Coffee: America's Favorite Addiction
Stephanie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Caffeine consumption is a morning ritual for many Americans. While energy drinks and sodas comprise some of that consumption, coffee is still the go-to morning drink for many people.
Nowhere is this more apparent than Starbucks (NASDAQ: SBUX). One look at an average location on a workday morning reveals just how addicted Americans are to coffee. Lines for Starbucks drive-thrus often stretch around the building, with consumers paying as much as $4 to feed that addiction.
Consumers pay more
On the heels of Starbucks' announcement that it would implement a slight pricing increase, the company revealed a 28% increase in earnings for its second quarter. Same-store sales were up 8%, while revenue was $3.7 billion, compared to $3.3 billion a year ago.
As Starbucks makes plans to offer yogurt in its stores by next year, analysts are closely watching. For its next quarter, EPS is expected to be between $0.59 to $0.60, with full year EPS between $2.22 to $2.23. With revenue growth of as much as 13% next year, Starbucks has high hopes its new initiatives.
A Cheaper option
Since 2001, McDonald's (NYSE: MCD) has tried to grab the American coffee dollar, but the company began its McCafe line as a national standalone restaurant in Australia in the 90's. The stores were a success, bringing in 15% more revenue than a McDonald's location and eventually became the largest coffee shop in Australia and New Zealand.
In America, McCafe has been incorporated into regular McDonald's locations, with the goal of being seen as a high-end brand of coffee. In 2011, the company credited McCafe with boosting sales 15% for the quarter, stating that its frozen drink line is particularly popular during the summer months.
The company's $7.08 billion in revenue fell slightly short of analyst expectations in its most recent quarter, the decline blamed on weak earnings in Europe and Asia. The shortfall has one investor posing an interesting idea: split McCafe off as its own chain. Is it possible we'll be passing a McCafe location on our own morning commutes?
It's not a far-fetched idea. One of the company's biggest struggles is competing with fast food giants like Wendy's and Burger King, while customers seek out healthier food choices from chains like Subway. Instead of adding more stores, the company could implant small McCafe locations in high-traffic business areas to lure some Starbucks customers.
Investors had hoped the company would rally, but this most recent disappointment only confirms that earnings will remain flat for the remainder of the year. Frankly, there is no rush to open a position in McDonald's
As America continues to recover from the recession, Keurig K-Cup coffemakers have given consumers the ability to brew Starbucks beverages at home. As proof that home-brewed coffee is hotter than ever, Zacks recently reaffirmed Green Mountain Coffee Roasters (NASDAQ: GMCR) "outperform" rating. In its most recent quarter, the company reported $1 billion in earnings, with revenue up 13.5% from 2012.
As the owner of Keurig brewing machines, Green Mountain benefits from agreements with Starbucks, where it helps package and distribute the retailers' coffee in a K-Cup format. In return, the chain sells Keurig coffeemakers in their stores. The company recently raised its earnings projection for the fiscal year, citing plans to bring even more big brands to its K-Cup portion packs. With a consensus rating of "Buy," the company's average target price is $73.25.
Foolish final word
The partnership between Green Mountain and Starbucks is symbolic of consumers' coffee consumption habits. Even those consumers who brew coffee at home make at least the occasional trip through the McDonald's or Starbucks drive-thru. Still, with partnerships in place, Green Mountain looks to be a promising company to satisfy consumer caffeine demand over the long term. With Starbucks continuing to be the name in coffee consumption, McDonald's will have to make serious changes to compete.
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Stephanie Faris has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's 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!