Can This Impressive Expansion Last?

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There is no doubt that Starbucks (NASDAQ: SBUX) has become one of the largest coffee companies in the world. In some cities you can find one Starbucks shop in each block. The company has diversified its products, including brands such as Best brand, which commercializes whole-bean coffee, energy drinks such as Refreshers, and even coffee machines with its Verisimo brand, not to mention cups, mugs, and grinding equipment.

No obstacles ahead for Starbucks

Starbucks seemed to be at the peak of its growth in 2008-2009, posing concerns over its expansion possibilities, but no decline happened. Since Mr. Howard Schultz took the CEO position in January 2008, the coffee company’s stock has grown approximately 220%.

Its geographic expansion was rapid. In 2012 (until September 2012), 234 stores were opened in the Americas region, 10 in EMEA, and 154 in China and Asia-Pacific which amounted to 9,405 company-operated stores. This has significantly diversified risks from the main U.S. market (75% of total revenue came from the U.S. in 2012) and opened new opportunities in China where numerous consumers could increase sales substantially. In 2012, net revenue grew 14% to $13.3 billion compared to 2011, mainly driven by better operating margins and increased sales. Note that these results were helped by low Arabica coffee prices.

What about the competition?

One of its closest peers is McDonald’s (NYSE: MCD) which has been expanding its McCafe stores to different regions. In Europe, the American company has 1,600 McCafe stores which are separated from the fast food restaurants. Although it is not specifically a coffee company, McDonald’s is looking to expand into China and get a piece of the coffee consumer pie, planning to hire 75.000 new employees and increase the total McCafe stores to 750 which signifies a 45% increase. This could be a problem for Starbucks as McDonald’s is a fast food giant that could steal some market share in the coffee business.

Another competitor is Dunkin' Brands (NASDAQ: DNKN), the owner of the Dunkin' Donuts stores. The company has nearly 17,400 distribution points in over 60 countries and is positioned as one of the leading companies in coffee serving and baked products. As well as Starbucks, Dunkin' Brands is properly diversified across different regions, which makes it safer against economic fluctuations in specific countries. The company has some solid financials as it increased its first-quarter revenue 6.2%, to $162 million, compared to the first quarter of 2012 and its operating income surged 15% to $8.3 million.

Starbucks seems to be the king

Starbucks has shown that its business model is somewhat recession-proof. But, the company must be aware of the expansion other companies are planning, especially in Asia, where the market is robust and could drive revenue even higher. Also, the coffee market is exposed to risks related to downturns in the economy as its business model was hurt by the housing decline in Europe. Moreover, Starbucks will have to focus heavily on expansion plans in Asia because having such a concentrated revenue mix (75% of revenue comes from the U.S.) could be dangerous as the economy has not yet fully recovered.

Is this the time to buy?

If we compare Starbucks to its peers, the stock seems overpriced as it is trading at 25 times forward P/E, while Dunkin' Brands is trading at 23 times and McDonald’s at 15.7 times. The best moment to make a decision is to wait for the resolution regarding the Kraft lawsuit. The story started with Starbucks alleging that it would discontinue their distribution agreement due to material breaches from Kraft. But Kraft denied those breaches and is suing the coffee company for $2.9 billion plus attorney fees.

If the case goes wrong for Starbucks, it could hurt its balance sheet or it could make the company tap the debt markets. This will definitely impact its stock price and could lead to an opening for investors to take a position at a lower price.

McDonald’s turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.


Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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