Starbucks Is Winning The Coffee War With Its Gift Cards

Starbucks Is Winning The Coffee War With Its Gift Cards

For many shoppers this holiday season, the quickest and easiest gift to give someone is the Starbucks Gift Card. After all, we all love Starbucks, and a card says to that person, "treat yourself to a cup of coffee at Starbucks on me." This is one key advantage Starbucks has over competitors McDonald's and Dunkin' Brands Group . If you give a gift card from McDonald's or Dunkin' Donuts, that person assumes you're saying, "treat yourself to a Big Mac or a dozen donuts and gain weight." It just doesn't have the same ring to it as a gift card for Starbucks. The Starbucks Gift Card is another example of why Starbucks is winning the coffee war against McDonald's and Dunkin' Donuts.

That's a lot of gift cards
Gift cards are a huge business worldwide. The National Retail Federation estimates that 80% of all shoppers will purchase a gift card this holiday season. Starbucks says that one out of every 10 Americans received a Starbucks gift card last holiday season.

Since the Starbucks gift card was launched 12 years ago, $16 billion has been uploaded to the cards. Last year alone accounted for nearly $4 billion of that amount. On the Thursday before Christmas last year, more than 2 million cards were sold in the U.S. and Canada. That's a rate of nearly 1,500 cards every minute. This year Starbucks expects to sell even more cards.

Only Starbucks could turn a gift card into a status symbol
Only Starbucks could get buyers to pay $450 for a Starbucks Gift Card. Starbucks partnered with and offered 1,000 limited edition rose-colored Starbucks Gift Cards that only came with $400 pre-loaded on the cards. The other $50 bought Starbucks Gold Status, which gets you a free drink or food item every 12 visits.

The amazing thing about this card is that it sold out within six seconds. You would think that this special card would be a waste of $50, but not to devoted Starbucks fans who also got a blue gift box with a letter inside explaining the card's value. For those who weren't lucky enough to purchase one of the 1,000 cards, one of the cards sold on eBay for $1,296.

The coffee wars continue
Both McDonald's and Dunkin' Donuts aim to challenge Starbucks for coffee supremacy. I say good luck to both companies, because they are going to need it. In the fourth quarter, Starbucks' global comparable-store sales grew 7% on the back of a 5% increase in store traffic. Earnings per share increased 37%, and the company opened 558 net new stores in the quarter.

McDonald's is really hoping to be like Starbucks with its McCafes. In many ways, McDonald's missed the coffee craze and is now trying to catch up. The hamburger chain is hoping coffee can be one way to help turn sales around. In November, McDonald's global comparable sales increased only 0.5%. In the U.S., McDonald's comparable sales were actually negative and they fell 0.8% in November.

Dunkin' Donuts is faring better than McDonald's, but not quite as well as Starbucks. In the third quarter, its comparable sales grew by 4.2%. The company also opened 222 net new restaurants in the quarter. For those who live in New York City, Dunkin' Donuts is the largest chain in the city, where it beats out both Starbucks and McDonald's. Dunkin' Donuts has 515 locations in the five boroughs, versus 283 locations for Starbucks.

How do shares compare?
McDonald's has the highest dividend yield at 3.4%, but it was the worst performer among the three this year as its shares rose only 5%. The good news is that McDonald's is the cheapest in terms of its price/earnings multiple. McDonald's is trading at only 15 times next year's earnings. Dunkin' Brands is a little more expensive and trades at 25 times next year's earnings. Shares of Dunkin' Brands rose 42% this year and the dividend yield is 1.6%. Shares of Starbucks had a similar year with a 40% rise. Starbucks' dividend yield is slightly lower at 1.3%, but its shares are a little cheaper at 23 times next year's earnings.

Foolish assessment
Starbucks' customers remain fiercely loyal to their favorite coffee chain. This shows in the strong demand for their gift cards, and let's face it, no one takes offense when they get a Starbucks gift card for the holidays. After all, it's the thought that counts and who doesn't love a great cup of coffee? The Starbucks gift card is another example of why Starbucks continues to pull ahead of its rivals McDonald's and Dunkin' Donuts in the battle for your coffee dollars.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends eBay, McDonald's, and Starbucks. The Motley Fool owns shares of eBay, 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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