Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Is It Too Late to Buy Starbucks?

By Andrés Cardenal - Mar 26, 2014 at 9:08PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Does Starbucks still offer room for growth or is the best part over for the company?

Source: Starbucks.

Starbucks ( SBUX -0.16% ) has been one of the most remarkable success stories in the consumer sector over the past several years, and the company has rewarded shareholders with substantial gains over time. However, market saturation could be a problem sooner or later, and competition is rapidly increasing on multiple fronts, be it from fast food giants such as McDonald's ( MCD 0.21% ) and Yum! Brands ( YUM -1.34% ) or traditional coffee players like Dunkin' Brands ( DNKN ).

Does Starbucks still offer room for growth, or is the best part over for the company?

Steaming hot competition
Success generally attracts competition, and Starbucks is no exception, as competitive pressure is clearly rising lately.

McDonald's is looking for alternatives to reinvigorate its stagnant sales performance, and the company intends to gain market share in segments like coffee and breakfast. McDonald's is betting on its McCafe concept to expand sales and increase profit margins, while at the same time it's broadening its food offerings in the breakfast segment.

According to CEO Don Thompson: "We're enhancing the breakfast experience by creating more of a coffee culture through high-quality McCafe products. They pair very well with delicious foods, both existing and new."

Yum! Brands' Taco Bell will be launching its breakfast menu nationally on Thursday; the company will offer a waffle taco, a breakfast burrito, premium hot coffee, and Tropicana orange juice among other alternatives in its breakfast menu.

Fast-food companies are facing slowing demand in the U.S. lately, and breakfast seems to be the next battleground in the fast-food war. In addition, Starbucks faces growing competition from traditional coffee players like Dunkin' Brands.

Unlike fast-food chains, Dunkin' Donuts is benefiting from strong demand in the U.S., with comparable store sales rising by 3.4% in the country during 2013. Dunkin' Donuts introduced more than 40 new products during the year, and management is quite optimistic regarding customer response to these innovations and its implications for growth in the middle term.

A differentiated player
No company is completely immune to competition, but Starbucks has been able for a long time to deliver extraordinary financial performance while facing growing competitive pressure, and there is no reason to believe that's going to change anytime soon.

Starbucks benefits from tremendous brand power, a reputation for quality, and a differentiated customer experience. While McDonald's, Yum! Brands, and Dunkin' Brands compete aggressively in the low end of the pricing spectrum, Starbucks is uniquely positioned in the premium segment.

Starbucks reported a big 12% revenue increase during the quarter ended on Dec. 29 to a record $4.2 billion. Global same-store sales increased by 5% during the quarter, and the company opened 417 new stores for a total of 20,184 stores at the end of 2013.

Even in the Americas region, where market penetration is quite high, comparable-store sales increased by 5% on the back of a healthy increase of 4% in transactions and a 1% rise in the average ticket price during the last quarter. New store openings are not cannibalizing sales at existing locations, so Starbucks seems to be far away from reaching a saturation point.

In the China/Asia-Pacific region, where the company has a lot of room for store base expansion, Starbucks delivered a whopping annual increase of 25% in sales during the last quarter of 2013, so international expansion has a long way to go, judging by demand strength.

In addition, broadening the portfolio of products is a smart strategy to generate sales in a cost-efficient way, and the company is firing on all cylinders in that area. Acquisitions like Teavana, Evolution Fresh, and La Boulange provide a deep pipeline for product innovation in the coming years.

The company has recently announced it will start selling beer and wine in thousands of stores, adding more sophisticated food offerings such as bacon-wrapped dates with balsamic glaze and chocolate fondue to its new evening menu in those locations.

Alcoholic drinks are typically high-margin products, and the company's latest menu innovation could provide a lot of leverage by increasing sales during the evenings, a typically a slow time of the day for Starbucks. There could be considerable risks and complications involved in this move, but if it works out as expected, it could do wonders for Starbucks in terms of growth and profitability.

Bottom line
Growth tends to slow down as companies become bigger, and Starbucks is facing rising competitive pressure. However, Starbucks is a high-quality company with a differentiated brand and solid competitive strengths. Demand remains remarkably strong judging by financial figures, and the company has plenty of room for store expansion and product innovation in the coming years. This caffeinated growth story is far from over.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Starbucks Corporation Stock Quote
Starbucks Corporation
$111.24 (-0.16%) $0.18
McDonald's Corporation Stock Quote
McDonald's Corporation
$249.33 (0.21%) $0.53
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
$124.83 (-1.34%) $-1.70
Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/03/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.