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-thru's 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 in 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 $55 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 system wide, 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 Cd's 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 system wide 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 units in the Unites States and another 18,000-20,000 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!!(http://finance.yahoo.com/q?s=sbux&x=35&y=17) Their revenue and earnings growth gas 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 4-6 years. Starbucks will earn $.76 per share in ca lander 2006, and $.90 per share in 2007, 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
Georges Yared is the author of Baby Boomer Investing...Where do we go from here? and Stop Losing Money Today. For more info go to http://www.georgesyared.com











Reader Comments (Page 1 of 2)
2-14-2007 @ 7:34PM
c.hunter said...
over priced coffee--no better than mcdonald's at $.69
so there !!!
2-14-2007 @ 11:15PM
Mr. noitall said...
O.K., Going to Starbucks and over paying is hip and cool. Especially if you're wearing your iPod while you're there. But being "hip and cool" just isn't "in" anymore. People are now secretly laughing to themselves when they see these "hip and cool" iPod wearing Starbuckers. Also the word "hip" isn't cool anymore. Being "hip and cool" and going to Starbucks and other gourmet coffee shops is the type of life style some "mommy" like Sarah Gilbert enjoys. So how cool could that possibly be?
2-14-2007 @ 11:27PM
Charlette Sgro said...
Compelling description of a company that's probably in the 3rd or 4th inning! SBUX looks like a good buy @ $33-$34 level. Thx for the recommendation.
2-15-2007 @ 1:27AM
Richard said...
OK - OK, No matter what happens someone is going to bash Starbucks just because they are Starbucks. I can say one thing above all about them - they make a consistantly good (I think) coffee drink and if they do mess it up they will make you another one and give you a coupon for a free one in the future.
2-15-2007 @ 1:44AM
Alan Cohen said...
Apparently, Americans are losing their sense of taste. Both my father and I did exactly the same thing at different times when we tried our first taste of Starbucks (also known as charbucks after they finish over roasting their beans), we both took one sip and poured the rest down a sewer. I drank armed forces coffee for 7 years, and that tastes better than Starbucks. My one trip there was my first and my last! I prefer Gloria Jeans or McDonalds coffee any day. Starbucks, YUCK!!!!!
2-15-2007 @ 10:51AM
Kevin said...
Starbucks need to rethink their Internet access vendor and charges. I have stopped going due to constant hassles with signing on AND paying $$ for access--my new choice is Panera with free wireless, more food choices and coffee that is just as good.
2-15-2007 @ 7:24AM
Lou said...
There is a small problem with Mr. Yared's thinking...ok, a big problem. I guess he did not have many business courses in college or he would understand that for a brand specific product to become synonymous with a type of product..it needs to be interchangeable. i.e. Hand me Kleenex...even when it is another brand of tissue. So tissue has become synonymous with Kleenex. I doubt anyone would say hand me a Starbucks when in fact the product was Maxwell House.
2-15-2007 @ 9:16PM
CL said...
Here is a clear example of a nice article about a good american company and pretty much only negative comments. People that drink Box Wine shouldnt expect to be taken serious for one when commenting on an elegant Merlot. I work at Starbucks and am just a barista, and get better benifits than when I worked at a hospital. Not only that the wages are fare and competitive. Howard Shultz has taken a modest company conceived out of the love of bold and aromatic coffee and help to spread that love of finely roasted coffee to the world,(the flavor of coffee is in the oil of the coffee bean, harder you roast them more the oil comes out). Everything about the company is about respect and hospitality. Just look at the music artist Starbucks supports, the Movies they are involved in, (Akeelah and the Bee), the books that have come to the stores, One Last Day by Mitch Albom, and now A Long way Gone, Memoires of a Boy soldier a true story by Ishmael Beah, in which Starbucks Donates $2 for every book sold, with a minimum of $100,000 donation to Unicef, who was the Group that helped Ishmael. These things are intentional, not just trying to drive easy profits, there are a lot of other things they could do to do that, but not as ethical also. Before you decide to critisize, think before you type, do some journalism, not emotionalism, there's already too much of that. If you prefer weakly roasted coffee, then Gloria's might be for you, or Seattle's Best, Tullys, or a whole list of others. The price is there, because the market sustains it, no other reason. Support a company that understands Social Responsibility and demonstrates it in more than just handing out cash at the end of the year, but demonstrate it in their actions day to day...
Have a wonderful day.
2-17-2007 @ 11:19PM
Tom said...
I think people are confusing two things - taste and business.
I for one don't care for McDonald's food but who could argue with the business?
I am a coffee lover and would agree that Starbucks burns their beans and as a result, choose to buy my coffe elsewhere. But, I'm a very happy shareholder because of the way they run their business!
2-19-2007 @ 2:52PM
Bill said...
