Alternatives
There are several alternative ways to play the coffee industry. Arguably, the closest competitor to their café business is McDonald’s Corporation (NYSE:MCD), not so much in terms of product quality, but in that their other offerings, in addition to premium coffee drinks could steal a significant chunk of Starbucks Corporation (NASDAQ:SBUX)’s business. A plus for investors is that McDonald’s Corporation (NYSE:MCD) is more recession-proof than Starbucks, since its lower-cost menu items tend to do even better in a poor economy. Plus, their profits are not as dependent on commodity prices (the price of a pound of coffee beans can fluctuate pretty drastically).
I have written extensively about how McDonald’s Corporation (NYSE:MCD) is the best way to play fast food, and it is certainly a viable alternative here, especially for those who may be willing to give up a little of the growth potential in exchange for more stability and a great record of performance.
The biggest threat to Starbucks Corporation (NASDAQ:SBUX)’s take-home coffee business, in my opinion, is Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). I know that there are Starbucks K-Cups for sale, however this is a very small portion of Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s sales, and Starbucks has tried (unsuccessfully) to capture significant market share with its own single-serve brewing system.
I love Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) as a company, but in terms of an investment, my attitude has shifted to wait-and-see. Fears and uncertainty of the K-Cup patents expiring last year caused the stock to nosedive, trading as low as $17. With the market realizing that the fears were a bit overblown, and two good quarterly reports, shares have effectively tripled, and now may be a good time to head for the exits. Congrats to whoever bought near the lows, but I’m not sure that the upside potential in the intermediate term justifies the downside risk should a correction occur.
Conclusion
Starbucks Corporation (NASDAQ:SBUX) is a great way to play the coffee business, and I absolutely love Howard Schultz’s vision for the company. Despite the high valuation, there is definitely massive potential for expansion abroad and many niche areas to explore domestically, such as their recent ultra-premium coffee offerings to coffee connoisseurs. While McDonald’s Corporation (NYSE:MCD) is definitely a great alternative, if you can stomach a bit more risk, Starbucks Corporation (NASDAQ:SBUX) definitely could have another leg up from here!
The article Still Room To Grow For The Coffee Shop King? originally appeared on Fool.com and is written by Matthew Frankel.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
