Starbucks chairman and CEO Howard Schultz (R) and Japanese actress Shinobu Terashima promoting Starbucks in Japan, where Starbucks has 878 stores. The coffee giant has just 365 stores on the Chinese mainland. (Tomohiro Ohsumi/Bloomberg)

Dow Jones Newswires-Wall Street Journal | Howard Schultz, the
CEO of Starbucks Corp., said China is set to usurp Japan as its
second-biggest market, as the American coffee titan plans to open
“thousands” of stores in China over the next few years.  Schultz also
said the Seattle-based chain was eager to crack into the potentially
lucrative Indian and Vietnamese markets, where it does not yet have a
presence.

“Asia clearly represents the most significant growth opportunity on a go-forward basis,” said Schultz, in an interview with the Wall Street Journal. “India and Vietnam are two markets we’d like to get to at some point. We are still at the embryonic stages of what Asia will be for the company.”

Despite its long presence in the Chinese market–Starbucks opened its first shop in Beijing in 1999–the Seattle coffee giant only has 365 stores on the Chinese mainland, compared with 878 in Japan.

“Over time there will be thousands of stores in China,” said Schultz. “The foundation we have built over the past ten years will serve us well. But it’s a complicated market that requires significant discipline and thoughtfulness.”

Following a significant retrenchment in the U.S., which involved Starbucks closing hundreds of underperforming stores and shaving nearly $600 million of costs, the company has turned its fortunes around, allowing it to now turn its attention to its international market. In January, Starbucks reported its first quarter of same-store sales growth since the end of 2008.

“Given the crisis (in North America) and the issues we had to solve, the focus and attention was on transforming the U.S. business. We have now done that,” said Schultz. “Personally, I am leaning toward taking that learning and discipline to international market.”

In Japan, Starbucks’s second-biggest market, the company has undertaken a similar strategy of cost-cutting, though the chain hasn’t been nearly as aggressive at closing its ubiquitous outlets.

Overall sales in Japan for the current fiscal year that ended on March 31 is forecast to have stayed flat at 96.4 billion yen from the year before. But operating profit is forecast to rise 12 percent to Y6.1 billion yen, due largely to cost cuts.

Now there appears to be a tentative turnaround in sales as well. Same-store sales in February in Japan rose for the first time in 15 months. The ubiquitous coffee chain plans to open 50-60 more stores in the country this year.

But in a country saddled with pernicious deflation, where a cup of decent coffee can be bought for as little as Y100, it has been a challenge keeping Japanese consumers loyal to the Starbucks version, which costs three times as much.

To counter this problem, Starbucks Japan, which is a joint venture with Sazaby League Ltd. (7553.JA), a Japanese retailer, launched in January promotions such as offering customers a second cup of coffee for Y100 if they purchase a coffee beverage earlier the same day.

It proved to be so successful that the company has extended the deal until August, from an earlier date of April. It has started to make some pastries smaller–some muffins have shrunk in Japan and so too have their price tag, to Y190 yen from Y230.

Starbucks, which entered Japan in 1996, has also worked over the years to customize its menu to cater to local tastes and bring costs down by procuring more ingredients locally. In the beginning, the company imported most of its food items into Japan from the U.S. “The food wasn’t good–the items were too big and the texture was dry,” Norio Adachi, its director of corporate affairs and marketing in Japan, said in an interview last week.

Since those days, the company has worked to improve upon its offerings, focusing on items that would please the discerning Japanese palate. Some recent seasonal offerings included a Sakura Steamer (steamed milk with syrup, invoking the Japanese name for the cherry blossoms currently in season) and a Roasted Green Tea Latte. They’ve also been selling a sakura steamed bun filled with red bean paste.

Analysts say the next challenge for Starbucks in Japan and in Asia, more broadly, is fine-tuning marketing in a region populated by young people who hungrily surf the internet on their mobile phones. “The leading coffee shop companies are not as advanced as some of their fast food counterparts at monetizing their customer base by collecting and analyzing consumer data collected via mobile and PC digital marketing initiatives,” said Brian Salsberg, a partner at McKinsey & Co. in Tokyo.

Schultz says the company will continue to grow in the Japanese market, by adopting new store formats, such as drive-throughs, and introducing new products, such as its Via instant coffee that it will start selling from Wednesday in Japan. But he says China is the next frontier of growth for the company.

“Cracking the code in China for any company is not an easy task–there will be a number of winners and lots of losers of people who go there and rush to judgment and don’t succeed,” said Schultz. “The thing I am most interested in when I go to China is whether or not local Chinese are buying Starbucks coffee and sitting in our stores.”