Looking for the Next Starbucks
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After the outstanding success Starbucks (NASDAQ: SBUX) has been to its investors over the past several years, many are looking for the next winner in the sector, the hottest coffee stock to by right now. It makes little sense, however, to look for the next Starbucks when you can buy, well... Starbucks.
Other companies have fewer locations, and hence can increase sales at a faster pace since they are growing from a smaller base. Dunkin' Brands (NASDAQ: DNKN), for example, has nearly 7,000 US locations, while Caribou Coffee (NASDAQ: CBOU) has 580 and Peet's Coffee & Tea (NASDAQ: PEET) barely 200 locations in the US. Compared to the 15,000 or so stores that Starbucks has in the country, these smaller competitors could be considered higher growth alternatives to the more mature Starbucks.
However, it may not be so simple for these companies to replicate the Starbucks story; size is not the only relevant factor to consider. In terms of brand differentiation and customer experience, Starbucks is a unique company. Howard Schultz and his team have done an outstanding job at making of Starbucks a third place, between home and work, where people know what they will find, and customers enjoy a comfortable atmosphere.
Location is another big factor, which limits competitive pressure from smaller companies. Starbucks has secured space in many of the most attractive places of the biggest cities in the world, and opening a competitive store near an existing Starbucks is not precisely the best idea from the point of view of the smaller players. The first mover advantage has given Starbucks access to some very valuable locations, and there is not enough room for unlimited competition in a specific place.
Brand recognition, a differentiated customer experience and limited space availability in key locations create strong competitive advantages which protect Starbucks from the smaller players. They may deliver higher growth rates in the next years, but their chances of replicating the Starbucks success look quite remote. In fact, the biggest challenge to Starbucks does not come from these smaller players, but from fast food giant Mc Donald's (NYSE: MCD).
With more than 14,000 US stores in the most desirable locations, McDonald's has been quite successful in its McCafé business, and the company is expanding that business both locally and internationally. McDonald's competes with lower prices in the coffee business, and although it doesn't have the same premium image as Starbucks, it's clearly the most relevant competitor on a global scale.
Being the undisputed leader in the fast food business, McDonald's is strong enough to affect Starbucks to some degree, but it could hardly be considered the next growth story in the coffee business since it’s such a big company with a gigantic market position in another business.
Going back to the “Starbucks is the new Starbucks” thesis, there is certainly no lack of growth opportunities for the world famous coffee brand. The recent acquisition of La Boulange Bakery is one simple example of how Starbucks can increase sales by introducing new products into its enormous network. The company's new product offerings like smoothies and tea and its renewed food program are smart strategies to increase sales without requiring big capital investments.
Starbucks has also developed an interesting approach to the single serve market with VIA for those who don't want an at-home brewer, K-Cups for basic brewed coffee and Verisimo for sophisticated users. Judging by the success other companies like Green Mountain Coffee Roasters have experienced in this business, Starbucks could certainly have a big opportunity by leveraging its brand power into this area.
Perhaps the biggest and most important driver of growth opportunities for Starbucks could be international expansion. According to Howard Schultz, the company's products are quickly gaining acceptance in countries like China. The company's CEO said during the last earnings release:
You almost have to see the customer engagement for yourself to fully appreciate the transformation. In the past, our typical core customer in China was an expat or tourist visiting a store in Shanghai or Beijing. Today, without question, we have made the significant transition to serving local Chinese customers who enjoy a wide variety of locally relevant products and a welcoming third place environment.
Emerging markets are still mostly virgin territory for Starbucks -- the company will need to adapt to the habits and tastes of these geographies, but its unparalleled branding power could certainly be a valuable asset when it comes to introducing the products to new customers. If Starbucks can replicate in other regions at least part of the success it has experienced in the US and big European cities, the company could still have many exciting growth opportunities ahead of it.
If by “the next Starbucks” we mean the next company to capitalize superior growth opportunities in the coffee business, I think the best candidate for that role is, precisely, good old Starbucks.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Starbucks. Motley Fool newsletter services recommend McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.