Coffee Industry
Though Starbucks is doing great, it will face relatively tough competition in the upcoming years. McDonald’s Corporation (NYSE:MCD), Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) and Dunkin Brands Group Inc (NASDAQ:DNKN) share the coffee market with Starbucks. Despite the fact that McDonald’s didn’t do that well in 2012, its McCafe coffee had a great year. McCafe has done so well in the last year that McCafe customers have almost outnumbered McDonald’s regular “burger” customers. The core reason behind it is McCafe’s reasonable coffee prices. McDonald’s released its 4Q12 earnings on Jan. 23; though the company beat its estimates by reporting an EPS of $1.38, it still had an average year. In 4Q12, the company reported a 0.2% increase in sales at restaurants open at least a year. According to the company, this sales figure is of foremost importance to the company as it tells how much the company is making on net new restaurants opened (new restaurants less restaurants closed). In 3Q12, this figure dropped to a record low of 2.2%. As a matter of fact, we remain neutral on McDonald’s in the short run.
On Nov. 28, 2012, Green Mountain Coffee Roasters rose to a record high of $39.86 as the company reported a 22% rise in profits for 4Q12 amid huge K-Cup sales. In order to reduce its dependence on a single partner, GMCR is still adding more K-Cup licensees; the company doesn’t sell more than 6% of its K-Cups to a single partner. GMCR’s latte and cappuccino making “Vue machine” has shown a lot of promise lately and is giving Nestle’s Nespresso stiff competition. With GMCR’s patents for the K-Cups expiring last year, companies like Starbucks can cash in on this huge opportunity. Therefore, GMCR’s 1Q13 earnings, which are expected to be released on Feb. 6, would give the market a fair idea about its K-Cup sales. At this moment, we remain neutral on GMCR just like MCD.
Conclusion
Starbucks’ global expansion plans and Verismo are the biggest catalysts for the company in the coming years. China will remain one of the biggest markets for Starbucks where the company expects to see more than 1,500 stores by 2015. With Versimo doing really well in the market, Starbucks is expected to capture a huge market share through its K-cups, capsules, pods and portions.
One thing the company should realize is that it can’t remain that expensive relative to its peers. With more affordable brands like McDonald’s and Dunkin’ doing well, Starbucks should try to lower its prices to some degree. Dunkin’ has already expanded itself in the Northwestern region and expects to open more than 15,000 stores by the end of 2020. However, McDonald’s and Dunkin’ beating Starbucks in the near future still remains a distant call. At present; with an expected return of almost 20%, Starbucks is still the global leader in the coffee market and remains one of the top buys in the industry.
The article A Prosperous Year Awaits This Giant originally appeared on Fool.com and is written by Adnan Khan.
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