Ackman Bets China Coffee Drinkers Will Be Next Fast-Food Win

(Bloomberg) -- Three years ago, Bill Ackman was shorting China’s currency. Now he’s going long on the country’s coffee drinkers.

Revealing a stake of about 1.1 percent in Starbucks Corp. on Tuesday, Ackman said he thinks China is the U.S. coffee chain’s “single-largest unit growth opportunity,’’ which could help the company’s underperforming shares double in the next three years.

Ackman Bets China Coffee Drinkers Will Be Next Fast-Food Win

“We expect that China will grow nearly twice as fast as Starbucks’ overall earnings and represent an increasingly larger percentage of the company’s earnings,” Ackman said in a presentation at a conference in New York Tuesday.

Starbucks’ shares fell about 2 percent to $56.76 at 9:58 a.m. in New York trading on Wednesday, after spiking Tuesday when Ackman disclosed that his Pershing Square owned 15.2 million shares. His stake is worth about $863 million, as of Wednesday morning.

Ackman will be hoping that the Seattle-based company’s performance follows the path of his other fast-food investments, which have largely been successful for the billionaire activist. His gamble on Restaurant Brands International Inc., the owner of Burger King, Tim Hortons and Popeyes Louisiana Kitchen, has been a bright spot for Pershing Square. The company’s share price has increased about 270 percent from the hedge fund’s average cost of $16 each since it merged with Justice Holdings in 2012, according to an investor presentation earlier this year.

An investment in burrito chain Chipotle Mexican Grill Inc. is also starting to pay off after languishing for months in the wake of an illness outbreak and other incidents at the stores. The stock has gained 55 percent this year.

China Growth

China is a major pillar of Starbucks’ plans for growth and a market that it eventually sees as surpassing the U.S. The company is aiming to triple revenue in the country over the next five years and almost double the number of stores to 6,000 by the end of fiscal year 2022.

But there have been bumps in getting that ambitious plan off the ground. Same-store sales in the latest quarter fell 2 percent there as the coffee field becomes increasingly crowded.

In an attempt to reignite growth, Starbucks said it’s joining forces with Alibaba’s Ele.me unit to begin delivery of its drinks and baked goods in China. The chain, which began the pilot last month in Beijing and Shanghai, plans to expand the program to more than 2,000 locations by the end of the year.

Trade War

Some investors are also concerned growth could be hindered if Chinese consumers sour on American brands amid rising trade tensions. As a tit-for-tat trade war heats up, it’s possible China could employ a similar strategy to the one used when South Korea installed a missile defense system -- shuttering stores and factories owned by Korean companies and stoking boycotts.

In his 2016 letter to investors, Ackman said he had built large short positions in China’s currency to “protect the portfolio in the event of unanticipated weakness in the Chinese economy.”

While Chinese consumers don’t seem to be putting down their coffee cups yet, Starbucks is more exposed than many other U.S. restaurant chains because it owns most of its roughly 3,400 stores in the country, rather than selling franchise rights. That could also shield it from a backlash because it’s seen as a good employer and founder Howard Schultz travels to the region often for public events.

Management Changes

“We view the active, engaged dialogue that we have with shareholders as critical input into our strategic approach and we value constructive feedback on delivering long-term shareholder value,” a spokesperson for Starbucks said in a statement. “We look forward to maintaining a productive dialogue with Mr. Ackman as we do with all of our shareholders.”

Last month, the company said it was planning structural changes, including layoffs, starting at the top levels to help make decisions faster. Same-store sales growth in the U.S. has stalled in recent months as consumers spend less in the afternoon and shun Frappuccinos.

Starbucks named a new chief financial officer Monday, Patrick Grismer, who joins from Hyatt Hotels Corp., where he was CFO. In June, former finance chief Scott Maw announced plans to retire this year, which spooked investors already worried about stability after Schultz departed the same month. Ackman cited management turnover and leadership transition as one of the main drags on the share price.

The issues affecting on U.S. same-store sales are temporary though, Ackman said. He’s encouraged by management’s recently announced plans to reinvigorate sales through new premium products, new concepts for boutique stores, healthier offerings and a roll-out of an improved mobile ordering and payment app, according to Tuesday’s presentation.

Undisclosed Position

Speculation began to swirl about a new Ackman bet in August, when he said Pershing Square had built up a position valued at about $800 million in a company he didn’t identify. The 52-year-old pledged in March to end three years of underperformance at Pershing Square, calling its most recent returns at the time “particularly unsatisfactory.”

Last week, Pershing Square reported a net return of 15.8 percent on its investments this year through the end of September, compared with gains of about 8 percent for the S&P 500 during the same period.

©2018 Bloomberg L.P.