Starbucks versus Restaurant Brands August 3, 2019

Having recently looked in detail at Starbucks and at Restaurant Brands, I wanted to look at some of the big similarities and differences between the two businesses.

Both are in the quick-service food and beverage industry with tens of thousands of locations world wide. There are almost 31,000 Starbucks while Restaurant Brands has over 26,000 locations of which 69% are Burger Kings, 19% Tim Hortons and 12% Popeyes. Starbucks of course is mainly selling coffee as sales of a typical store are 74% beverage and just 20% food and 6% other.

Starbucks concentrates almost exclusively on its one brand (its other brands include Teavana and Seattle’s Best Coffee). Restaurant Brands has its three current brands and could acquire other restaurant brands over time. Therefore Restaurant Brands may grow somewhat by acquisition while Starbucks will grow almost exclusively organically. The Starbucks brand is known and recognized globally. Burger King is well known but is not close to the global leading brand that Starbucks is. Tim Hortons is not well known outside of Canada and some parts of the U.S. Popeyes is not well known outside of the U.S.

Both companies plan to continue to expand internationally by seeking partners or master franchise arrangements that involve hundreds or even a thousand or more locations.

Their franchise models differ greatly. Restaurant Brands has almost no company-operated locations whereas half of the Starbucks are company owned (and the vast majority in Canada are company-owned). For Restaurant Brands many or most locations in North America are owned by people who own just one or a few locations. Some Burger Kings are owned in very large groups but most are not. Outside of North America, Restaurant Brands partners with with companies that own many locations perhaps even all the locations in a given country. Starbucks has very few one-off type owners in North America. It is not a traditional franchise model. Instead they partner with companies that own many locations. And outside of North America that is even more the case.

Starbucks leases virtually all of its store locations and does not own them. In contrast, many Burger King and most Tim Hortons locations are owned by the company and the franchisees pay lease rents to the company.

Restaurant Brands in the case of Tim Hortons (but not Burger King or Popeyes) acts as wholesaler in selling coffee and many supplies and even equipment to franchisees. This does not appear to be the case for Starbucks.

Geographically, Restaurant Brands gets a high 56% of its revenue from Canada. This is due to collecting rent and providing wholesale supplies to Tim Hortons which results in far more revenue per location for the company as compared to Burger King and and Popeyes locations. 33% of its revenue is from the U.S.A. and the remaining 11% is spread across about 100 countries. In contrast, Canada would represent probably less than 10% of revenue for Starbucks and the total for the U.S.A alone is 70% with the other 30% coming from all other countries combines.

The balance sheet and debt leverage of the two companies is quite different. Starbucks has grown organically and most of what acquisitions it has made involved buying back non-company-operated stores. As a result purchased goodwill and similar intangibles represents “only” 25% of its assets. Restaurant Brands purchased its three brands with the result that purchased goodwill and similar intangibles represents 75% of its assets. Both companies are worth far more than the book value of assets. Debt finances 57% of the assets of Restaurant Brands while Starbucks appears similar at 52%. And Starbucks now has negative book equity due to share buy backs. But when it is considered that Restaurant Brands has vastly more goodwill and intangibles then Starbucks is far less leveraged in terms of debt versus market value. Restaurant Brands’ debt is 25% of the value of its enterprise value (book debt plus market value of equity). Starbucks’ debt is only 9% of its enterprise value (book value of debt plus equity). In terms of interest coverage ratios, Starbucks is far stronger.

Starbucks has been buying back vast amounts of its shares – partly because it came into a wind-fall of $7 billion by selling distribution rights for grocery stores product sales to Nestle but also by recently using large amounts of debt to fund buybacks. Restaurant Brands bought back only relatively few shares in recent quarters.

The above information may or may not be useful in evaluating whether the shares of the two companies are attractively priced but it does provide a description and comparison of the two.