Wall Street Won't Tell You About Starbucks' Magic Bullet


Everyone likes stocks that go up. For the last few years, up is the only direction where Starbucks and Dunkin' Brands have gone. In the last year alone, Starbucks' stock price is up 31% and Dunkin' Brands' stock price is up 41%, which compare to a 24% rise in the S&P 500. However, investors don't care about the past return, they care about the future return. Lucky for Starbucks shareholders, one key advantage gives the global coffee powerhouse an almost insurmountable edge over Dunkin' Donuts -- and it is one that few Wall Street analysts even talk about.

Starbucks' magic bullet
Like Starbucks, Dunkin' Donuts benefits from economies of scale in purchasing, advertising, and distribution. Its brand name also confers significant benefits; customers know what to expect when they order a Dunkaccino or a Dunkin' Latte. Moreover, since more than 70% of Dunkin' Brands' franchisee revenue comes from U.S. Dunkin' Donuts locations, management remains focused on nurturing the brand to compete with Starbucks.

However, Dunkin' Donuts remains a far cry from Starbucks on one key measure: employee satisfaction. Here's why employee satisfaction is so important:

Packaged coffee sold in grocery stores generates lower wholesale margins than cold coffee at a coffee shop. Packaged coffee is of the same quality as that sold in a coffee shop (although consumers have to brew it themselves). The price difference comes from the experience of ordering and drinking coffee in the shop.

Starbucks justifies its high prices by providing great customer service in an inviting store atmosphere. Dunkin' Donuts is not known for a great environment or outstanding customer service -- an image that the company is trying to erase. The coffee chain is changing its stores to look more like Starbucks, adding comfortable seating, relaxing music, and places to linger.

However, Dunkin' Donuts is tackling only half of the problem. The store atmosphere is one thing, but customer service is quite another. In order to provide great customer service, employees must be happy, motivated, and inspired. Starbucks' employees fit the bill, but Dunkin' Donuts' employees do not.

Employee satisfaction
If employee ratings on Glassdoor are any indication, Starbucks has a hefty lead over Dunkin' Donuts in employee satisfaction. CEO Howard Schultz receives an 87% approval rating from Starbucks employees, while only 56% of Dunkin' Donuts employees approve of President John Henderson. Schultz, a superstar in the industry, came back in 2008 to turn around the company after it over-expanded in his absence. His legendary status gives him a cult-like following among employees and consumers alike -- an asset that Dunkin' Donuts cannot hope to replicate.

Source: Glassdoor

It is not just the CEO that gives Starbucks an edge; employees truly value their employment at the company. Reviews like "Great place to work" and "Best job experience of my life" sprinkle Starbucks' Glassdoor page. Dunkin' Donuts' page consists of decidedly more tame reviews, like "Good starter job" and "It was not a good experience; was treated harshly and given little pay." That may be why an overwhelming majority of Starbucks employees -- 79% -- would recommend the company to a friend, whereas only 41% of Dunkin' Donuts would do the same.

Moreover, employees give Starbucks a higher overall rating than Dunkin' Donuts' employees give their company; Starbucks is rated 3.7 out of five and Dunkin' Donuts is rated 2.9 out of five. Starbucks employees value the company's culture and values the highest, giving the company four out of five stars on this metric. Dunkin' Donuts receives a rating of less than three out of five stars in the same area. This speaks to the overall cohesiveness of the Starbucks environment.

Source: Glassdoor

Starbucks also receives high marks for compensation and benefits. Health insurance is a cornerstone of Starbucks' employee compensation packages. Even after admitting that Obamacare might increase the company's insurance costs, Schultz said he had a responsibility to keep providing health insurance even to part-time workers. In addition to generous health benefits, Starbucks employees may receive bonuses, 401(k) matching, tuition reimbursement, and a free pound of coffee each week. On the other hand, Dunkin' Donuts' compensation and benefits is its lowest-ranked component, as it receives two out of five stars there. Considering that compensation forms the basis of most employees' attitudes toward a company, the low rating speaks volumes about Dunkin' Donuts' employee satisfaction.

Foolish takeaway
Dunkin' Donuts may be changing its stores to look like those of Starbucks, but it cannot match the Starbucks experience without changing its culture -- something that is very difficult to change. Starbucks' employees' devotion to the company and its culture give the company a competitive advantage that few Wall Street analysts will talk about, but it is one that is crucial to Starbucks' ongoing success.

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The article Wall Street Won't Tell You About Starbucks' Magic Bullet originally appeared on Fool.com.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of 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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Originally published