Starbucks (SBUX 0.39%) needs no introduction. The massive coffeehouse chain is well known among consumers and investors for selling high-priced and in-demand beverages around the globe. The business hit a rough patch during the pandemic, but it’s recovering nicely as the economic picture normalizes.
As of this writing, shares are 21% off their all-time high, although they’re up 30% in the past 12 months. They now trade at a price-to-earnings ratio of 31.7, which is a slight discount to its trailing one-year average. This might be a compelling opportunity for some investors.
But before you decide to caffeinate your portfolio with Starbucks, it’s critical to gain a better understanding of the business. Here are three important things the smartest investors know about this top restaurant stock.
1. Powerful competitive advantage
An effective strategy for boosting your investment returns is to only look for companies that have some kind of competitive advantage. Warren Buffett believes this concept, which is a key characteristic that allows a specific business to outperform its peers financially for a longer period, is important when picking stocks.
For Starbucks, its competitive advantage is quite easy to recognize. The company’s powerful brand is the most important ingredient in its success. According to Interbrand, Starbucks is the 51st most valuable brand in the world, and the second most valuable restaurant, behind McDonald’s.
While it’s hard to quantify this very qualitative trait, Starbucks’ pricing power demonstrates its brand strength. For an otherwise commoditized product like coffee drinks, it has figured out a way to charge premium prices. Over the past five years, the company’s gross margin has averaged a stellar 28%. And during a time of inflationary pressures, it has proved its ability to raise menu prices.
2. Starbucks is an international company
As of April 2, Starbucks had a whopping 36,634 stores worldwide. That makes it the third-largest restaurant chain by number of locations. No wonder many people think it’s a ubiquitous concept — it seems like there’s a location on every corner.
Investors would be surprised to find out that more than half of these stores — 20,590, to be exact — are located outside the United States. Starbucks made its first foray overseas in 1987, and it has been engaging in rapid expansion ever since. So this is wholeheartedly an international operation. In fact, there’s a Starbucks location in 80 countries. The products it sells can transcend borders. Caffeine beverages are loved everywhere, and this broad demand gives the company wide reach.
3. Leaning on the Chinese market
There’s a sizable market for Starbucks that has huge potential. With 6,243 stores in China as of April 2, the nation has long been a major growth engine for the overall business. More than five years ago, at the end of fiscal 2017, there were fewer than 3,000 Starbucks locations in China. Naturally, revenue there has climbed as well.
In 2020, Starbucks had a leading market share of 36% in the country, with Luckin Coffee a distant second. But China will continue to be the biggest growth market in the decade ahead. Management plans to have 9,000 stores open there by the end of fiscal 2025. And during its 2022 Investor Day, the leadership team said a new Starbucks will open in China every nine minutes through the end of the 2025 fiscal year.
The Brookings Institution estimates that by 2027, China’s middle class will total 1.2 billion. As a result, every Western consumer brand wants a piece of the action. These consumers are generally tech-savvy, too, so Starbucks’ loyalty program in China, which now has 17.8 million active members, will be critical to attracting new customers.