Coffee Will Be Tastier After George Howell's Comeback

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the four filters that Warren Buffett and Charlie Munger often seek for investment opportunities is “able and trustworthy managers.” Indeed, I think having a great chief would be extremely beneficial, and more often than not, a great leader can turn around a sinking ship. Investors might get very rich by just “following the entrepreneur,” investing in the company that an entrepreneur with a proven record of success is leading. 

George Howell, who is considered to be a specialty coffee pioneer and the expert on single-origin coffee, has decided to come back to the coffee business. George Howell is actually the founder of The Coffee Connection, the high-end coffee retailer located in the Boston area that became the first acquisition of Starbucks (NASDAQ: SBUX) back in 1994 for $23 million. At that time, Coffee Connection had around 22 stores in 3 different states. The purchase of Coffee Connection would allow the 300-stores Starbucks had at that time to expand in the East Coast market. From talking to customers, Starbucks found out that when Coffee Connection got acquired and its name was changed into Starbucks, the Coffee Connection roast would disappear. In addition, Starbucks had a right on “Frappuccino” trademark, which was originally developed and sold by Coffee Connection and George Howell.

Actually at that time, Howell didn’t like Howard Schlutz. Joe Caruso, an advisor to Howell, commented that the main reason for the acquisition of Coffee Connection was the real estate and merchandise; it was not about coffee. Thus, Schlutz offered the deal but got rejected twice.  The Boston Magazine quoted John Rapinchunk, Coffee Connection’s board member: “He got smart, and told George that he wanted the respect and the name and the quality.”  It was said that Schlutz promised to keep the Coffee Connection name and kept Howell as a coffee consultant. Gradually, the recipe of the Frappuccino was changed.

After spending the time with the United Nations and waiting for his noncompeting agreement with Starbucks to expire in 2001, he was back in the game, opening George Howell’s Terroir Cafe after that. According to Boston Magazine, after 8 years of operating his roastery, he was quite ready for the coffee battle as the business became profitable last year. According to IBISWorld, in 2011 Starbucks had quite a meaningful share in the US market, about 32.6%. The second biggest player in the Coffee and Snack Shops industry was Dunkin Brands (NASDAQ: DNKN), with a 16.1% market share. Other major players owned a much smaller share of the market, including Krispy Kreme Doughnuts (NYSE: KKD) with only 3%, and Einstein Noah Restaurant Group (NASDAQ: BAGL), with 2.5%.

Year-to-date, Starbucks has not been the best performer, as it only delivered nearly 20% total gain to its shareholders.

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SBUX Total Return Price data by YCharts

Krispy Creme Doughnuts and Dunkin Brands are the two best performers, giving investors total gains of 40.8% and 30.5%, respectively. However, looking at a 5-year horizon, Starbucks is the best performer, with more than 50% total gain, as Starbucks has the most consistently profitable operations with the market leading position. Thus, the market is giving Starbucks quite a generous valuation, of nearly 30x P/E. But Dunkin Brands is the most expensive with 78x P/E. Krispy Creme Doughnuts is the cheapest, with only 4.1x earnings valuation. Einstein Noah is in between, with 17.1x P/E.

Foolish Bottom Line

Indeed, the competition in the industry is fierce and will be fiercer going forward. With the comeback of George Howell, there will definitely a lot of changes in the coffee industry. If and when his new business IPO's, and if its price is reasonable, I am willing to be in for the long run. 

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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