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
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Reader Comments (Page 2 of 2)
2-19-2007 @ 2:04PM
Rich said...
Starbucks: The Cadillac of Coffee.
Ha!!
A reader above insisted that the product *needs* to be synonymous with all its look-alikes; i.e., xerox, kleenex, clorox. How about being able to carve yourself a niche as being *never* a waste of money because it is *always* the best. Quality is a hot commodity. If you believe you're buying the absolute best product, there is no way that you'll ever feel ripped-off.
And Starbucks coffee is delicious! I'm in. Where do I sign.
2-19-2007 @ 10:51AM
Vic said...
I like Starbucks ( alot-bucks coffee) but in the long run , McD's will win out. McD's caters to kids and parents. Now that I am a parent and no longer allowed to truly indulge myself, I actually enjoy going to McD's to take the kids there and I must say that their coffee is very good. Mcd's is timeless because it is generational. I actually get insightful thoughts watching my kids enjoying Happy Meals. It takes me back when I was a kid myself!
2-19-2007 @ 10:51AM
Michael Moran said...
Starbucks' service gets an A grade. McDonalds service grade? Starbucks doesn't just serve regular and decaf coffee. If you don't like the taste of their regular blends, you can get them to make what you want to. The stores and service cost you to get that A grade experience. Its all done very smart. I didn't say it was a cheap cup of coffee, but what I get is a custom drink and McDonalds can't do that. You get what you pay for.
2-19-2007 @ 10:59AM
Brett said...
They have just built a Starbucks in Williamsport PA. My wife & I drink a cup of Dunkin Dunut coffee in our home every day. We started to try Starbucks of few years ago. Back then we only saw Starbucks on vacation. The thoughts I had then are different then now. When we went there the first time. I had sticker shock when I saw the price. Since we was on vaction I thought who cares everything is over priced. We had the Breakfast blend with sugar & cream. The coffee was strong but good. My wife & I booth agreed that Dunkin donuts tasted better. The tasty treats Starbucks has are a nice special treat on vacation. I was thinking I would not like anything stronger than the Breakfast blend for the first few years. Since they have a Starbucks close to us. I stop to get a treat with my sons in the morning. I have enjoyed the houseblend in the one that is close. When I sit there & watch the customers come in & order. I learned that there is a lot of work making fancy coffee. The machines they use cost more than the average home is willing to pay. Starbucks has a nice feel to it when sitting inside. It is a nice to take your time and enjoy a treat with the coffee. I would buy the housblend for my home use. If the price was more competive. I think Starbucks will keep growing. Starbucks price does not seem so high to me, after paying over $2.00 a gallon for gas.
2-19-2007 @ 10:57AM
J. Hebbel said...
For a happy meal - morning, noon or night - try
PANERA!
2-19-2007 @ 10:55AM
Paul said...
Coffee taste, like any food or beverage is personal. Why are we debating the taste of Starbucks? They obviously have fans as the stock market shows. The too strong or to bitter comments really mean too strong or bitter for the writer. For those of you that buy Starbucks because it is "hip" to do, but yet do not like the flavor, I believe you have been riding entirely too many horses in the heat of the miday sun.
2-19-2007 @ 10:57AM
Carol said...
Starbucks isn't McDonalds, with the same boring blend day after day. There are some coffees of the day I just don't care for. But that doesn't mean I hate all Starbucks. I like going in there, having barista's who remember my drink, my name. And I buy their beans to brew at home. Yes, you can get a cheaper cup of coffee-- and its coffee, so you'll get your morning caffiene. Just like the shirt on my back didn't have to come from Saks. I mean, its a nice cotton shirt-- I could have bought it at Goodwill. And the Goodwill shirt provides the same function at this one. But don't see me changing my clothing habits.
2-19-2007 @ 11:00AM
Paul S said...
I find it ammusing that people who go
to Starbucks think they are cool and hip??
I am curious how they stay in buiness since every
person who enjoys coffee hates Starbucks??
And I understand from a very good inside source
that thier corprate culture of carrying for thier
employees and the environment is a bunch of crap.
2-19-2007 @ 11:28AM
Sassafras said...
