It looks like Starbucks (Nasdaq: SBUX) has one more thing to worry about.
Procter & Gamble (NYSE: PG) is getting into the coffee wars, with an agreement to license, manufacture, and distribute Dunkin' Donuts coffee in big-name retailers nationwide. Starbucks has a similar retail deal with Kraft (NYSE: KFT).
Dunkin' Donuts certainly seems like a formidable rival. Even my Foolish colleague Nathan Parmelee, a fellow Starbucks shareholder, has admitted that he's often lured by Dunkin's brew instead. Now he'll be able to find it on supermarket shelves, too.
Procter & Gamble will distribute the coffee through retailers such as Wal-Mart (NYSE: WMT), Kroger (NYSE: KR), Costco (Nasdaq: COST), and even CVS Caremark (NYSE: CVS). P&G is no stranger to coffee -- it also provides Folgers and Millstone, as well as its "Home Cafe" single-cup coffee pods.
The move makes sense for both companies. Procter & Gamble gets to distribute a well-branded coffee, and although terms weren't disclosed, Dunkin' Donuts will most likely get royalty payments, along with the opportunity to expose more consumers to its coffee. (Dunkin' Donuts outlets are mostly concentrated in the Northeast U.S.)
The implications for Starbucks may be even more interesting. The java giant faces a variety of rivals on all sides, and now fiercer competition in the grocery aisles. Dunkin' Donuts' encroachment seems fairly noteworthy, since reaching consumers in grocery aisles is one way to help entice them into stores. Last I heard, Starbucks had a mere 7% of the market of coffee consumption here in the U.S. Obviously, it hopes to move that needle upward -- and the more rivals it has in areas where it might win over customers, the more difficult that growth could theoretically become.
I'm still a long-term bull on Starbucks; it's got a great brand and a history of doing things right, and I don't think investors should panic about its short-term troubles. However, as I said in response to Starbucks' latest earnings, Fools shouldn't forget that it's abundantly challenged these days, particularly by aggressive competition.
Starbucks and Costco are
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recommendations. Wal-Mart is a
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Alyce Lomax owns shares of Starbucks. The Fool's disclosure policy likes sour cream crullers.
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