Starbucks Is Piping Hot, But This Surprising Stock May Be the Better Buy

Whether you drink coffee or not, java is big business, with a retail market worth over $47 billion. Let's take a look at a couple of major players in this segment -- one of which you probably won't recognize for coffee.

Starbucks eyes international growth

The world's most dominant purveyor of java, Starbucks (SBUX -0.35%), operates nearly 35,000 stores worldwide. Starbucks stores account for an astounding 40% of all coffeehouses in the U.S.

At Starbucks' investor day earlier this month, the company announced aggressive international expansion plans. With the goal of reaching 45,000 stores by 2025, Starbucks plans to open eight new stores every day for the next three years.

A small percentage of these stores will open in the U.S., but Starbucks' main focus will be China, where the company aims to hit 9,000 stores by 2025. According to Belinda Wong, chair of Starbucks China, "we'll open one new store nearly every nine hours for the next three years." Starbucks Japan and U.K. will also be opening more locations.

Aside from expansion plans, Starbucks also laid out improvements to its loyalty program, which accounts for more than half of store sales, according to estimates. Considering that 25% of U.S. transactions come from mobile orders, Starbucks recognized a ripe opportunity to streamline the ordering process.

With the launch of Starbucks Connect, a tool that better integrates mobile ordering with individual stores, Starbucks has already observed increased sales at licensed stores.

Another takeaway from Starbucks' investor day was the company's emphasis on its workforce. With unionization efforts among Starbucks employees a major factor, the company has taken strides to better support and retain its employees. To lighten the burden for employees, Starbucks is rolling out new systems that automate certain processes.

Jam isn't Smucker's only jam

Many investors may not realize there's another coffee powerhouse, too. Aside from its signature fruit spreads, the J.M. Smucker (SJM 0.20%) family of brands includes such coffee favorites as Folgers, Dunkin', and Café Bustelo. American coffee drinkers have enjoyed Folgers brew for over 150 years, but coffee is a relatively new category for the J.M. Smucker Company.

The Ohio-based company broke into the coffee game in 2008, when the company purchased the Folgers brand from Procter & Gamble. As of 2020, Folgers was the clear leader of retail packaged coffee in the U.S., with sales of over $1 billion -- more than double its closest rival in the space, Starbucks.

Smucker's didn't stop with Folgers. To diversify its coffee portfolio in 2011, the company purchased Café Bustelo. Expanding further still in 2018, Smucker's launched the rustic boutique 1850 brand, a tribute to the year Folgers was founded.

Plus, Smucker's has an arrangement to sell packaged Dunkin' coffee products to grocery stores and other retail channels.

Combined with its broad family of retail food brands like Jif peanut butter and Carnation, Smucker's is a widely diversified consumer staples stock. The company also operates a broad family of pet food and snack brands, a $30 billion-plus industry in the U.S. alone. While Starbucks is more susceptible to fluctuations in the coffee market, Smucker's presents a more balanced and stable long-term business model.

Which is a better buy?

To compare these two coffee purveyors, let's look at market capitalization, price-to-earnings ratio, and price-to-sales ratio.

Since the two companies' price-to-earnings ratios are nearly identical, a lower price-to-sales ratio dictates Smucker's to be a better buy at the moment. However, for a long-term investment, you really can't go wrong with either of these coffee titans, which have both outperformed the S&P 500 for over two decades.