Starbucks (NASDAQ:SBUX) has been a great pick for 2013. It should also be a great pick for 2014. Despite the fact that coffee prices are expected to rise, Starbucks should remain resilient. Throughout the years, its margins have been steady.
The real beauty is that Starbucks is tapping into the large Chinese market. China has a rising middle class, which means its residents will have more disposable income. China is expected to become Starbucks' second-largest market in 2014.
Emerging markets keep driving the company higher
Starbucks' China store count will jump to 1,500 locations across 70 cities by 2015. The company's other expansion plans involve Japan and Korea. Over the next three years Starbucks plans to open some 100 stores each in Indonesia and the Philippines.
Latin America could also be a big opportunity for Starbucks, with the coffee retailer looking to open some 500 stores in Mexico, Chile, and other nations in the region over the next few years. Starbucks also recently launched gift cards in China, which should help it capture more market share.
Beyond China, innovation drives the Starbucks story
Starbucks can also use its mobile payment app at all of the Teavana stores. As far as My Starbucks Rewards goes, the company hopes to double its membership level thanks to the Teavana addition. Going into fiscal 2014, Starbucks had 6 million active members.
The launch of mobile payments should keep driving Starbucks higher. Its mobile payment app has been a success to date. About 11% of Starbucks' U.S. transactions are done via its mobile platform. It's also no secret that Starbucks is taking market share from the likes of Green Mountain Coffee Roasters with its own single-cup coffee machine, Verismo.
On the healthy side, Starbucks bought Evolution Fresh back in 2011. It is planning to expand this brand into granola bars, dried fruit and yogurt. Starbucks also now offers an energy drink, Refreshers, and a variety of breakfast sandwiches.
Who challenges Starbucks' success
Starbucks' success in the U.S. could be threatened by Dunkin' Brands (NASDAQ:DNKN) and McDonald's (NYSE:MCD). Dunkin' still has a large market to expand into across the western part of the U.S., which is why Dunkin' believes that it can double its Dunkin' Donuts store count from current levels. Dunkin' has also become aggressive on the marketing front to help generate some buzz around its brand. As a result, Dunkin' saw a near 9% jump in revenue year-over-year for the third quarter.
McDonald's is the real value proposition in the industry. McDonald's introduced its McCafe a couple of years ago to grow its presence in the coffee business. Last year it introduced new products, such as the Pumpkin Spice Latte and White Chocolate Mocha to drive more coffee sales. The company is also launching a McCafe bagged coffee. These initiatives will hopefully bring life to the company's performance, which has been lackluster. The third quarter saw comp-store sales grow only 0.9% year-over-year. Yet, on the investing front, McDonald's pays an impressive 3.3% dividend yield. That's well above Starbucks' yield and McDonald's is also cheaper, trading at only 17 times earnings.
Starbucks is still very much a growth story. The company has one of the most recognized brands in the world, yet it still has many growth opportunities in emerging markets. Trading at a price-to-earnings to growth ratio of only 1.45, Starbucks looks to be a very solid investment for 2014. McDonald's looks to be a solid income play, while Dunkin can be considered a growth story in its own right with strong growth prospects in the Western U.S.