McDonald’s and Starbucks stocks are on the mend since going public. The shares of the two largest American franchises are beating major averages by a big margin, as the two companies deliver what Wall Street is always looking for, defying critiques: strong growth on the top and bottom line.
“Revenue, and EPS upside and a guide-up all serve to support the stock’s 13-year high valuation,” said John Zolidis, following the release of strong financial results last week for Starbucks. “We continue to like the shares long, for the reasons we have reiterated (global growth, ROIC profile, FCF, return of capital, innovation in product and technology) although the name is not for the valuation sensitive and we do expect a period of consolidation at some point.”
How did McDonald’s and Starbucks do it? With location and branding, their two most important advantages.
Both franchises were the “early movers” in their own markets; and that allowed them to acquire the best locations at home and abroad—train and bus stations, and airports and city landmarks. Travel anywhere inside and outside the US, and almost always you will find a McDonald’s or a Starbucks around the corner.
Then there’s branding. Both franchises are well recognized for what they do. McDonald’s is recognized for fast, convenient, and inexpensive food. Starbucks is recognized for its “third place,” an “affordable luxury” where people can enjoy mixed espresso drinks with friends and colleagues, away from work and home.
Location and branding give the two franchises a “captive market.” And these advantages have allowed them to endure the many changes they have encountered over the decades they’ve been in business. Like change in consumer preferences, growing competition, and market saturation.
All they have to do is to adjust their product offering, and ride one trend after another.
Back in the 1960s, McDonald’s began by riding the baby-boomer trend, the swelling ranks of teenagers and the growing female labor force participation, by offering a fast and inexpensive menu. In the 1970s and the 1980s, the company rode the globalization trend by transferring the American Way of Life to many countries around the world. At the same time, McDonald’s adapted to the social context of each country by franchising to locals.
In the 1990s and early 2000s, McDonald’s adjusted the company’s product portfolio to emerging food industry trends—the refurbishment of McDonald’s restaurants to achieve a branded, updated, and more natural dining environment.
Nowadays, McDonald’s continues to broaden its product portfolio by offering high quality coffee and healthy drinks (either through its traditional restaurants or cafés), and everyday breakfast, competing head to head with Starbucks and local cafeterias.
Meanwhile, Starbucks has capitalized on its location and brand advantage to address changes in its own market.
Back in the 1990s, the growing ranks of mid-age professionals that created the need for a “third place.” The chain inserted itself into the American urban setting more quickly and craftily than any retail company in history, and forever changed the way Western companies market their brand to consumers.
Nowadays, Starbucks has broadened its menu to include breakfast items to compete with McDonalds, which has invaded its market;and it keeps on introducing new drinks to address the preferences of customers with a taste for non-caffeine drinks; and use technology to enhance overall customer experience.
The bottom line: Location and branding makes McDonald’s and Starbucks operate like ATM machines. All it takes to keep on feeding the machine with cash is to come up with the right product offerings to capitalize on the advantages that put each of them at the head of the game in the first place.