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Starbucks Corporation (SBUX): A Premium Company at a Premium Price

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When it comes to Starbucks Corporation (NASDAQ:SBUX), there are some interesting parallels between the stock as an investment and the company´s products: both Starbucks and its products are a bit pricey, but at the same time they both offer superior quality and some fairly unique characteristics. Waiting for a pull back before buying the stock could be a sensible approach, but make no mistake, any pullback is a buying opportunity with this high quality business.

A special business

Starbucks Corporation (NASDAQ:SBUX) practically invented specialized coffee as a popular product category. The company charges significantly higher prices that the competition and, judging by financial performance, consumers seem more than willing to pay premium prices for Starbucks products. This is a trait that investors should appreciate, since it generates higher profit margins for the company and its shareholders.

Starbucks Corporation (NASDAQ:SBUX)

Product quality is important, but Starbucks Corporation (NASDAQ:SBUX) is about more than that–brand power is a key competitive strength for the company. Starbucks has a unique cultural footprint and provides a differentiated customer experience which has been nourished through years of attention to detail. Things like the taste and smell of the products, store decoration, and customer attention are hard to measure and quantify, but they do have a very real economic value.

The company also has one of the best CEOs in corporate America. Howard Schultz didn´t just build Starbucks Corporation (NASDAQ:SBUX) into a gigantic corporation, he also came back to the company in January 2008 to correct the mistakes made by a management team that was too focused on opening new stores at the expense of diluting the Starbucks experience.

The company came through the great recession stronger than ever, and investors should feel reassured on the fact that Schultz understands Starbucks´s identity and success drivers like nobody else. Having the founder on board is quite comforting in terms of making sure that growth will not be detrimental to quality and brand differentiation over the next years.

Competitive strength

Competitors have increased their pressure over Starbucks Corporation (NASDAQ:SBUX) lately, and McDonald’s Corporation (NYSE:MCD) is perhaps the company’s biggest challenge on a global scale. The fast food giant has been quite successful with its McCafe initiative, McDonald’s charges lower prices than Starbucks, and it benefits from the enormously valuable location of its stores and drive-ins.

McCafe is a great move by McDonald’s Corporation (NYSE:MCD) — it adds to profitability due to higher profit margins than the traditional fast food business, and it diversifies the company away from those fattening products with their negative health implications. McDonald’s will certainly continue expanding in the coffee business, and its size and global presence make it a competitor to watch.

However, the damage to Starbucks Corporation (NASDAQ:SBUX) from McDonald’s venture into coffee has been contained so far, and it will probably remain so as long as Starbucks manages to keep its brand differentiation and superior experience. While Starbucks is the undisputed leader in upscale coffee, McDonald’s has a more attractive proposition for value-conscious customers, and there is no reason to believe that both companies can´t continue doing well by targeting their respective customer base.

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