The mere fact that Starbucks Corporation (NASDAQ:SBUX) trades at 33 times trailing earnings is an indication of where most investors stand on the issue of whether the company can maintain its growth trajectory and profit margins. The company is the clear leader in the U.S. premium specialty coffee market and has been able to raise prices seemingly at will.
However, while Starbucks will likely continue to lead the specialty coffee market in the U.S. — and expand its market leadership overseas — the company faces increasing competition both at home and abroad.
Starbucks Corporation (NASDAQ:SBUX) is the unquestionable market leader in the U.S. and is in the early stages of an international expansion plan that could lead to more revenue coming from international than domestic locations within the decade. The company’s primary emerging market targets — Brazil, India, and China — are all in the process of building an affluent middle class that will be drawn to premium specialty coffee.
Starbucks’ dominance in the U.S. and mouth-watering growth opportunities overseas make its expansion appear to be unstoppable. However, competition has intensified — both domestically and abroad — over the last couple of years. With no switching costs, Starbucks Corporation (NASDAQ:SBUX) must continually refine its in-store environment and product mix to justify its premium pricing.
Competition on all fronts
In the U.S., Starbucks should be most concerned about Dunkin Brands Group Inc (NASDAQ:DNKN), which has a strong base in the northeastern United States. Although the company has a number of appealing businesses under its banner, including its market-leading Baskin-Robbins concept, Dunkin Brands’ key growth driver is its specialty coffee sales. Specialty coffee not only commands high margins, but also has strong demand for a populace that hooked on coffee.
Dunkin Brands Group Inc (NASDAQ:DNKN) has one important advantage over Starbucks Corporation (NASDAQ:SBUX); while Starbucks builds and manages its own stores, Dunkin Brands sells franchises to independent owners. Investors can make the case that Starbucks captures more of the upside by owning its stores, but Dunkin Brands Group Inc (NASDAQ:DNKN)’ ability to rapidly expand its store presence with little capital investment makes it a major threat to Starbucks Corporation (NASDAQ:SBUX)’ lead in store count.
While Dunkin Brands poses a competitive threat to Starbucks in the U.S., McDonald’s Corporation (NYSE:MCD) represents a threat globally. The company’s fast-food restaurants have the leading market share in every major company except for China. Its McCafe specialty coffee offering has been an enormous success alongside other menu experiments like serving real fruit smoothies and a revamped breakfast menu.