I’ll Have Starbucks Shares With Room For Growth

About a month ago, I posted about how I liked McDonalds’ coffee better than Starbucks’ coffee. Since that post, I’ve probably stopped for coffee three or four times on my way to work. With the exception of the one time I wanted a sausage biscuit with my coffee, I got my coffee at Starbucks. Why did I get my coffee at Starbucks if I like McDonalds’ coffee better? Convenience.

I pass two Starbucks stores on my three mile commute to work each day, and one of those is right outside my neighborhood. So instead of going an extra mile or so out of my way to the nearest McDonalds for coffee I like better, I buy Starbucks coffee, because the store is conveniently located. Am I lazy? Maybe. Or maybe it’s that Starbucks has built a business and a great brand and sells it in very convenient locations.

There has been a ton written about Starbucks since they reported last week that their earnings — which will be announced on Wednesday — will come up short of analysts’ forecasts. Starbucks seems to be the most blogged about stock in the blogosphere since that statement, even more so than Apple’s stellar 36% rise in earnings or Microsoft’s disappointing results. There’s been both good and bad written about Starbucks in the past few days.

There are two blog posts in particular that I found compelling on the subject of Starbucks. Minyanville writes about Starbucks competitive advantage in the US, and compares that with its advantage worldwide. However, the part of the post that sticks out for me most is an account by author Vitaliy Katsenelson about a radio show he did recently. As a gesture of kindness, he brought coffee for the radio host and himself to the show. He says that while consumer surveys show consumers prefer McDonalds’ coffee to Starbucks:

I would have looked silly if brought a McDonald’s coffee instead. Some may disagree about the taste, but Starbucks went into our dictionaries as quality coffee

McDonalds may be the king in the fast food world, but Starbucks is king in the coffee world.

The other blog post I found particularly interesting echoes sentiment I’ve felt about Starbucks for a while. In 2003 McDonalds was the unloved burger chain. McDonalds was having operational problems and accused of having too many stores. To make matter worse for ubiquitous burger chain, the low carb fad was sweeping the nation, and everyone was eschewing burger buns and fries. McDonalds’ stock hit bottom around $12.

McDonalds got the opperational problems under control, closed under-performing stores, and jazzed up its menu and stores. And good ol’ Americans, God bless us, we just couldn’t stay away from the burgers and fries forever; the low carb diet faded, as did McDonalds’ dark days in the early 2000s. McDonalds’ stock closed today at $59.59.

There’s a lot of parallels between McDonalds of 2003 and Starbucks of 2008. I’m not naive enough to think that Starbucks’ stock will recover just like McDonalds’. But I think the key to remember is that Starbucks has a tremendous brand and a great business model. Sure, everyone is getting into the coffee business now; even Dunkin Donuts is preaching the folly of having to speak “Fritalian” when ordering coffee. But just as Wendy’s and Burger King have found it impossible to knock off McDonalds in the burger world, competitors won’t be able to unseat Starbucks in the coffee world.

Disclosure: I own shares of Starbucks. The above is not a recommendation to buy or sell any stock mentioned.

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