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.
Georges Yared is the CIO of Yared Investment Research. For more growth stock ideas please visit the web site.



Reader Comments (Page 1 of 1)
5-25-2007 @ 11:24PM
Tom said...
Wake up and smell the coffee!
Starbucks will be bankrupt within 10 years. Their stores are dirty, employee-management relations are dysfunctional, the coffee is over-priced and over-roasted and their business ethics are abominable. Same store sales growth is in decline and their coffee just lost a taste test to McDonald's recently. McDonald's!!!
5-26-2007 @ 5:44PM
LooneyLeft said...
I have never been in a Starbucks store as you describe. Employee pay is no worse, perhaps better, than any competition if they really have any.
5-26-2007 @ 8:39AM
Meg said...
I'm a Starbucks employee and I truly believe it's one of the best corporations out there.
1. We WON'T be bankrupt in 10 years because of the high demand internationally.
2. Our stores have repeatedly recieved higher ratings in cleanliness compared to McDonalds. Have there been bits and pieces of animals or inanimate objects found in our products? No.
3. Considering I am an employee, you have no room to argue your next statement. Our managers are always exceptional in the way they do business and are always inviting to new ideas. I personally have a great relationship with my manager, I consider her a friend, as most of my other partners do also. Dysfunctional? I think not.
4. Our coffee is neither over-priced nor over-roasted. We use arabica beans. They're more expensive because they're the definition of exceptional quality. If you want to argue the way we roast our coffee, why don't you catch a plane over to Columbia, Ethiopia, or possibly Mexico to watch our coffee farmers in action.
5. The way we do business is self-explanatory. Ask anyone who has ever been to a Starbucks.
Yes, we may have lost a taste test to McDonald's, but it's people like you who have probably never been there because you're too preoccupied with trying to retaliate against the "Robber baron" corporations of America. Hey, here's an idea. Why don't you actually visit one of our stores, take a tour, and have a conversation with a partner and one of our managers- then get back to me.
5-26-2007 @ 11:09PM
arlene beasey said...
I purchase a mcdonald's side salad 3-4 times a week. ($1.08) Fantastick price for( lunch )I especially like the Ginger dressing with the healthy almonds, delicious meal since I like a lite lunch. I purchase the Gift coupons for birthday and Christmas gifts to get the u promise coupons for my youngest Grandson, Nicholas, 5 years old.
I love Starbucks but can't afford it since I am on a strict budget to get my financial situation back to a stablized position which I know will happen soon. But...when I am down and want a treat, I treat myself to a starbucks and tell myself "You deserve". I always purchase the tall Latte, my favorite. The card is a no brianer gift selection and no hassle. Who wouldn't smile at that gift. I purchase cards for birthdays, Christmas, etc. Love you.
5-26-2007 @ 10:44AM
Sheldon said...
We don't go to McDonalds for salads??? ( we do but it dilutes the concept) Well, we don't go to Starbucks for sandwiches (again dilutes the concept). Short term gain, they don't have the room to sit and eat if this idea really takes off big. Just opens them up to the next guy (store concept) in a shorter amount of time.
5-26-2007 @ 2:24PM
mark said...
if starbucks is going bankrupt then that means the oil companies will to- coffee is overpriced just like the price of gas and milk..but everyone continues to buy right? right! u can blame these high prices on the war.. and all these companies are making ridculous profits- paying employees STOP BUYING that will put em all bankrupt -
5-27-2007 @ 7:24AM
George said...
McD salads??? unless u get the fat free dressing, you may as well eat a burger - there is so much fat content in a little packet of dressing. No brainer there. If you wanna know who will survuve the longest - look at it this way. It's called branding. How many Starbuck commercials have you seen??? Little to none. Why? B/c they do a better job in marketing and branding their products than McD. McD tries to tailor their food and other products to the entire population- from the rich to the poor - which doesn't work. Starbucks $5 lattes - either you can afford or you don't. pretty simple economics and a unique market. As along as there is a Gen X and Gen Y, you will always have a Starbucks. Starbucks is the McD of those 2 generations.As someone who is orginally from Eastern Europe and has been drinking coffee since I wa sa toddler and has tried every coffee house and every coffee bean around, Starbucks beans are unique - flavor and all.
