regulations, or if their interpretations of those laws or regulations were to change over time, the Company’s affiliates could be subject to fines and other financial penalties or forced to cease operations entirely. Moreover, it could adversely affect the Company’s business if it is unable to enforce its intellectual property and contract rights in China’s courts.
Additionally, Starbucks plans to enter selected markets in other developing countries (such as Russia and India) as an important part of the projected growth of the International operating segment. Some of those markets pose legal and business challenges similar to the China market, such as substantial uncertainty regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights.
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