Starbucks plans big expansion in China

He also said the Seattle-based chain was eager to crack the potentially lucrative Indian and Vietnamese markets, where it doesn't yet have a presence.

"Asia clearly represents the most significant growth opportunity on a go-forward basis," said Mr. Schultz, in an interview.

Starbucks has searched for new areas of growth following a deep retrenchment in the U.S. during the past year, which involved Starbucks closing hundreds of underperforming stores and shaving nearly $600 million of costs.

Mr. Schultz says the company has turned its fortunes around, allowing it to now shift its attention to international markets. In January, Starbucks reported its first quarter of same-store sales growth since the end of 2008.

But he said the company would plan its China growth carefully. "Over time there will be thousands of stores in China," said Mr. Schultz. "But it's a complicated market that requires significant discipline and thoughtfulness."

Despite its long presence in the Chinese market -- Starbucks opened its first shop in Beijing in 1999 -- the coffee company only has 376 stores on the China mainland, compared with 878 in Japan.

"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 Mr. 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."

In Japan, Starbucks's biggest market after the U.S. and Canada, the company has undertaken a similar strategy of cost-cutting, though the chain hasn't been nearly as aggressive at closing outlets.

Overall sales in Japan for the current fiscal year that ended on March 31 are forecast to have stayed flat at 96.4 billion yen ($1.03 billion) from a year earlier. But operating profit is forecast to rise 12% to 6.1 billion yen, largely because of cost cuts.

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

But in Japan, where coffee drinking has long been popular and price competition is keen -- a cup of decent coffee can be bought for as little as 100 yen -- 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, a Japanese retailer, launched in January promotions such as offering customers a second cup of coffee for 100 yen 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 original end date of April. Prices for some pastries have fallen -- their size has also shrunk -- to 190 yen from 230 yen.

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 during an interview last week.

Since those days, the company has worked to revise recipes, focusing on items that would please the 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. Starbucks has 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.

Mr. Schultz said 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, which it will start selling Wednesday in Japan.

The chief executive said that after working through problems in its U.S. business during the past year, the company had turned its focus abroad.

"Personally, I am leaning toward taking that learning and discipline to the international market," Mr. Schultz said. "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."