Through his conglomerate Berkshire Hathaway, Warren Buffett has invested in a number of different industries over the years ranging from banks and airlines to energy and railroads. One sector he has also shown familiarity with is the restaurant business, at one point owning a stake in Restaurant Brands International.
But even an investing legend such as Buffett can’t pick every stock market winner. The Oracle of Omaha himself is bound to miss some big winners, like this well-known restaurant stock.
Elevating the coffee game
Although Buffett is a big Cherry Coke drinker, he missed the boat on popular caffeine giant Starbucks (NASDAQ:SBUX). With a stock price that has soared more than six-fold over the past decade, the coffeehouse chain has significantly outperformed both Berkshire Hathaway and the broader S&P 500 market index.
Starbucks has an incredible 33,295 locations worldwide today, making it one of the largest restaurant businesses in the world based on that metric. In the most recent quarter, revenue hit a record $7.5 billion, and U.S. same-store sales soared 83% as Starbucks returned to growth mode following the pandemic’s negative effect in the year-ago period.
What really stands out is something that fits what Buffett seeks in an investment: an economic moat. Starbucks has been thriving primarily as a result of its powerful brand. That’s a unique business advantage that rivals just can’t reproduce. And its strategy of elevating coffee drinking to a premium experience is a proven success. As a result, Starbucks has single-handedly altered the market landscape, as coffee enthusiasts today have no problem paying a few dollars for their favorite drinks.
A strong brand is something Buffett loves, and Starbucks certainly possesses this trait. The intense customer focus has resulted in the business being widely recognized globally. And the company’s first-class rewards program and digital infrastructure only bolster its enduring customer loyalty.
Not only does Starbucks have an impressive 24.2 million active rewards members in the U.S., the company has 17 million in the important Chinese market. These are Starbucks’ biggest supporters who usually spend and visit more, and they provide the business with an extremely valuable engagement channel. This also lets Starbucks serve its customers in whatever ways are most convenient for them, whether it be delivery, curbside pick-up, or the popular drive-through option. If a company doesn’t put the customer above everything else, chances are the stock won’t perform well over the long term. Starbucks is not falling into that trap.
While Starbucks’ business model hasn’t changed much over the years, the business has excelled at product innovation, constantly introducing new menu items that encourage people to come back. And this results in pricing power, another characteristic Buffett loves.
Starbucks presents similarities to Berkshire’s investment in Apple because the coffee behemoth, like the consumer tech ruler, has shown that it can raise prices with seemingly minimal effect on its sales. Again, this all comes back to selling a premium product with a strong brand.
Even the best investors miss some winners
It’s no debate that Warren Buffett is one of the greatest investors of all time. But no matter how skilled or experienced an investor you are, there will always be some missed stocks. That’s the nature of the investing game.
Buffett was clearly familiar with the restaurant business, but he never invested in Starbucks for reasons unknown. It even had many of the qualitative traits he likes in businesses, like a powerful brand, customer obsession, and pricing power, yet it never became a portfolio holding.
For individual investors, it pays to listen to your gut when looking at stocks, primarily those whose products and services you are familiar with. Then, if you like many things about a company, don’t hesitate to put some cash to work. That was the case a decade ago, and it’s the case today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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