How To Spot The Next McDonald's And The Next Starbucks

&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-975968928&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/975968928/960x0.jpg?fit=scale&q; data-height=&q;639&q; data-width=&q;960&q;&g; NEW YORK, NY, UNITED STATES - 2018/06/15: Star bucks Coffee shop in Union Square in New York City. (Photo by Michael Brochstein/SOPA Images/LightRocket via Getty Images)

McDonald&a;rsquo;s and Starbucks made investors who purchased shares of the two franchises early on very rich. And they still have some room for further gains for value investors in the form of dividend payouts.

But the golden days, when their sales and stock values soared quarter after quarter, is over.

For an obvious reason: they have conquered every market frontier.&a;nbsp;So, there&a;rsquo;s no room for further growth.

Wall Street has taken notice. Both franchises have been underperforming the overall market in recent years&a;mdash;see table 1.

Table1

McDonald&a;rsquo;s and Starbucks&a;rsquo; Market Performance

&l;/p&g;&l;div class=&q;table-wrapper&q;&g;&l;table&g;&l;tbody&g;&l;tr&g;&l;td width=&q;208&q;&g;Company/Index&l;/td&g;

&l;td width=&q;208&q;&g;2-year performance&l;/td&g;

&l;td width=&q;208&q;&g;5-year&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;McDonald&a;rsquo;s&l;/td&g;

&l;td width=&q;208&q;&g;28.66%&l;/td&g;

&l;td width=&q;208&q;&g;55.64&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;Starbucks&l;/td&g;

&l;td width=&q;208&q;&g;-18.10&l;/td&g;

&l;td width=&q;208&q;&g;43.36&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;SPY&l;/td&g;

&l;td width=&q;208&q;&g;27.52&l;/td&g;

&l;td width=&q;208&q;&g;66.77&l;/td&g;

&l;/tr&g;&l;/tbody&g;&l;/table&g;&l;/div&g;

Source: Finance.yahoo.com 6/29/18

That&a;rsquo;s why it&a;rsquo;s time for growth investors to look elsewhere to spot the next emerging franchise that can make them rich.

But how can investors identify this sort of franchise? What are the key metrics to look for?

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There are a couple of metrics.

The first metric is the business model -- the value proposition, the way the emerging franchise enhances customer value vis-&a;agrave;-vis the competition.

Once the business model passes the market test, the franchise can be scaled up by expanding in the domestic and overseas markets. And attain &a;ldquo;economies of scale,&a;rdquo; the cost savings associated with a larger production size.

That&a;rsquo;s what both McDonald&a;rsquo;s and Starbucks did, soon after their business model passed the market test. They opened up new stores in almost every corner at home and abroad.

The second metric is market saturation, the degree of market penetration. The lower the degree of market penetration, the higher the room for the franchise to grow by opening new stores.

Two good examples of two emerging franchises that satisfy both metrics are Dunkin Donuts and Chipotle.

They both have market-tested business models, and plenty of room to grow. Dunkin Brands have 10,858 stores and Chipotle has 2,250 stores, a fraction of McDonald&a;rsquo;s and Starbucks stores&a;mdash;see table 2

Table 2

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Number of Stores For Major Franchises

&l;div class=&q;table-wrapper&q;&g;&l;table&g;&l;tbody&g;&l;tr&g;&l;td width=&q;208&q;&g;Company&l;/td&g;

&l;td width=&q;208&q;&g;12-month performance&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;McDonald&a;rsquo;s&l;/td&g;

&l;td width=&q;208&q;&g;35,000&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;Starbucks&l;/td&g;

&l;td width=&q;208&q;&g;28,218&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;Dunkin Brands&l;/td&g;

&l;td width=&q;208&q;&g;10,858&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;Chipotle&l;/td&g;

&l;td width=&q;208&q;&g;2,250&l;/td&g;

&l;/tr&g;&l;/tbody&g;&l;/table&g;&l;/div&g;

Wall Street has begun to take notice. In the past twelve months, Dunkin Brands and Chipotle are up 24.10% and 6.11% respectively, compared to 2.87% and -15.78% for Starbucks&a;mdash;see Table 3.

Table 3

Dunkin Brands And Chipotle Beat McDonald&a;rsquo;s And Starbucks On Wall Street

&l;div class=&q;table-wrapper&q;&g;&l;table&g;&l;tbody&g;&l;tr&g;&l;td width=&q;208&q;&g;Company&l;/td&g;

&l;td width=&q;208&q;&g;Number of stores&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;McDonald&a;rsquo;s&l;/td&g;

&l;td width=&q;208&q;&g;2.87%&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;Starbucks&l;/td&g;

&l;td width=&q;208&q;&g;-15.78&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;Dunkin Brands&l;/td&g;

&l;td width=&q;208&q;&g;24.10&l;/td&g;

&l;/tr&g;&l;tr&g;&l;td width=&q;208&q;&g;Chipotle&l;/td&g;

&l;td width=&q;208&q;&g;6.11&l;/td&g;

&l;/tr&g;&l;/tbody&g;&l;/table&g;&l;/div&g;

Disclosure: I own shares of DNKN and CMG