McDonald’s Corporation (MCD): Starbucks Corporation (SBUX) Goes Farming for Premium Profits

Starbucks Corporation (NASDAQ:SBUX) has decided to continue their foray into the farming business. The company purchased a 593 acre farm in Costa Rica to expand its farmer support center program, which also features centers in Rwanda, Tanzania, Colombia, and China. The centers provide local farmers with the expertise and resources to improve coffee quality, to help lower the cost of the production of beans, and to increase the yield of coffee beans, particularly premium coffee beans.

Starbucks Corporation (NASDAQ:SBUX)

Similarly, coffee competitor McDonald’s Corporation (NYSE:MCD) will be investing $6.5 million over the next five years to support 13,000 Guatemalan coffee growers create sustainable coffee production environments to produce higher quality coffee beans.

Farmer support programs establish good will among coffee producing communities as well as ensure high quality coffee beans and efficient coffee production processes. The Costa Rican farm will also be used to conduct research on the Leaf Rust fungus, which is currently hurting coffee crops in Central America. However, Starbuck’s (NASDAQ:SBUX) main reason for purchasing the Costa Rican farm is not good will, but a management control strategy called vertical integration.

Its the supply chain, stupid

In his interview on CNBC, Starbucks CEO Howard Schultz emphasized that the purchase of this farm will combine technology and best practices to cross varieties and create micro-lots of very special, rare, and very high quality coffee. This is an innovative way to differentiate Starbucks and its competitors. The Starbucks CEO also mentioned that this is a continuation of the vertical integration strategy, which could lead to more vertical integration acquisitions.

In 2010, Starbucks bought a coffee farm in China, a rapidly growing coffee drinking market where competition is fierce with McDonald’s Corporation (NYSE:MCD)’s and Britain’s Costa Coffee. With a limited supply of high quality beans among all China coffee market competitors, Starbucks ensured that it will have always have a supply of high quality beans while also controlling the cost with the purchase.

Technology companies have mostly abandoned the vertical integration strategy, except one little company called Apple Inc. (NASDAQ:AAPL). Since the late Steve Jobs was a control freak, Apple has championed the vertical model. For example, the iPhone and iPad have their software and hardware designed by Apple. Additionally, they have also designed its own processors for these products. Apple is able to make rapid quality improvements such as enhancements to power consumption, as well as rolling out new features faster due to its control of the software, intellectual property of the system design, parts, and semiconductors.

Premium blends for premium profits

The one disadvantage of the Costa Rican farm is the cost to sustain and maintain its unique features, but the advantages in distribution, supply, and the overall process justify the investment. Starbucks will use the Costa Rican farm to experiment with different high quality blends and more importantly, create rare coffee that is uniquely crafted only at this farm. Since the strategy is to only distribute micro-lots of these rare coffee blends, Starbucks can sell this coffee at a premium to consumers, which could lead to higher margins in the future. Will this lead to an $8 cup of coffee? We will see.

The article Starbucks Goes Farming for Premium Profits originally appeared on Fool.com and is written by Sergio Balatan.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!