5-27-2007 @ 9:39AM
Jo said...
Starbucks is much too expensive. Their regular coffee is terrible and the stores are not kept clean. I have stopped purchasing their products. I'd rather invest in a bag of organic coffee from the market.
5-27-2007 @ 1:10PM
ggdahle said...
For anyone who thinks Starbucks coffee is terrible, is not a connesoiur of coffee. They need to pay attention to the coffee they are drinking as it can change daily. I, for one, cannot drink central and south american coffees which includes the popular columbian coffee. I love the african coffees. Sumatra is one of the best coffees anywhere. Once you know your coffee, you cannot go to McDonalds or Dunkin Donuts because of the lack of variety in their offerings. Starbucks is a very well run company and have been a loyal customer for many years. Starbucks offers ALL their employees benefits and not just their full time employees and I have not been into a Starbucks that is Corporate owned and not well run. If there is one that is not well run, chances are it is one that has been franchised out to either Magic Johnson Enterprises or HMS.
5-28-2007 @ 1:12PM
Joseph Lieb said...
Everyone has been to McDonalds at least once,
Starbucks is for the select devoted coffee buffs. But until they become a stand alone store with a drive through, I don’t see any massive possible growth potential, they are keen with trying different items in there stores but nothing is really taking off.
5-29-2007 @ 2:54PM
Jenny said...
Joseph...Starbucks does have a stand alone store in the Eastgate area in Bellevue. It opened last summer and is extremely busy. Between 7-9am the drive-through area backs out onto the street. During the day, there is always a crowd there. Last week around 10am, I dropped by for a coffee and found at least 15 people ahead of me in line!! They have it staffed well, and they are efficient, but in a relatively off the beaten path area of Bellevue, this Starbucks is indeed very successful.
5-30-2007 @ 1:32AM
Kari said...
I sometimes wonder where some of you have been because I moved out of the Washington State area two plus years ago and in my little town we had TWO stand alone Starbucks. I then moved to a small town in Texas and the only Starbucks we had was a stand-alone and now I live in Colorado Springs and we have several stand-alone and attached to mall food court or bookstore versions. I have been all over the country for travel and have been seeing the stand alone stores for years.
As far as taste and cleanliness, I have never walked into a "DIRTY" Starbucks, they are often busy and could use a little organization during those busy times, but not dirty. And as far as taste, I am assuming many of you who are complaning drink Folger's or the like. Good coffee is like good wine, once you have it, the cheap stuff just will not do. It could also be that when you brew at home, you are not using enough ground beans for the size of your machine. Most coffee shops are much stronger than what you would make at home and need a little getting use to. Now, that is in defense of the Northwest's favorite Homegrown business, now, for something not so nice.
If you want to have a reason not to drink coffee from Starbucks, they have continually refused to support our troops in combat with donations of coffee or even a "Support Our Troops" Banner, which has led to a boycott in our Proud Army household. We instead buy very good coffee from a smaller establishment with several locations in Colorado. They have very good coffee, although I must admit I miss my White Chocolate Mocha's and Vanilla Latte's from the original.
6-01-2007 @ 12:08AM
bullit said...
Anybody that thinks Starbucks will be bankrupt in 10 years is smoking crack. Starbucks has a passionate following among its everyday customers that McDonalds can only dream about. I have yet to hear someone say I didn't get my McDonalds today, but I've heard gotta have a Starbucks on a regular basis from total strangers.
6-07-2007 @ 10:39PM
ednan said...
You got to be kidding me if someone compares starbucks with mcdonalds. I live in SF and starbucks is very popular. I sometimes just go to starbucks to read a book or work. Also, I travelled to europe every year, the most popular coffee stores in london is starbucks. I was in seville, spain and out of the most popular catherdal there was a busy starbucks. I have had strabucks in switzerland and it was busy. Like it or not starbucks is a great place to hangout and a great place to meet for those online daters :)
8-02-2007 @ 2:02AM
Rod said...
R & R Cafe Rocks........Locatd in Redford Township, Michigan. They have gourmet sandwiches and great coffee. I wonder is Mc d's and Starbucks looked to them for the trend? They do in fact have it down to and art.