Starbucks: It's about the experience

Posted Jan 8th 2008 10:33AM by Aaron Katsman
Filed under: Starbucks (SBUX), China, McDonald's (MCD)

Man drinking Starbucks With McDonald's (NYSE: MCD) upping the ante in its coffee war with Starbucks (NASDAQ: SBUX) with the report that it will install coffee bars at 14,000 U.S. stores, incorporating theatrics similar to Starbucks' counters, displaying espresso machines and having baristas prepare drinks, I think that investors are missing the boat. Anyone who has ever sat in a Starbucks will tell you that it's not about the coffee. If you want a cup of coffee you can head to the nearest 7-11. Starbucks is all about the experience, and that experience can't be reproduced no matter how golden the arches are.

As someone who frequents Starbucks often, either to hold a business meeting, or in between meetings, where I can sit with my laptop and nurse a coffee, I would never entertain the thought of doing the same thing at a McDonald's. How many of you in a similar situation would?

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Investors shouldn't lose track of the impact that global growth, especially China, will have on Starbucks. In the next few years, I think it's conceivable that half of all revenues will come internationally, and that's growth. It's not going to come at the expense of North America.

Investors need a bit of perspective, but even with today's spike, in the $20 range, SBUX is a lot cheaper than the price of the coffee it sells.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer has no position long or short in any stock mentioned as of 1/08/07.

Tags: China, Coffee, MCD, McDonalds, SBUX, Starbucks

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Reader Comments (Page 1 of 1)

1-10-2008 @ 11:29AM

darlene said...

Starbucks better watch out how they treat thier baristas, as na ex employee who was happy with the motto and i lived my life by there motto, i would jump at the chance to help mc d's start it up remmeber, it WAS the baristas who created the atmosphere, they so claim they have to offer.

1-12-2008 @ 12:16AM

Sylvia SC said...

I think McDonalds have great coffee. Patterning the coffee subject after Starbucks is no incentive to me. I do not like any of Starbucks coffee.

Plain, good coffee that I can count on is what I want from McDonalds.

1-17-2008 @ 5:06PM

Antonio Goicochea said...

Keep in mind not all Starbucks locations are the same.

Starbucks has a lack of consistency in the design of their individual stores that gives it that "third place" feel that so many of us fell in love with.

In fact, most of mom and pop cafés / coffee shops have that "extension of your living room" feel which most of us prefer.

Starbucks needs to realize at the end of the day emotion sells.

People buy emotion / experience.

Believe me I wouldn't be caught dead at some Starbucks locations because of the lack of the comfortability in the stores.

Starbucks would fare better if they were to craft individual stores to better suit the local target demographics of that particular store.