Coffee House Soda Doesn't Taste Any Better
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Starbucks (NASDAQ: SBUX) is testing out soda in its coffee stores, latching on to the trend made popular by SodaStream (NASDAQ: SODA). It's a nice idea, but this fad can only last so long and isn't likely to turn the company's afternoon business around.
Jones Soda shares are up over 100% since February. The company makes fancy sodas like Strawberry Lime, Green Apple, and Blue Bubblegum, all using pure cane sugar. Its branding is distinctive and cutting edge. The all-time high for the stock was around $28 a share.
The high water mark, however, was reached in April of 2007. The amazing advance this year has taken the shares from around $0.25 a share to about $0.60. Since 2007, the company's top line has fallen 60% and earnings have been mired in the red. There's a reason why it's a penny stock.
Fancy sodas and other drinks can quickly gain traction, but can also rapidly fall out of favor as fickle consumers jump on the next fad. Jones is a prime example.
The “It” drink
SodaStream sells a machine that carbonates water and a collection of drink flavors used to make homemade soda. The “technology” SodaStream is based on is commonly known as a soda siphon, and it is anything but new. All SodaStream has done is build a “system” around this old technology. That's not much to build a business off of, but it has captivated consumers.
The top line has more than doubled over the past three years to $436 million in 2012. Earnings have gone from just under a dollar in 2010 to just over $2.00 per share last year. Its price to earnings ratio is about 27, that's expensive even though earnings have doubled in just a few years. If that growth doesn't continue, the shares are likely to fall back to Earth. Most investors should stay on the sidelines.
Coffee and soda
Coffee house giant Starbucks sports a P/E near 35. That's backed by sales that have increased from around $10 billion at the end of the 2007 to 2009 recession to a little over $13 billion last year. Earnings more than tripled over that span, hitting nearly $1.80 a share last year. The company is a category killer with a long history.
If you had to choose between SodaStream and Starbucks, coffee should win. However, according to The Wall Street Journal, Starbucks is testing soda in some of its shops made with a SodaStream-like device. The goal is to bring customers into its stores in the afternoon when business is light because people aren't as interested in coffee.
Serving fancy, and expensive, soda isn't a bad idea. However, latching onto the SodaStream fad doesn't mean the push is going to work. It requires customers to completely rethink the Starbucks concept, which isn't likely.
Although the company is doing well, recent moves show that it is desperately looking for a way to move beyond coffee. Soda is one example of this. However, over the last few years, it has also purchased tea merchant Teavana, French bakery firm Bay Bread, and juice maker Evolution Fresh.
It's tough to change
It isn't easy taking a brand into new areas. For example, Yum! Brands (NYSE: YUM) tried to shift its KFC brand toward more healthy grilled fare. However, you go to KFC for fried chicken, not healthy food. With the fried chicken image ingrained in customers' minds, it isn't surprising that franchisees were angry at the push.
Although the chicken concept has been in the news because of all of the problems KFC has faced in China, Yum! remains a solid company. The top- and bottom-lines will probably suffer in the near-term, but long-term growth should resume as China's chicken problems fade.
With a P/E near 24, the shares are a bit expensive compared to the P/E of around 19 at McDonald's (NYSE: MCD), which has a similar global reach and has been better able to broaden its reach.
For example, McDonald's has fairly successfully introduced such things as fancy coffee, salads, and wraps to its menu. While the company is known for burgers, it hasn't had any trouble expanding out its menu. But, it already attracts customers throughout the day, so the extension into new areas has been easier to achieve.
Although same-store sales comparisons have been relatively weak this year, the company is a leader with a long history of revenue, earnings, and dividend growth. It's probably a better option than Yum! today.
So, will soda work?
Starbucks is attempting to get customers into its restaurants at times when they are thinking about other food concepts. That's going to be tough. At the same time, it is deviating from the core product for which its known. That's a double whammy that probably won't work out too well. Don't expect much of a boost from soda.
The company would probably have better luck trying to aggressively expand the French Bakery concept, Teavana, or its fruit drink line. Investors should forget about the soda fad and look to the collection of acquisitions that the company has made to push growth. If those don't work, Starbucks has bigger problems than soda.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends McDonald's, SodaStream, and Starbucks. The Motley Fool owns shares of McDonald's, SodaStream, 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!