Starbucks will be the next McDonald's
Posted May 25th 2007 8:12PM by Georges Yared
Filed under: Forecasts, Products and services, Consumer experience, Competitive strategy, Starbucks (SBUX), McDonald's (MCD)
Who has the audacity to say that ... even think it? Nobody is bigger than McDonald's Corp. (NYSE: MCD). After all, didn't McDonald's change the way we Americans eat? Didn't fast food and drive-thrus become the norm? Didn't McDonald's capture the hearts and, therefore, the appetite of every little kid with its Happy Meals and Ronald McDonald character? Didn't McDonald's even say that the world was ready for their menu and actually expand around the world? Even in France!
The answers to all the above questions is yes. McDonald's set the table (pardon the pun) to the way we view and eat fast food. Its success fostered major competitors like Burger King Holdings (NYSE: BKC), Wendy's International (NYSE: WEN) and Sonic Corp. (NASDAQ: SONC). It boasts a number of celebrities who have worked there in the past.
But McDonald's is still McDonald's. It has tried to be hip and cool by actually offering salads, but do you really go to a McDonald's to eat a salad? The movie Super Size Me did not do anything for its image either; yet McDonald's still marches on.
McDonald's went public in 1965 and a $2,250 investment back then would be worth nearly $2 million today. What a great success story; 31,000 units spread out over 119 countries. It is truly one great American export. The brand name alone is among the world's top 10 most recognizable and worth untold billions of dollars.
So, who is going to be bigger than McDonald's? The answer is Starbucks Corp. (NASDAQ: SBUX).
Starbucks went public in 1992 and has already captured a market capitalization value of $25 billion. McDonald's with a 27-year head start has a current market capitalization of $60 billion. (Market capitalization is all outstanding stock shares times the current market price.) Starbucks has already in place 11,500 units, and the story is just beginning. I believe Starbucks will hit the magical $100 billion market capitalization long before McDonald's does.
Starbucks, headquartered in beautiful Seattle, Washington, dominates and will continue to dominate the high-end, premium coffee business. Coupled with superb daily choices of the featured "coffee of the day," Starbucks has several different coffee concoctions and cold drinks as well. They also offer freshly baked items every morning. Okay, so far it is impressive ... but you said they would be bigger than McDonald's ... so what gives?
Starbucks is just beginning to offer warm breakfast sandwiches, available in only about 600 units, and lunch sandwiches, now available in 60% of their units. The additional annual revenues from breakfast and lunch sandwiches will be $60,000 per store. They are rolling it out systemwide, but in typical Starbucks fashion: one store at a time and do it to perfection. The "extra" $60,000 per unit when the roll out is complete will add up to $600 million in additional revenues for the company. Not bad for a few sandwiches!
Music CDs and movies in a DVD format have begun to find a happy home in Starbucks' stores. They could become the biggest seller of CDs in the nation and a major player in movie sales. Starbucks offers unique CDs, such as the Best of Ella Fitzgerald, the Best of Nat King Cole, and the like. These are titles we don't rush out to buy at our local Target stores or any other retailer. These are impulse buys, and the quality of the offerings is of the highest caliber. Movie DVDs are now rolling out systemwide as well. The selling space required is minimal and the margins are quite high.
All Starbucks stores offer wireless internet connectivity, which is a strong competitive feature. They also offer their customers the Starbucks Card, whereby a customer buys $25 worth of credit, and charges their coffee and other Starbucks items against the card. Once the $25 is spent, customers re-up for another $25 of credit. The whole process takes about 60 seconds to sell, and customers love the convenience and the ease of use. Starbucks is also testing a drive-thru window system where appropriate. The early results are stunning as the sales generated from the drive-thru concept are almost entirely incremental.
Starbucks has room for 17,000 to 20,000 units in the United States and another 18,000 to 20,000 units in the rest of the world. They will own and dominate the Chinese market. Starbucks is rolling out stores and by the end of the decade will have 6,000+ units in China alone! Its revenue and earnings growth has been consistently above 30% per year. As Starbucks will generate total revenues this year of about $8.2 billion and $9.8 billion next year, their growth rate has slowed to the low 20's%, but sustainable for the next four to six years. Starbucks, I estimate, will earn $0.90 per share in 2007, and $1.10 per share in 2008: strong and consistent earnings growth.
Starbucks has entered our vocabulary, like Kleenex or iPod. I hear so often people saying "let's go get a Starbucks", not a cup of coffee, but a Starbucks. They have arrived! They will become bigger than McDonald's, especially for their shareholders.
Since I wrote this original article back in early February, McDonald's has done quite well, seeing its stock appreciate from $44 to $51. McDonald's has put up some strong same-store sales recently and has offered a few new innovative menu selections to broaden its appeal. McDonald's is a mature company going through a nice growth phase within its existing units. The longer-term issue is market saturation therefore limiting unit expansion.
Starbucks stock has been range-bound between $28-32. Starbucks reported a good in-line March quarter and has reiterated its growth plans and initiatives.The company now has over 12,000 units on its way to global domination with a plan calling for more than 40,000 units.Starbucks has the win-win scenario of driving same-store sales higher with new product offerings AND tripling its store-unit base over the next decade. Cash flow from operations provides more than enough growth capital. (As an aside, Starbucks is now exclusively offering the new CD by Paul McCartney)
As the years go by we will witness Starbucks become bigger than McDonald's.
From:bloggingstocks:sbux
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Trust all had a great holiday week end.
G' day Mates,
Aussie
AI
