Starbucks (NASDAQ:SBUX) seemed the trendsetter and McDonald’s (NYSE:MCD) the follower when the burger chain recently introduced its line of McCafe premium coffees, aping the darker roasts at Starbucks.
But let’s forget about the stuff that gets pushed across the counter at these two outfits and instead focus on business strategy.
McDonald’s is seven years into a phase of slower growth in the number of its restaurants and of an intense effort at smarter, more cost-efficient operations. For its stock, the shift has been a huge winner. Starbucks slammed on the brakes more recently, deciding as same-store sales went into a two-year swoon (fiscal ’08 and ’09) to close about 1,000 locations and tighten up its own operations. Starbucks shares, too, have turned around.
Starbucks is also increasing the number of outlets that are licensees, as opposed to company-run, again following the lead of McDonald’s, which favors franchisees to company-owned outlets.
Why compare a coffee shop to a burger joint? Well, they operate from very similar real estate. They hire the same workers. And they compete for casual dining/snacking/sipping spending by consumers.
McDonald’s margins are better, in part because of its larger network of franchisees, which produce a more profitable revenue stream than do company-owned stores.
Starbucks, around only since 1985, for years outclassed McDonald’s in revenue growth, but they’re running neck-and-neck now, which is to say not all that rapidly.
McDonald’s — using new menu items, cleaner restrooms and faster drive-through times – has made each of its eateries more productive in recent years. Starbucks, too, is trying to make its labor scheduling more efficient, and run its stores in ways that waste less of the product. But it’s early going on those efforts.
Howard Schultz, the CEO, has made a lot of noise about selling food in recent years, but food sales at company-owned stores have been stuck at 17%-to-18% of sales, the last three fiscal years. Obviously, more food sales – but done so in a way that doesn’t turn off the latte crowd – would make stores more productive.
The question for investors is this: can Schultz really transform the Starbucks culture from one of growth to one of disciplined execution? Or, encouraged by recent improvement in earnings, will Schultz hit the accelerator again? The company plans to add 500 new stories in fiscal 2011. Will the site selection be better this time around? Will Starbucks avoid the sales cannibalization its last round of expansion created?
There are a lot of questions, yet to be answered, and a lofty stock price that the YCharts proprietary valuation system finds overvalued. McDonald’s less so.
McDonald’s has proven it can adapt to a slower-growth business model. Until Starbucks proves that it can, does it really deserve to trade at such a premium?