Starbucks vs McDonald's

McDonald’s Corp. (NYSE: MCD) announced strong earnings. Comparable store sales skyrocketed by 13% from a year ago. Revenue rose 4% to almost $9 billion. Net income rose 63% to $1.8 billion. Chris Kempczinski, McDonald’s president and chief executive officer, admitted to a tough economy but said his company had cut through it: “Amidst a challenging operating environment, customer demand for McDonald’s Brand remains strong.” McDonald’s shares are up 17% this year. To the likely dismay of McDonald’s management, the stock of Starbucks Corp. (NASDAQ: SBUX) is up 50% over the same period. McDonald’s management has to question how that happened. (These are America’s most trusted food and drink brands.)

Starbucks is among the most maligned companies in America. By most reports, it has treated front-line employees poorly. Some workers who have tried to start a union have been treated even worse. The National Labor Relations Board has taken the employees’ side and criticized Starbucks’s senior executives. The villain in most of this is former CEO Howard Schultz, who returned to help the company out of a rut. He was even called before Congress to defend his behavior. Schultz left his successor Laxman Narasimhan a gift. Starbucks is stronger than when Schultz took the job.

In its most recently reported quarter, Starbucks revenue rose 8% to $8.7 billion. Net income rose 10% to $855 million. As he walked out the door, Schultz said, “Starbucks performance in Q1 demonstrates the strength and resilience of our business and accelerating demand for Starbucks Coffee all around the world.”

There is no easy explanation for the share price difference. Both companies face a slowing economy. Both face higher prices for ingredients used in the products. Both face pressure to raise wages for front-line workers. Both have store chains covering most of the world’s largest countries.

The trick to Starbucks’ success is that it is considered the better brand. That presumably means it has more pricing power. It had a better capacity to raise prices, maybe. Perhaps it has the means to keep more customers in an economic slowdown.

The truth is that the stock performance difference between the two companies is a mystery, and all observers can say is that, by this yardstick, Starbucks wins.

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