Starbucks: From A Third Place To Everybody's Place

| About: Starbucks Corporation (SBUX)

I like Starbucks (SBUX). I spend a big part of my weekends sipping a Blonde Roast and reading my favorite newspapers in Starbucks. I have raved about the business model of the company in one of my books. Starbucks has been riding the baby boomer trend in the 1990s that created the need for a "third place," an "affordable luxury" where people could share and enjoy a cup of coffee with friends and colleagues, away from work and home. The chain has inserted itself into the American urban landscape more quickly and craftily than any retail company in history, and has forever changed the way Western companies market themselves to consumers.

In recent years, however, I have observed that Starbucks attracts bigger and bigger crowds, from all strands of life, including families with young children. This means that the company turns from a "third place" for the young and middle-aged professional to everyone's place. One factor that has contributed to this transformation is the broadening of the menu that includes more breakfast and light lunch item. Another factor is the weak economy that helps Starbucks attract customers from more expensive places. This is especially the case in Europe where the company competes against traditional cafeterias that are much more expensive than Starbucks.

All this is certainly music in the years of Starbucks stockholders. The stock has been a highflier, gaining 62% in the last year alone, compared to a 28% gain of its closest competitor, McDonald's Corporation (NYSE:MCD). The company is further beating McDonald's Corporation on revenue growth. We think that the stock is still a buy, for four reasons:

Starbucks versus McDonald's Financial Performance Statistics in 2011

 

Starbucks

McDonald's

Dividend

1.3%

2.9%

Operating Margins

13.27

30.71

Qtrly Earnings Growth (yoy):

10.20

10.80

Qtrly Revenue Growth (yoy):

 
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16.4

9.80

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1. Right market segmentation: The company has stayed with the upper-scale of the coffee market, competing on comfort rather than convenience, as is the case with its closest competitors, McDonald's and Dunkin Donuts (NASDAQ:DNKN).

2. Execution: In spite of expanding its product bundle, the company continues to maintain superior services, and a nice environment to hang around, delivering double digit earnings and revenue growth.

3. A superb leadership: Starbucks is lead by company founder Howard Schultz, who continues to come up with innovative products to expand the company's product portfolio.

4. China expansion: As is the case with Japanese people, Chinese people live as extended families in small houses. This means that there is a strong demand for Starbucks "third place." Currently, Starbucks has 700 stores in China, planning to bring them to a total of 1500 by 2015. Now, consider China's imense population of 1.3 billion people (ten times that of Japan) and its robust economic growth and you figure out the growth potential by the time Starbucks turns into everyone's place in that country.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SBUX over the next 72 hours.