By Vishal Gupta — 21 Mar 2026

Starbucks uses these 2 strategies to enter new markets

Debt and partnership.

Starbucks, the largest coffee chain in the world, has an interesting strategy for entering new international markets. In fact, 2 strategies, not 1.

First, they take debt instead of using their cash reserves to open stores in the new market or country. This is fascinating because Starbucks is a cash-rich company. Last year, 2025, their balance sheet showed a cash balance of around $3 billion. This money is enough to open thousands and thousands of new stores each year in both high-cost and low-cost markets.

Second, they don’t go alone when entering a country. They always partner with a local player on the way. In China, they partnered with Uni-President Enterprises and President Chain Store Corporation. In India, they partnered with the Tata Group. In Japan too, they initially entered with a joint venture. Of course, there are obvious reasons for this, like local regulations, understanding local market needs, etc. But there’s also a financial strategy behind this.

Debt

Why use debt when you already have enough cash to fund thousands and thousands of new stores?

Well, that’s because debt is a low-cost source of capital, and cash is a comparatively high-cost source of capital. Which source of capital should a wise company use? Yes, of course, a low-cost one.

Let me explain with an example.

Let’s say Starbucks wants to enter a new country for the first time and open 1,000 new stores. Each store costs $1 million to set up. So, the total investment needed is $1 billion.

Option 1: Use cash

Starbucks has $3 billion in cash reserves.
If it spends $1 billion of cash, shareholders see that money as their capital (of course, rightfully so, the cash reserve belongs to the shareholders).
Shareholders expect a minimum of, let’s say, 10% as a return for the use of their capital. Why? Because that’s what they might earn if they invest the money somewhere else (like index funds). So, 10% is their minimum expectation from Starbucks. In other words, you can say the cost of equity capital for Starbucks is 10%. That’s the cost Starbucks has to pay shareholders to raise or have access to their capital. Now, can we replace the word “equity capital” with “cash”? Yes, it’s simple now: the cost of cash.
So, that means Starbucks must generate $100 million a year (10% of $1 billion investment in the country) just to satisfy the shareholders.
The problem? If the new stores generate $80 million a year (that’s an 8% return, which is lower that shareholders’ minimum expectation of 10%), the shareholders won’t be happy and will sell their shares and invest their money somewhere else.

Option 2: Use debt

Starbucks borrows $1 billion at 5% interest (cost of debt).
After tax of let’s say 30%, the effective cost of debt is 3.5%. (Interest is a deductible expense as per most income tax laws).
Now Starbucks only needs to generate $35 million (3.5% of $1 billion) a year to cover the debt cost (interest).
The advantage? If the new stores generate $80 million a year, that’s a massive surplus of $45 million ($80 million - $35 million) over and above the debt cost. This surplus is value creation for Starbucks shareholders (shareholders get whatever is left after debt costs are covered). Whereas when using cash, to create or unlock value for shareholders, Starbucks must generate more than $100 million a year.

So, cash (equity) is high-cost capital because shareholders demand higher returns (10%) and debt is low-cost capital because lenders only demand interest (3.5% after tax).

Also, if Starbucks uses cash, it risks destroying value for shareholders unless returns exceed 10%. On the other hand, if Starbucks uses debt, it creates value for shareholders as long as returns exceed 3.5%.

Makes sense?

I know you may be confused with the terms “value creation” and “value destruction”. Now, let me go technical and explain what these terms really mean.

Value Creation and Value Destruction

Example: A Small Cafe

You invest $10,000 to start a cafe.
You expect at least a 10% return on your $10,000 investment. Why? Because you can easily earn 10% by investing in stocks or index funds. So, if you’re taking a risk and starting a cafe, you would expect a minimum return of 10%, or why else would you take the risk, right?
For your business, you are the investor who has invested $10,000 and wants 10% in return. So, for your business, 10% is the cost of equity capital.

Case 1: Value creation

The cafe earned $1,200 in profit in the first year. That’s a return of 12% ($1,200/$10,000).
This 12% return is greater than the 10% cost of equity.
The cafe created value (for you) in the first year because you’re earning more than the minimum expected.
That extra $200 ($1,200 - minimum expected profit of $1,000) is like surplus that grows your wealth. Yes, shareholders’ wealth. That $200 belongs to you. You’re happy because that’s more than what you may have earned by investing elsewhere, like index funds or the stock market.

Case 2: Value destruction

The cafe earned $800 profit in the first year. That’s a return of 8% ($800/$10,000).
This 8% return is less than the 10% cost of equity.
The cafe destroyed value (for you) in the first year because you’re earning less than the minimum expected.
You’re disappointed because had you invested the $10,000 elsewhere, you might have earned $1,000.

So, when we say value creation and destruction, we really mean value creation or destruction for shareholders. The extra return or surplus over and above the minimum required return flows back to the shareholders as dividends, retained earnings, or higher share prices.

Now let’s continue this example and assume you took a loan of $10,000 instead of investing your own money.

Cafe example (all debt)

Total investment needed = $10,000.
You borrow the entire $10,000 from the bank.
Cost of debt (after tax) = 3.5%.
Interest payment = $350 a year (this is also your minimum required return because anything above this will create wealth for you since you haven’t invested your own money).
Cafe earns $1,200 profit per year (12% return).
You pay the bank $350 in interest.
Leftover = $850 ($1,200 - $350).
Since you didn’t put in your own money, this $850 is pure upside for you as an owner.

Partnership

This strategy is comparatively easy to understand.

As you may already now return is calculated by dividing profit by invested capital.

Let’s say Starbucks enters partnership with a local player where Starbucks invests just 20% of the capital and is entitled to 80% of profit sharing (through royalties, brand fees, etc.). What happens?

Since Starbucks invests only 20% of the capital but still captures most of the profit, the denominator (invested capital) shrinks dramatically, while the numerator (profits) stays large. This makes the return go up compared to if Starbucks had fully funded the project with no partner.

100% self-funded

Investment: $1 billion.
Profit: $100 million.
Return: 10% ($100 million/$1 billion).

Investment: $200 million (20% of $1 billion)
Profit: $80 million (80% of $100 million)
Return: 40% ($80/$200)

As you can see, the return jumped from 10% to 40% just by partnering.

What are your thoughts? Comment below.