The changing competitive landscape
Starbucks Corporation (NASDAQ:SBUX) has been in heavy competition with McDonald’s Corporation (NYSE:MCD), which has re-focused its whole brand concept from being fast and cheap. The major fast-food chains have adopted more of a health-conscious approach to food, and have also raised the prices on food products in order to maximize profitability.
McDonald’s Corporation (NYSE:MCD) has been refocusing its efforts on improving the overall customer experience by re-modeling pre-existing stores and driving unit sales by improving the overall satisfaction and quality of the dining experience.
Like Starbucks, McDonald’s Corporation (NYSE:MCD) must aggressively keep up with the changing trends, which involves improving the overall layout and experience of stores. McDonald’s posted more or less a flat quarter, with 1% growth in both revenue and net income. The company’s performance was flatter than a football field, which may imply that investors are better served by investing into higher-growth names like Starbucks.
Starbucks’ revenue growth of 11% for the quarter outperforms McDonald’s 1% year-over-year growth. McDonald’s trades at an 18.7 earnings multiple compared to the 32 multiple-over-earnings for Starbucks.
Starbucks trades at twice the price-to-earnings multiple compared to McDonald’s Corporation (NYSE:MCD) but comparatively grew revenue 12x faster than McDonald’s for the quarter. Overall, Starbucks seems to offer better value for the amount of growth.
Guidance and conclusion
Starbucks posted a fairly solid quarter. The company’s sudden acquisition of Teavana was what led to the sudden increase in revenue year-over-year. Analysts’ earnings projections were beat because Starbucks was able to manage the Teavana operation in a way that would generate greater profitability than what was anticipated.
Going forward growth will be sustained as the CEO is leading the company to aggressively expand into other products and brands, while at the same time rapidly increasing store count in China.
The Teavana brand is likely to expand directly into China, as the country is one of the world’s largest markets for tea. Combine high-end tea with the fastest-growing country, and you have a winning business segment. Clearly Starbucks is on the right path, and there’s no question that investors should stay on top.
Comparatively it out-does McDonald’s Corporation (NYSE:MCD) in terms of growth and valuation. There’s no question that investors will be able to fetch a reasonable return on investment. The restaurant industry is fairly stable and predictable. What will lead to Starbucks’ growth are its proven business model, excellent management, and continuous store growth.
The article Starbucks Versus McDonald’s originally appeared on Fool.com.
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