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

By Ted Cooper – Mar 5, 2014 at 5:00PM

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

Everyone likes stocks that go up. For the last few years, up is the only direction Starbucks (SBUX -0.08%) and Dunkin' Brands (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.

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.

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.

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 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. 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.

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