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Better Buy: Costco vs. Starbucks

Many readers out there are probably customers of both Costco (NASDAQ: COST) and Starbucks (NASDAQ: SBUX). And if your investing style focuses on quality businesses, they might just be in your portfolios as well.

Costco's stock is up five-fold over the past decade, while Starbucks' stock is up over six-fold. What makes these businesses great is just how vital they are to their customers' lives.

But the past is not what we should fixate on as investors, as the stock market is forward-looking. Let's assess the investment merits of these companies.

Image source: Getty Images.

The case for Costco

Costco received a major boost from the coronavirus pandemic, with customers coming to its warehouses with the intention of purchasing all their essentials in one trip. In the most recent quarter (Q1 2021), which ended Nov. 22, sales rose 16.9% from the prior year. What's more impressive is that the four-week period ending Nov. 29 was the fourth-straight month that revenue increased 15% or more from the same period last year.

Even as the initial surge of customer shopping in March and April has passed, Costco is still growing revenue at a high rate. Given that Americans are spending more time at home and spending less money on eating out or vacations, demand for fresh foods, electronics, furniture, housewares, and cookware have all been strong.

Probably the most important characteristic of Costco's business is its membership model. Owning a company with a recurring revenue stream is wonderful, as it adds predictability. The membership renewal rate in the most recent quarter in the U.S. and Canada stood at 90.9%, and Costco now counts 59.1 million households as members. Management's relentless focus on maintaining low prices should keep these customers satisfied, especially during a difficult year like 2020.

With eight new locations opened just in the last quarter, Costco remains concentrated on getting people into its warehouses, even with e-commerce sales jumping 86.4% in the last quarter. As many other retailers struggle, customers can count on Costco to provide exceptional value. This will support growth going forward.

The case for Starbucks

The work-from-home trend certainly hurt Starbucks' business, as consumers no longer needed to make coffee stops during their daily commutes to the office. The coffee chain has, however, been improving since the onset of the pandemic. Global comparable store sales, or comps, were down just 9% in Q4 2020 (ended Sept. 27, 2020), a significant improvement from the prior quarter, which experienced a 40% decline.

Starbucks has taken the current change in consumer behavior as an opportunity to adjust its store base, adding curbside pickup to 800 U.S. company-operated locations so far. The goal is to have curbside pickup at 2,000 domestic stores by the end of fiscal 2021. Most orders are made to go, so a small tweaking of its footprint to cater to this behavior is a smart move.

Unlike Costco, Starbucks does not officially have a membership-based business model. But with 19.3 million active rewards members, it unofficially does. Selling coffee in the manner Starbucks does, with a premium brand image centered around repetitive transactions, has led to customers forming daily purchasing habits.

Starbucks still has plenty of growth in front of it, as management expects to reach 55,000 locations worldwide by 2030, up markedly from the nearly 33,000 it has now. This would make it the largest fast food restaurant chain in the world, topping Subway and McDonald's. Much of this growth will come from China, where Starbucks plans to add 1,300 stores by the end of fiscal 2022.

The final verdict

Costco and Starbucks are excellent businesses that have both produced stellar returns for investors over the years, and I see no reason why long-term investors can't add both names to their portfolios.

But if I'm picking one here, I'd have to go with Starbucks. The coffee giant profits from small, repeat purchases built around consumer habits, and its products (caffeinated beverages) have global appeal.

With plenty of growth opportunities still ahead, Starbucks is the better buy.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale and Starbucks and recommends the following options: short January 2021 $100 calls on Starbucks. The Motley Fool has a disclosure policy.


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