Well, one of the simple pleasures in life I guess. Caffiene rush and all. But can someone explain why people I know spend enough money on this so-so coffee to pay their light bill every month? Not only does it add to many peoples' over-stretched budgets, it also adds to their ever expanding hip size. Just had to give it up!
2-19-2007 @ 7:29PM
Angelo said...
I go to Starbucks a couple of times a week and get a quad shot cappuccino. It is strong and I like it that way. The service and products are very consistant. I rather pay more and know what I'm getting. Strong is good!
2-19-2007 @ 1:38PM
DANNY MORRIS said...
TRIED STARBUCKS AND DID NOT LIKE IT. TRIED MCDONALD'S MANY YEARS AGO AND GO BACK QUITE OFTEN. IT MAY NOT BE THE BEST
BUT ALWAYS BETTER THAN MOST AND BEST PRICES IN TOWN.
2-19-2007 @ 1:21PM
Gary Stoltz said...
Personally, I don't care for the taste of Starbucks and I've never had McDonald's coffee. The real test will be to see if Starbucks can keep up the quality on the items being added. Besides, McDonalds has Ronald, what does Starbucks have?
2-19-2007 @ 1:24PM
Barbara Shrader said...
It's fun to go to Starbucks occasionally...kinda like seeing how the "other side" lives...yes, the coffee is quite good, but not worth a special trip to overspend for a cup of coffee that I can make better at home in my French press. I get a kick out of seeing the patrons with various and sundry mechanical devices attached to their ears...and having conversations which appear to be being conducted with air (whoops, I missed that earpiece!)
I can't see comparing Starbucks in any way with McDonalds, though. Totally different entities in my opinion. Both will survive with the aid of those who pick up a cup of latte in the a.m. on their way to the office, and take the kids to Mickey D's after a long hard day at work. Live and let live I say.
2-19-2007 @ 2:19PM
sienna said...
Most of the current Starbuck locations are too small to accomodate any serious growth in their dining rooms. I think Panera is a better choice for a growth company, their locations are already layed out for diners and they also have a great cup of coffee at a reasonable price.
2-19-2007 @ 2:03PM
Bob Duncan said...
I have tried several of Starbucks Coffee drinks and havent found even one that is not to bitter to drink, also it is way overpriced.
2-19-2007 @ 2:05PM
Jon Nelson said...
First cup of Starbucks I had was in a restaurant... I didn't drink it all. After several tries at many restaurants (in Seattle) to get a good cup of coffee I succeded. It was starbucks... much to my supprise, it was mild, not strong, and not bitter. I asked the waiter what brand it was and he said Starbucks.... but NOT the house blend that most reataurants use. I now enjoy Starbucks "other" blends and really enjoy the service and atmosphere in there stores. It is all part of the experience and what I am willing to pay for. They are willing to do it your way.... IF you ask them to!
2-19-2007 @ 2:11PM
TP said...
I'm collecting ideas from you all on how to compete with Starbucks for your coffee needs. So far you've told me:
- Free internet access
- No burnt-tasting coffee (McD's is OK?!)
- Friendly service
- Relaxed atmosphere
What else will get you to come my Mom & Pop noname coffee shop when Starbucks is across the street?
2-19-2007 @ 2:56PM
Kelly T said...
Don't know if anyone knows this or not, McDonald's is a franchise company, offering a great opportunity to entrepenuer's. Starbucks, from what I've been told is NOT a franchise company, therefore there is no comparison. If I am incorrect here, please, someone let me know.
Anyway, I like both of them for different reasons.
2-19-2007 @ 8:37PM
eire said...
hmm I hate coffee. Can't stand the taste of it. But have you actually looked at the drive up line at Starbucks? It usually has 1-3 cars..all the time. That doesn't include the people inside. My wife goes with a few of her friends regularly. The prices are outrageous.. and there’s the rub. The profit margin is huge. If you commented negatively on the article, I question your business sense. Starbucks is more like Harley Davidson. It has the same passionate statements. You love it or hate it. The end result is that it has a very, very profitable niche product. And the taste? It all taste's like mud water regardless of who brews it. But that doesn’t matter if your looking to make money. Ask those saps that passed up on Harley when it was in a low ball condition.