The War of the Coffee Giants

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

Back in the day, coffee was used just to keep us going. But as time progressed, the same cup of coffee came to represent a more glamorous lifestyle. Suddenly people began drinking coffee to rejuvenate themselves, and spending $2-$5 for a cup of coffee was no longer considered ridiculous. This process is still under way, as Starbucks (NASDAQ: SBUX) and Dunkin Brands (NASDAQ: DNKN) continue to enter unexplored markets.

Reasons to be Bullish on Starbucks

Coffee behemoth Starbucks operates more than 18,000 outlets around the globe, and plans to open 1,300 more stores in FY13. Its presence in 61 countries somewhat advertises for the brand itself. But even adding 1,300 stores would contribute to nearly 7% of its annual revenues (best-case scenario). With such a magnitude of global presence, growth in same sale stores becomes more important than inorganic expansion.

For this very reason, Starbucks acquired the premium tea brand Teavana for $620 million. The latter operates around 300 stores, and with the acquisition, Starbucks would be able serve premium tea at almost all its outlets.

Starbucks also attracts customers by offering free Wi-Fi, reward points and seasonal discounts. Furthermore, its Verismo single-serving coffeemakers are capturing the market like wildfire.

Reasons to be Bullish on Dunkin Brands

Dunkin Brands operates with over 10,000 stores, which includes both Baskin Robbins and Dunkin Donuts outlets. Compared to Starbucks, Dunkin Brands is a much smaller company both by operations and enterprise value, which allows it to grow faster than its larger peer. As a result of rapid expansions and a cost-effective business model, shares of Dunkin Brands have appreciated by almost 34% over the last year, and its growth story is still intact. Its management aims to double its store count over the next 20 years, and would have the option to avoid economically troubled countries.

The company added just four stores over the last year, but despite that, it reported a staggering 69% spike in store revenues. Its management explained that it had acquired stores near the end of the quarter, and their financial results were not reflected upon its books.

But Dunkin Brands is not all about inorganic growth. Its same-store sales rose by 7%, which contributed to an overall 5% increase in quarterly revenues. It operating expenses dipped by 22%, and all together, its gross income rose by nearly 50%. Growth at such staggering rates is common amongst micro or small-cap companies, but the highly competent management of Dunkin Brands made it possible for the $4 billion enterprise (by market cap) to grow faster than its peers.

Wrap Up

Another peer, JM Smucker (NYSE: SJM), reported a staggering 50% spike in its K-cup sales. Its revenues were up by 6%, but this growth was mainly driven by its acquisition of Sara Lee. The acquisition of the coffee brand accounted for nearly 30% of its revenue growth, without which its revenue growth would’ve clocked in at around 4%. Even after the inorganic growth, the consensus annual EPS growth estimate for JM Smucker is only 8.43% while Starbucks and Dunkin Brands sport 18.57% and 15.43% respectively.

Although JM Smucker is a good company, I believe that investing in Starbucks or Dunkin Brands would greater returns.


PiyushArora has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, Panera Bread, and Starbucks. The Motley Fool owns shares of McDonald's, Panera Bread, and 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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