More Bad News for McDonald's: Starbucks Isn't Slowing Down

Lately, the news out of the restaurant sector has not been that bright. Most notably, McDonald's (NYSE: MCD  ) weak same-store sales have cast a shadow over the industry. Well, one name that isn't facing the same difficulties as McDonald's is Starbucks (NASDAQ: SBUX  ) . Starbucks racked up a 6% increase in U.S. same-store sales in its most recent quarter. Starbucks presented at the William Blair Growth Stock Conference this month, and this Fool decided to listen in. Turns out there's a lot more to come from Starbucks.

Source: Starbucks

Starbucks and McDonald's seeing different results
Starbucks is expecting its strong growth to continue. Revenue is forecast to grow 10% this year. Global same-store sales growth is likely to remain in the 6% to 8% range, and earnings per share should grow 20% to 22%. Global same-store sales numbers are in line with Starbucks' targets, while earnings-per-share growth is above the company's goal of 15% to 20% annual growth.

McDonald's, on the other hand, saw its May U.S. same-store sales drop 1%. The restaurant giant is having to fend off a challenge for its lucrative breakfast business from both Taco Bell and Starbucks. McDonald's even ran its first-ever, free small cup of coffee promotion in the first quarter and that still wasn't able to turn sales positive. As the competition chips away at McDonald's lock on breakfast, it has a real impact on McDonald's numbers. Breakfast accounts for about 20% of total sales. For now, McDonald's management is focused on what it can control, and that's returning a good portion of McDonald's profits to its shareholders in the form of share buybacks and dividends.

The two questions on everyone's mind
At the conference, CFO Scott Maw asked the two questions us Fools wonder about:

  1. Starbucks had $15 billion in revenue last year and will have more than $16 billion in revenue this year. How does Starbucks keep the growth going?
  2. How is double digit-growth and that kind of margin expansion and earnings growth possible?

A good chunk of this growth is going to come from more store openings. While it appears there's a Starbucks on every street corner, that isn't the case in China. Of the 1,500 new stores Starbucks plans to open this year, half will be in China. The rest of the store openings will consist of 600 new stores across the Americas and 150 in Europe, the Middle East, and Africa.

The other key for Starbucks is continued beverage innovation. This year, Starbucks rolled out Teavana Oprah Chai Tea, and in Asia it launched the Green Tea Red Bean Frappuccino. Furthermore, Starbucks is targeting the later-day crowd with its new Fizio drinks. These are handcrafted, high-quality, made-in-front-of-you sodas that Starbucks hopes will boost same-store sales by providing another option for non-coffee drinkers or those who choose not to drink coffee in the latter part of the day.

Source: Starbucks

Tea for Starbucks has the potential to be a real growth driver. Right now, tea sales account for about 9% of Starbucks' sales in the U.S. I think Starbucks could really increase this percentage because tea is actually a bigger market than coffee. Tea is the world's second most widely consumed beverage after water.

Another driver for Starbucks is food. While food sales account for only about 20% of Starbucks' U.S. sales and about 33% of all transactions, Starbucks is looking to move the needle and increase its overall food sales. Food is now the biggest contributor to Starbucks' same-store sales growth in the U.S. This will likely continue, as Starbucks' La Boulange menu items are available in only about 75% of its U.S. locations.

La Boulange is known for its high-quality ingredients and artisan crafted sandwich recipes. Starbucks has seen sales of croissants and chocolate croissants double since the La Boulange recipe was introduced. In terms of La Boulange breakfast sandwiches, they have delivered a 50% increase in sales for Starbucks since they were introduced.

Source: Starbucks

The focus on food has resulted in Starbucks seeing its highest comparable growth during lunch and the early afternoon. Same-store sales growth has been spiking during the 11 a.m. to 3 p.m. time slot. What's most impressive about this is that not all of Starbucks' latest innovations are available at all its stores. Starbucks is still rolling out Teavana iced teas, Fizio sodas, and La Boulange sandwiches.

The final part of the day that Starbucks is turning its attention to is the evening hours. Starbucks is getting ready to roll out its evening program. This will include beer, wine, and small food plates.

Taking all these initiatives together, Starbucks has incorporated its mobile app and gift card to provide a better customer experience. It's not just the coffee, tea, food, or free Wi-Fi. Starbucks has made the customer experience seamless. That's why its loyalty program has more than 8 million active members, and its mobile-payment app is No. 1 in the market. Starbucks is now testing mobile ordering, and if everything goes according to plan, it will be rolled out nationally next year.

The final piece of the puzzle is that Starbucks has found a way into our homes. Its second-largest business is its packaged-coffee business. Starbucks coffee is available on our grocer's shelves, and the company has expanded its relationship with Keurig Green Mountain (NASDAQ: GMCR  ) in single-serve. Starbucks is working with Keurig Green Mountain on innovation and is developing more products around K-Cups.

In March, Starbucks and Keurig Green Mountain amended their five year agreement. Starbucks received better business terms and can expand the varieties of Starbucks K-Cups available for sale. This is great news for both companies as over 2 billion Starbucks K-Cups packs have been sold through the end of last year.

Foolish final thoughts
It's safe to say that Starbucks has a well thought out game plan. The company continues to blow away the competition. It's delivering growth McDonald's would love to have. Based on Starbucks CFO Scott Maw's presentation at the William Blair Growth Stock Conference, it looks like Starbucks' growth is set to continue, and that's more bad news for McDonald's.

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