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 Fool.com 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.
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