I too find Starbucks over-roasted and bitter. Try some local shops in your town and compare. In our town (Lebanon, Oh) there are several including Starbucks, but the best of the bunch is by far the Full Cup Cafe, a small, growing chain of 3 stores in central Ohio. You can order FRESH-ROASTED coffee from their website, something Starbucks is too huge to be able to provide, in their stores or on their website
2-19-2007 @ 7:29AM
DennisB402 said...
McDonalds coffee... and that of many other coffee shops and restaurants is better than Starbucks. I've tried many times. I love good strong coffee... but Starbucks coffee is bitter, and high priced!! What we won't do for great marketing...
2-19-2007 @ 7:45AM
Joe said...
Starbucks is garbage. America runs on Dunkin.
2-19-2007 @ 8:38AM
jugdesh said...
keep rollin starbucks...its the american way for people to be pissed...jealous....opinionated.....or down right ignorant....to the successes of others.....I havent tried your coffee.......but I will someday..
2-19-2007 @ 8:45AM
tom said...
I agree with the user about internet access. When I am on the road, I stop where and when I need to. I drive by starbucks now because they try to lock you into a contract for service. there are many many options for free internet.
Also, starbucks hasn't really had a competitor, as far as I know. who else does a coffee shop like them except your local mom and pop shop. I think if someone did that, they would give them a run.
2-19-2007 @ 9:01AM
cullen said...
Like any other fad, Starbucks will fade away. Burned coffee, rancid hot cider and a hot chocolate that tasted more like eating a bar of unsweetened chocolate were the first encounter for me and my family at Starbucks. High atop Snowshoe in West Virginia, the dawn broke with a disappionting cup of coffee. The outside temperature was near 30 degrees and it was a bit windy. I was looking for a bit of warmth from the inside and nothing was open except for Starbucks. Had I known that the $25 I would spend would end up mostly in the trash can, I would have driven to the bottom and got a cup of convenient store coffee. Starbucks....great concept, poor execution. Yes they are making money but I would rather have the money in my hip pocket than be "hip". A message to Dunkin Donuts corporate... co locate your stores next to every Starbucks. You'll make a fortune!
2-19-2007 @ 9:01AM
doretha said...
Starbucks coffee is a real eye opener. Strong taste
with caffeine from the year 2020. You will not go to sleep drinking this coffee. Dieter's love this coffee!
2-19-2007 @ 10:02AM
PMace said...
I must say .... I absolutely love the post by CL. Thanks for the awakening!!! I couldn't have said it better myself. My sister just resigned from her $80,000+ medical software training position, and she plans to work part-time at a local women's prison teaching college courses. The other half of her time will be working as a clerk at Starbucks, and she's very excited about being a part of this socially aware/involved/giving company. Thanks again CL.
2-19-2007 @ 10:05AM
Nancy said...
I find this so hard to believe. Starbucks makes the worse coffee I have ever tasted. It is way to strong. There are very few Starbucks stores except in the big cities. I haven't been in one in 5 years and I don't plan to ever go in one again.
2-19-2007 @ 10:24AM
Carolyn said...
Gee talking about Starbucks is almost like bringing up politics it seems!!! When McDonalds opened up many decades ago, I did enjoy the food, but then I was a little kid and didn't know better. Now, I rarely step into a McDonalds and certainly NOT for the coffee. Their new coffee is terrible - bring back the old stuff. Now to Starbucks - I enjoy a really good latte, made the way I like it and consistently Starbucks has done that. I have been going to Starbucks for over 15 years - as soon as they opened a little kiosk in a food store in the northern suburbs of Chicago - and I still go there -and so do my parents and friends. Some people like strong coffee, some of us like lattes, others tea, others a frappacino. But the entire Starbucks aura is not just the drinks....it is the experience and the staff. Where I live I can go to any one of at least 6 stores within a 6 to 10 mile radious of my home or office. I enjoy walking in to my regular Starbucks and having the staff say HI to me by name, ask me about the day, and just really give good customer service - something I CAN NOT SAY about McDonalds. I enjoy having a place where, if I want to, linger awhile, read the paper and just relax. I don't mind paying extra for that little luxury every day. In a world where people just grunt at you, give you dirty looks, slam doors in your face, cut you off on the road and just be generally nasty - I like going somewhere to get away from that. I don't drink, or smoke. There are few movies out now that I care to see - why pay to watch violence when you can see it on the 6:00 news - so I like to spend my money on what I enjoy and see a smiling face too. I think everyone is missing the boat on Starbucks....it's not just the coffee you're paying for...it is the experience. It reminds me of when I was just starting out working and would stop into a neighborhood diner for a cup of coffee to take on the train to work. Also, I just think that some people are jealous that THEY didn't come up with the idea!!! And by the way, have a really nice day..I know I will as I sip my latte!
2-19-2007 @ 10:56AM
Jennifer said...
Carabou Coffee houses are on the rise. The coffee is smoother and tastier ....look out starbucks