Why Starbucks Could Double Again

Why Starbucks Could Double Again

In the course of its 21 year stock history, Starbucks 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 $74 in share price (at the time of writing), a better than 30% gain. There are many reasons to believe it will double again, and why you should own it for the long term.

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 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.

In the end, what I do know, is despite the constant threat of lawsuits, a possible FDA caffeine crackdown, and price increases, Starbucks 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 , which doesn't specialize in making coffee, and Dunkin' Brands , a donut chain with almost no presence in some parts of the US, including California.

McDonald's, though a large and capable organization, isn't quite selling to the same customer base as Starbucks 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 as opposed to a McDonald's. 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 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' 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.

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The article Why Starbucks Could Double Again originally appeared on Fool.com.

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. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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