Wall Street Won't Tell You About Starbucks' Magic Bullet

Starbucks has a magic bullet that allows the company to slay would-be competitors, but few Wall Street analysts have identified it.

Mar 5, 2014 at 5:00PM

Everyone likes stocks that go up. For the last few years, up is the only direction Starbucks (NASDAQ:SBUX) and Dunkin' Brands (NASDAQ:DNKN) have gone. In the last year alone, Starbucks' stock price is up 31% and Dunkin' Brands' stock price is up 41%, which compare to a 24% rise in the S&P 500. However, investors don't care about the past return, they care about the future return. Lucky for Starbucks shareholders, one key advantage gives the global coffee powerhouse an almost insurmountable edge over Dunkin' Donuts -- and it is one that few Wall Street analysts even talk about.

Starbucks' magic bullet
Like Starbucks, Dunkin' Donuts benefits from economies of scale in purchasing, advertising, and distribution. Its brand name also confers significant benefits; customers know what to expect when they order a Dunkaccino or a Dunkin' Latte. Moreover, since more than 70% of Dunkin' Brands' franchisee revenue comes from U.S. Dunkin' Donuts locations, management remains focused on nurturing the brand to compete with Starbucks.

However, Dunkin' Donuts remains a far cry from Starbucks on one key measure: employee satisfaction. Here's why employee satisfaction is so important:

Packaged coffee sold in grocery stores generates lower wholesale margins than cold coffee at a coffee shop. Packaged coffee is of the same quality as that sold in a coffee shop (although consumers have to brew it themselves). The price difference comes from the experience of ordering and drinking coffee in the shop.

Starbucks justifies its high prices by providing great customer service in an inviting store atmosphere. Dunkin' Donuts is not known for a great environment or outstanding customer service -- an image that the company is trying to erase. The coffee chain is changing its stores to look more like Starbucks, adding comfortable seating, relaxing music, and places to linger.

However, Dunkin' Donuts is tackling only half of the problem. The store atmosphere is one thing, but customer service is quite another. In order to provide great customer service, employees must be happy, motivated, and inspired. Starbucks' employees fit the bill, but Dunkin' Donuts' employees do not.

Employee satisfaction
If employee ratings on Glassdoor are any indication, Starbucks has a hefty lead over Dunkin' Donuts in employee satisfaction. CEO Howard Schultz receives an 87% approval rating from Starbucks employees, while only 67% of Dunkin' Brands employees approve of CEO Nigel Travis. Schultz, a superstar in the industry, came back in 2008 to turn around the company after it overexpanded in his absence. His legendary status gives him a cult-like following among employees and consumers alike -- an asset that Dunkin' Brands cannot hope to replicate.

Ceo Approval Rating Revised

Source: Glassdoor.

It is not just the CEO that gives Starbucks an edge; employees truly value their employment at the company. 

Comments like "Great place to work" and "Best job experience of my life" sprinkle Starbucks' Glassdoor page. Employee comments left on Dunkin' Brands' page range from "Dunkin' is Great" to "Okay company, poor management." Employees' opinions of the respective companies mirror the CEO approval ratings. An overwhelming majority of Starbucks employees -- 79% -- would recommend the company to a friend, whereas a smaller proportion of Dunkin' Brands employees -- 63% -- would do the same.

Moreover, employees give Starbucks a higher overall rating than Dunkin' Brands' employees give their company; Starbucks is rated 3.7 out of 5 and Dunkin' Brands is rated 3.1 out of 5. Starbucks employees value the company's culture and values the highest, giving the company 4 out of 5 stars on this metric. Dunkin' Brands receives a rating of 3 out of 5 stars in the same area. Starbucks’ consistent outperformance on these metrics shows that its employees have bought into its mission and culture.

Ceo Approval Rating Revised

Source: Glassdoor.

Starbucks also receives high marks for compensation and benefits. Health insurance is a cornerstone of Starbucks' employee compensation packages. Even after admitting that Obamacare might increase the company's insurance costs, Schultz said he had a responsibility to keep providing health insurance even to part-time workers. In addition to generous health benefits, Starbucks employees may receive bonuses, 401(k) matching, tuition reimbursement, and a free pound of coffee each week. On the other hand, Dunkin' Brands' compensation and benefits is tied as its lowest-ranked component, as it receives 2.5 out of 5 stars there. Considering that compensation forms the basis of most employees' attitudes toward a company, the low rating speaks volumes about Dunkin' Brands’ employee satisfaction.

Foolish takeaway
Dunkin' Donuts may be changing its stores to look like those of Starbucks, but it cannot match the Starbucks experience without changing its culture -- something that is very difficult to change. Starbucks' employees' devotion to the company and its culture give the company a competitive advantage that few Wall Street analysts will talk about, but it is one that is crucial to Starbucks' ongoing success.

Looking for more Starbucks-like returns?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Editor's note: A previous version of this article referred to John Henderson as the president of Dunkin' Brands. Dunkin' Brands' president of Global Marketing and Innovation is John Costello, and its chairman and CEO is Nigel Travis. The previous version also referenced Glassdoor.com data for Dunkin' Donuts' Northeast Distribution Center rather than Dunkin' Brands. The Fool regrets the errors.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers