Why Starbucks Corporation (NASDAQ:SBUX)
I’m going to start off by saying that I don’t drink coffee a lot, but that really doesn’t matter. There are literally millions of people around the world who drink coffee, most of whom go to Starbucks Corporation (NASDAQ:SBUX), Dunkin Brands Group Inc (NASDAQ:DNKN), or their Keurig machines made by Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). I personally believe that Starbucks is the biggest player in that industry, because its brand is synonymous with coffee and screams quality. People enjoy going to their stores and, more importantly, people enjoy what they offer.
The Experience is Key
When you walk into a Starbucks Corporation (NASDAQ:SBUX), the feeling, the aroma, the great taste and smell, and those nice comfy chairs that always seem to be taken all contribute to the experience. Dunkin Donuts may have good (and cheap) coffee, but the feeling isn’t the same, and they have wooden chairs that aren’t nearly as comfortable. The Keurig machines have a unique experience of being able to make quality coffee at home, but there isn’t anything like the espresso machines and other appliances found in both Starbucks and Dunkin Donuts. You can’t make specialty drinks with a Keurig, and Starbucks’ new Verismo machine is set to directly compete against Green Mountain's Keurig.
I believe that a person who goes to Dunkin Donuts is there to get cheap coffee on-the-go. Green Mountain's Keurig machine is a perfect replacement for that type of person. But the element that separates Starbucks from the other two is the sit down experience, and Starbucks also offers coffee for people who need to get up and go. Starbucks is the only competitor who is greatly exploring the “sit down and drink coffee comfortably” market.
Starbucks has several advantages in their moat. First, the brand tells customers that quality is guaranteed, unlike any other walk-n coffee shop where the coffee could be good or bad. Also, customers have an incentive to come back because of the Starbucks Card used to generate rewards such as free refills and free drinks.
In addition, Green Mountain’s Keurig machine is now in shaky territory because of Starbucks Corporation’s (NASDAQ:SBUX) Verismo machine that does exactly the same thing, if not more. Keurig’s basic models can do just coffee and hot cocoa, and the top model (which isn’t even released yet) can do espresso. Starbucks’ Verismo can do all of that, plus lattes and mochas for the same price.
Furthermore, the advantage Starbucks Corporation (NASDAQ:SBUX) has is that GMCR doesn’t have stores to sell its products, but instead has to rely on other sellers. Starbucks keeps 100% of the profit from selling its coffee, whereas Green Mountain has to give a cut to the supermarkets and club stores.
Starbuck’s profit margin for 2012 was 10.41%, whereas Green Mountain’s profit margin was 9.42%. Also, Starbucks’ Return on Equity was 29.15% for 2012, and Green Mountain’s was 17.38%. Starbucks makes more because it controls everything from production to sale, and Green Mountain just controls the production part and not distribution to customers.
Additionally, Dunkin Donuts may have good coffee, but they’re not on the same level as Starbucks in terms of making it a good experience. Starbucks has products in place to want people to come back, such as Starbucks iPhone and Android Apps, free Wi-Fi, and the My Starbucks rewards concept of earning stars. Dunkin Donuts doesn’t have that. If I had a business meeting, or asked a friend to get coffee, I would much rather go to a Starbucks than a Dunkin Donuts. The Dunkin brand also doesn’t scream quality like the Starbucks’s brand. I personally think that the same people who go to Dunkin Donuts are also very likely to buy a Keurig or Verismo machines to get their daily fix of energy.