Coffee Wars Intensify As Coffee Prices Rise
George Leong | Jun 08, 2014 01:17AM ET
If you cannot get through the day without that cup of coffee, you may need to prepare to spend a little more to get it.
Coffee prices have been surging, up more than 30% year-over-year. The cost to have that morning cup of java has edged higher, but not at the same rate as the cash price of coffee.
The coffee industry is a multibillion-dollar industry in the United States and is a competitive marketplace, but at the top of the coffee heap is Starbucks Corporation (NASDAQ:SBUX), which has developed into an iconic brand both domestically and worldwide. In Asia, Europe, and Latin America, no matter where you are, it seems there’s a Starbucks near you. In China, the brand is rapidly growing, and the company plans to expand in this region with thousands of outlets.
Starbucks has also expanded into providing more menu alternatives and is involved in the tea market via its acquisition of the Teavana chain. The company is also marketing juices and operates a small chain of hamburger outlets in California.
For long-term investors, you cannot go wrong with Starbucks, which could serve as a good core holding in your portfolio.
However, in the traditional coffee and donut market, the top player at this time is the Dunkin Donuts chain, operated by Dunkin Brands Group, Inc. (NASDAQ:DNKN). The company also operates the Baskin-Robbins ice cream chain. Unlike Starbucks, Dunkin is primarily a U.S. brand that doesn’t have much recognition outside American borders; albeit, the company is looking to expand to the United Kingdom via the planned opening of 50 outlets in Greater London within five years. The company has also indicated a possible presence in Moscow. For the investor, I highly doubt Dunkin will become a global brand to the same degree as Starbucks—or even close to that.
A rapidly growing direct rival to Dunkin that is expanding in the United States is Canada-based Tim Hortons Inc. (NYSE:THI). Tim Hortons dominates the Canadian coffee market and is seen as a direct competitor to Dunkin. As of December 29, 2013, there were 4,485 Tim Hortons outlets overall, including 859 in the U.S.
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Tim Hortons is aggressively targeting the lucrative U.S. market for coffee, donuts, and meals. In my view, the company is a bigger threat to Dunkin than Starbucks due to their similarities in products and target consumers. Of course, Tim Hortons has a long way to go to catch up with the more than 10,000 Dunkin outlets in the U.S.
On a comparative valuation basis, Tim Hortons is more attractive, trading at 14.87 times (X) its 2015 earnings per share (EPS); Dunkin Donuts is trading at 21.88X its 2015 EPS.
My view is that it’s a toss-up between Dunkin and Tim Hortons, but if Tim Hortons can expand into the U.S., then it’s the stock that needs to be monitored.
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