Who Can Compete With Starbucks Corporation (SBUX)?

McDonald’s is increasing changing its image to be one of quality, even going so far as to imprint what look like grill marks on its burgers and make its products appear to be handmade, even though they are still produced by machines.

This quality-at-a-discount branding is already infringing on Starbucks Corporation (NASDAQ:SBUX)’ offering, with the latter acknowledging competition from McDonald’s Corporation (NYSE:MCD) coffee offering. However, nobody is going to confuse McDonald’s and Starbucks on the basis of quality; more likely, price-sensitive consumers will increasingly view McDonald’s Corporation (NYSE:MCD) coffee as a viable substitute for Starbucks’, while more affluent customers will not switch.

Like Dunkin Brands Group Inc (NASDAQ:DNKN), McDonald’s has an important advantage over Starbucks Corporation (NASDAQ:SBUX) — it already has a global presence and strong brand equity in every major country on earth. Meanwhile, Starbucks has to build its brand and presence in these markets, which will take time and money that McDonald’s Corporation (NYSE:MCD) does not have to spend.

Bottom line

Starbucks commands a rich multiple for a reason; it is simply the best specialty coffee company on the planet. However, investors must decide if the company can fend off the competition before investing. Will Starbucks Corporation (NASDAQ:SBUX)’ store environment and great-tasting coffee keep customers paying high prices, or will customers eventually go to Dunkin or McDonald’s Corporation (NYSE:MCD) for lower-priced coffee?

It is not an easy question to answer, but any investor who buys the stock at 33 times earnings must be able to answer in the affirmative.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends McDonald’s and Starbucks. The Motley Fool owns shares of McDonald’s Corporation (NYSE:MCD) and Starbucks Corporation (NASDAQ:SBUX).

The article Who Can Compete With Starbucks? originally appeared on Fool.com.

Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.