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Wednesday, October 25, 2006

One Reason Starbucks Continues to Do So Well

By William Trent, CFA of Stock Market Beat

One of our early (and most popular posts) dealt with Starbucks’ (SBUX) growth opportunities and compared management’s growth plans to what McDonalds has accomplished. One key difference between Starbucks and McDonalds (MCD) is that the vast majority of Starbucks outlets are company owned (though there are also a number of licensees and many locations that simply sell coffee made from Starbucks beans). Still, the control over the entire process allows Starbucks to ensure quality and avoid some of the franchising pitfalls that befell companies like Krispy Kreme Donuts (KKD) and Boston Market (now a McDonalds subsidiary).

When entering new markets overseas, however, Starbucks often partners with local companies. Sometimes such partnerships are legal requirements for entering a market. Other times they simply reflect a desire to work with people experienced with the ins and outs of running a business in that particular company. Starbucks is usually a significant owner in the joint ventures and often intends to buy out its partners when allowed, as reported in Yahoo! Finance:

Starbucks Corp. said Tuesday it has expanded direct control of its operations in China by buying a Hong Kong company that has operated more than 60 of its coffee houses.

Starting with the local partner helps the company avoid many pitfalls, secure optimal locations, and deal with the unique aspects of operating abroad. Then, once the company has gained that experience itself it can buy out the local partner if desired. That’s good risk management and good business sense.

The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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