Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

McDonald’s Corporation (MCD), Dunkin Brands Group Inc (DNKN): Why Starbucks Corporation (SBUX) Could Double Again

In the course of its 21 year stock history, Starbucks Corporation (NASDAQ:SBUX) has doubled exactly 8 times. Minus the brief but major dips, the stock has taken off since ’08, and it has had a consistent rise in price for the last 6 years. Almost in a straight upward line. This year alone it has gone from $53.63 to $70 in share price (at the time of writing), a 31% gain. There are many reasons to believe it will double again, and why you should own it for the long term.

Starbucks Corporation (NASDAQ:SBUX)

Price increases and lawsuits are pretty irrelevant to the stock

Lets face it, coffee, just in itself, is a great business. You have a large and worldwide base of repeat customers, especially morning customers, who will always need coffee. Labor costs are low (the average hourly pay for Starbucks baristas is $9 an hour)  and brand recognition is high.

Coffee production prices can go up, causing you to raise prices for products and it won’t really affect customer willingness to pay. They’ve shown they have no problem ponying up $4 for a double mocha, venti latte with extra whipped cream. There’s even an index for it, partly because it’s so reliable.

The inelasticity of demand for their coffee leaves a lot of room to maneuver, and this works in Starbucks Corporation (NASDAQ:SBUX) favor profit wise. Their profit margins stand at 10% and gross annual profits at $1.3 billion. In fact, they just announced a 1% across-the-board increase on June 24 . What happened after that? The stock price rose again the next day.

Lawsuits don’t seem to be slowing them down either. They just lost a $14 million dollar suit from employees and another recent $1.7 million settlement (for scooped coffee beans. Don’t ask how). They are under constant attack by folks with (legitimate or otherwise) claims ranging from hot coffee burns to tip sharing. Suits can be costly and companies usually take a hit when word gets out. Not for Starbucks Corporation (NASDAQ:SBUX).

In the end, what I do know, is despite the constant threat of lawsuits, a possible FDA caffeine crackdown, and price increases, Starbucks Corporation (NASDAQ:SBUX) will continue its relentless march upward. Count on it.

Not much in the way of major competition

Besides local mom and pop shops, for major competition they’ve got McDonald’s Corporation (NYSE:MCD), which doesn’t specialize in making coffee, and Dunkin Brands Group Inc (NASDAQ:DNKN), a donut chain with almost no presence in some parts of the US, including California.

McDonald’s Corporation (NYSE:MCD), though a large and capable organization, isn’t quite selling to the same customer base as Starbucks Corporation (NASDAQ:SBUX) nor is it trying to offer a similar customer experience to capture that base. Adding WiFi won’t change the fundamentally different experience and level of service one gets when one walks into a Starbucks Corporation (NASDAQ:SBUX) as opposed to a McDonald’s Corporation (NYSE:MCD). The typical color scheme of a McDonald’s is loud and bright, feeling more like a playpen than a chill, coffee shop. Tough to imagine being comfortable doing important work or holding meetings in that type of setting, which is regularly what I see at Starbucks.

Buying coffee is usually not the first thing on McDonald’s customers minds, and if it is, they want it cheap and fast. Contrast this to the “premium” feel and subdued color scheme in a typical Starbucks store. People are willing to wait in line patiently, even long lines, just to get their coffee and pastries. Some stores have nice, comfy lounge chairs and fine artwork on the walls. Can your Average McDonald’s provide this and then justify charging higher prices? I don’t know.

Dunking Donuts, in the area of coffee, is suffering from much the same problem as McDonald’s: customer perception. Basically, they are cheap. Cheap usually means the perception of low quality. You can get a medium coffee for $1.79 at Dunkin’ Donuts. That’s great for customers, but bad for margins, and it makes your brand look cheapo.

When it comes down to it McDonald’s and Dunkin Brands Group Inc (NASDAQ:DNKN) Donuts’ serve an entirely different segment of customers than Starbucks. According to Pew Social Trends, folks making $75,000 or more, are typical Starbucks customers, in comparison with $30,000 or below for McDonald’s. No exact figures for Dunkin Brands Group Inc (NASDAQ:DNKN)’ Donuts but I’m sure it’s similar to McDonald’s. Add to that Dunkin’ Donuts stores are virtually non-existent on the west coast of the US and I don’t see them slowing Starbucks down anytime soon.

What about local coffee businesses and mom and pop stores? “Small” and “local” by definition mean limited reach. Coffee, though lucrative, is tough to scale, and I don’t see many stores growing into national chains rivaling Starbucks anytime soon. If they do they’ll probably get bought out by Starbucks. This was the fate met by Peets Coffee.

Revamped menu, acquisitions and Asian expansion
Starbucks acquired La Boulange, a trendy, popular Bakery started in San Francisco for $100 million, in 2012. They also acquired Teavana for $620 million and are aggressively opening more Teavana stores every quarter even as they add more Starbucks stores.

Since acquiring La Boulange, they added some of their great pastries (and much vaunted in San Francisco) items to their menu.   Customers were clamoring for more pastry options and that’s what they got, La Boulange pastries are delivered fresh every morning to Starbucks stores.

As it stands they have about 11,100 company locations, and they plan to open up about 600 locations in North America and another 600 in Asia.This is a great stock to buy and hold on a time horizon of the next 3-4 years, see where things go from there and, if necessary, reevaluate your course.

The article Why Starbucks Could Double Again originally appeared on and is written by Marcus Tisdale.

Marcus Tisdale has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald’s, and Starbucks. The Motley Fool owns shares of McDonald’s and Starbucks.

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

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.