A recent study revealed that although soda remained the main source of caffeine for adolescents from 1999 to 2010, its contribution to overall caffeine intake plunged from 62% to 38%. Instead, similar to adult coffee-consumption trends that jumped from 78% in 2012 to 83% in 2013 alone, kids are drinking a lot more coffee.
Starbucks (SBUX 0.38%), Green Mountain Coffee Roasters (GMCR +0.00%), McDonald's (MCD 0.68%), Dunkin' Brands Group, and numerous other companies are opting to capitalize on these coffee trends. However, despite innovations and improvements from industry competitors, Starbucks still offers the best coffee play going forward.
By Greenraystudio Alex Upshur, via Wikimedia Commons
Reason No. 1: Starbucks' recent record quarter, outlook, and global opportunity
This past month Starbucks delivered record earnings, which included the consolidated operating margin expanding to a record 19.2%, strong holiday store traffic, which increased revenue 12% to a record $4.2 billion, and a 29% increase in consolidated operating net income to $814 million.
Additionally, the company's earnings outlook for the 2014 fiscal year increased from a prior estimate of $2.55-$2.65 per share to $2.59-$2.67 per share.
The global opportunity continues to be fertile for Starbucks due to the fact that the operating margin in the China/Asia Pacific (CAP) segment is the highest among all segments, coming in at more than 30%. Furthermore, strong performance in China helped offset the weakening of the Japanese yen against the US dollar within the CAP segment.
Reason 2: Evolution Fresh and Teavana's growth potential
The $30 million acquisition of Evolution Fresh in November 2011 allowed Starbucks to capture the $1.6 billion super-premium juice industry. However, the $620 million acquisition of Teavana in November 2012 gave Starbucks a foothold into the $90 billion global tea category.
Tea, not coffee, is the second most consumed beverage in the world...behind water. Whether Starbucks decides to combine existing Teavana stores with Starbucks stores, or create something entirely new, is still unknown. A second Teavana Fine Teas and Tea Bar opened in December to Seattle's University Village.
A recent NPD Group study, which analyzed trends in American diets from 2003 to 2013, showed Starbucks may be ahead of the curve. Out of all food and beverage options, Americans now consume soft drinks just 5.2% of the time -- down from 6.2%. In contrast, fruit-drink consumption increased from 5.3% to 6%.
Credit: Starbucks website.
Reason No. 3: Starbucks cards are better than cash
Starbucks has one of the most successful gift-card programs in the business. With more than 7 million active users in the U.S. alone, the program, which was launched 12 years ago, is now available in 28 countries.
Last quarter, the amount of dollars added on Starbucks cards jumped 24% to $1.4 billion.
Starbucks cards are better than cash for several reasons. They increase the overall customer base through first-time customers that receive these cards as gifts, strengthen customer retention efforts for current customers, and increase revenue over the long term.
Additionally, gift cards in general almost act as casino chips. Mental accounting research has shown there is a change in perception to the way people treat money replacements like tokens, casino chips, and gift cards. In the end, this means that customers are likely to spend more when they use a gift card than they would using cash.
Reason No. 4: Low worldwide coffee prices
Coffee prices dropped 20% in 2013 and 49% since 2011. Global coffee output has been scaling up as more acres are dedicated to coffee. Farming advancements have also created more productive coffee-bean plants.
Because retail prices for coffee have remained generally constant across the board, there is a ton of opportunity for Starbucks to maximize its profit margin.
Reason No. 5: Competition may actually help Starbucks long term
Green Mountain Coffee Roasters' recent partnership with Cola-Cola may be a minor distraction to the bigger picture. In its recent earnings, Green Mountain Coffee Roasters showed net sales increased 4% to $1.4 billion, while net income soared 28% to $138 million.
However, despite a record 5.1 million Keurig brewers sold, Keurig brewers and accessories revenue declined 2.2% year over year. This was due to price reductions, as competitors have progressively introduced their own single-cup coffee brewer variations that also use K-Cups. Amazon.com currently shows that four of the top 10 selling single-serve brewers are not Keurig.
Credit: Starbucks presentation.
McDonald's recently announced it will focus more on its coffee offering over the next few years, with a key interest in expanding sales of espressos and specialty coffees. The company last year announced a partnership with Kraft Foods to put packaged McCafe brand coffee in grocery stores.
McDonald's also announced several other priorities during its recent earnings call, including renovating its 14,000 U.S. restaurants with high-density prep tables. Adding espresso machines that could cost more than $10,000 each could backfire financially, while expanding the current 180-plus item menu further could complicate things.
Lastly, Dunkin' Brands Group's recent earnings showed that net income rose 23%, driven by strong same-store sales and increased customer traffic. Results further illustrate how lucrative the coffee market is for all participants.
Bottom line
Starbucks has drifted lower from its all-time highs in November. Right now could be an opportunity for a long-term play on coffee. The company has multiple sources of growth potential and provides a product that is consumed by numerous cultures around the world.
Now that competitors are trying to increasingly profit from the world's coffee addiction, Starbucks is an even stronger play. Starbucks just surpassed 20,000 locations globally. However, looking at its most recent earnings, the market is far from being saturated.
