Starbucks (NASDAQ: SBUX) and McDonald’s (NYSE: MCD) were both in the business of serving customers quickly but they weren’t exactly competitors, at least not until McDonald’s got into the coffee business and attempted to take market share away from Starbucks.
Both companies have global reach, are extremely well capitalized, have loyal customer bases, and continue to expand, so between the two, Starbucks vs McDonald’s stock, which is best?
The two chains have enjoyed tremendous growth for decades. Though McDonald’s popularized fast-food on-the-go, Starbucks made a name for itself as the “go-to” coffee brand that could deliver consistent quality in virtually every of the world. McDonald’s hasn’t let the grass grow under its feet though, and has diversified from burgers and fries to gourmet coffee, and even salads.
McDonalds Still Holds The Lion’s Share
As of 2023, the QSR industry, better known as the fast food industry, is valued at $650 billion, and has grown at a compound annual growth rate (CAGR) of 4.6% since 2018.
In the U.S., McDonald’s leads the fast-food sector with a 43% market share, based on 2022 data from Statista. Starbucks follows with a 14% share of market.
But those numbers don’t reveal the full story because Starbucks holds a commanding 39% market share in the specialty coffee market, per the Specialty Coffee Association of America.
When it comes to global traction, the two companies vie neck-and-neck with McDonald’s operating in 118 countries and about 38,000 outlets while Starbucks has a presence in 84 countries and more than 33,000 stores.
In emerging markets, though, McDonald’s comes a close second with 5,400 outlets in China compared to Starbucks’ 6,019 stores.
Starbucks Leads On Revenues
After reading their latest financial reports, it’s apparent that Starbucks has the edge with $32.2 billion in sales versus $23.1 billion for McDonald’s.
Notably, McDonald’s, though it lags on revenues, posted a significantly higher operating income of $10.3 billion compared to the $4.4 billion reported by Starbucks management. That suggests McDonald’s is considerably more efficient at scaling operations than is its rival.
It’s not entirely a surprise, however, when examining gross margins. McDonald’s has a 57% margin whereas Starbucks comes in significantly lower at just 26%.
Can Starbucks Catch Up?
Still, the past is the past, and for investors the question is can Starbucks improve and catch McDonald’s on the profitability metric? For that, we turn our attention to growth.
When it comes to growth, Starbucks top brass has forecast growth between 10% and 12% through 2025, primarily fueled by its international expansion.
On the other hand, McDonald’s expects 4% unit growth as a result of slowing consumer demand. A driver of growth for McDonald’s has been its franchise model and foray into healthier options as well as offering upscale coffee through McCafé.
Growth challenges for Starbucks lie in maintaining the quality of the coffee while scaling up whereas for McDonald’s the ongoing public scrutiny over health concerns associated with fast food are a perpetual battle.
Starbucks Paved The Way for Online Ordering
You can’t count out Starbucks from identifying new and innovative growth drivers because its history has been impressive in so doing. For example, its mobile order and pay technology accounted for 25% of all its transactions in 2022 – its app has processed an astonishing 70 million orders.
Meanwhile, McDonald’s partnered with IBM to help it launch AI-powered drive-thrus – so far the initiative has been a roaring success, leading to a 10% increase in average ticket size in stores where this technology was implemented.
The adoption of technology has naturally led to increased scrutiny from regulators over wages and employee conditions. McDonald’s, in particular, has been subject to several lawsuits regarding its franchise employment practices.
On the flip side, Starbucks has generally been ahead of the curve, offering healthcare benefits and stock options to even part-time employees.
Valuation Insights
When we compare the two companies on valuation, Starbucks has a $111 billion market capitalization but analysts think it’s worth about 15% more, and have put a $112.85 price target on the stock.
Perhaps surprisingly to some observers, McDonald’s market cap is almost twice that of Starbucks, and sits at $205 billion. Analysts are a bit more optimistic on its prospects and, among 32 analysts, the consensus price target is $328 per share, approximately 18% higher than where MCD share price sits.
Starbucks vs McDonald’s Stock Verdict
McDonald’s is almost twice as large as Starbucks and also has almost twice as much operating income despite Starbucks enjoying almost 50% more revenues than its fast food rival.
Analysts are also more bullish on McDonald’s prospects going forward, placing higher upside opportunity to fair value on it, even though it’s growing slower.
The lesson is clear for investors that Wall Street prefers an operationally more efficient company that is growing slower – McDonald’s – versus a higher-revenue generating, lower profit firm, even if it’s growing at faster rate. In short, McDonald’s is the better bet.
A final addendum to the analysis is a note on dividends. Neither company can be separated much on yield with McDonald’s paying out a 2.16% yield while Starbucks offer 2.19%. On the measure of payout ratio, though, Starbucks comes second again because it has a payout ratio of 63.09%, which is a bit too high to be comfortable that it’s sustainable when compared to McDonald’s 54.3% payout.
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