The coronavirus pandemic wreaked havoc on world economies. Some, including the U.S., took the remarkable action of forcing non-essential businesses to close their doors temporarily. The move was intended to help slow the spread of COVID-19.
Thanks to efforts by the scientific community, several effective vaccines against the novel coronavirus were developed, and billions of doses have been administered. As a result, the total number of severe illnesses worldwide caused by COVID-19 is decreasing. The good news gave world leaders enough assurance to begin reopening economies cautiously.
Image source: Chipotle.
Most Starbucks (SBUX +1.43%) and Chipotle (CMG +1.28%) restaurants can now welcome guests back into their establishments to eat and drink, rather than rely on carryout and/or delivery to generate revenue.
That prompts an interesting question: Which company is poised to do better as economies reopen?
Chipotle's digital sales for delivery sustained revenue growth
Chipotle's overall sales actually did not drop in 2020. The company's quick move to digital sales for delivery and pickup at the start of the pandemic proved effective when dining within their restaurants was temporarily shut down. For fiscal 2020, Chipotle managed to increase revenue by 7.1%.
Moreover, even as restaurants got back up to full operations Chipotle held onto 80% of digital sales in its most recent quarter (ended June 30) compared to the previous year. Meanwhile, it regained 70% of the in-person business it lost because of the pandemic.
Still, company management said it would prefer more of its customers dine in person. Those transactions tend to include higher-margin beverages in the order, and it costs the company less to fulfill each order. In-person orders are likely to have a better effect on Chipotle's profit margin than digital orders.
Starbucks is having a worse time during the pandemic
Starbucks' overall sales fell by 11% in fiscal 2020. Part of the reason is the company did not do as well on orders for delivery, as the price of coffee is lower than a meal and delivery services charge customers as much on a small order as they do on a large order. Customers were hesitant to order a $4 coffee and pay a $5 delivery fee. Another part of the reason is customers dining in at a Starbucks tend to stay awhile and order more than those just getting carryout.
The drop in sales cut Starbucks' operating profit by more than half in fiscal 2020 to $1.5 billion, down from $3.9 billion in 2019.
There is also the issue that, even though vaccines are available to most people who want them, they don't completely protect an individual against the coronavirus (just against the worst effects of the virus). Because some small percentage of vaccinated people can still get infected with COVID-19, there is a broader concern among consumers still that makes them hesitant to return to dine-in at Starbucks coffee shops. The same cause could stop people from eating within a Chipotle restaurant as well, but the difference is they are more likely to order the meal for delivery compared to a Starbucks customer.
Which stock is more expensive?
Chipotle's stock has been on fire in 2021 and is up about 36.1% year-to-date. That makes Starbucks' 6.5% gain on the year look paltry.
Data source: Ycharts
The wide disparity in gains in 2021 is partly causing Chipotle's stock to trade at a massive premium to Starbucks. The fast-casual restaurant stock sells for a price-to-earnings ratio of 94.6, nearly double the 47.74 Starbucks is trading for.
While the economy is reopening, it's still somewhat in its early stages. That suggests that Starbucks has more to gain as economies reopen. It also happens to be selling for a significant discount to Chipotle. While both are excellent companies and great stocks, Starbucks is a better reopening stock at the moment.
