Channel development: K-Cups
As an avid coffee drinker, the largest issue I was facing several years ago is no longer a problem today. I often needed an ‘afternoon boost’ in the form of a cup of coffee, but I would be too far away from a Starbucks Corporation (NASDAQ:SBUX) location. Today, I no longer have this issue due to K-Cups. K-Cups are single serving “cups,” or pods, that attach to a Keurig machine and brew a single cup of coffee in less than one minute. These K-cups can be bought at most major grocery stores, retail chains including Wal-Mart and Staples. Keurig is fully owned by Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR).
Back in May, Starbucks Corporation (NASDAQ:SBUX) announced an extension of a long-term strategic partnership with Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) that will enable Starbucks to expand its reach and gain additional share in the U.S and abroad. Starbucks currently enjoys an impressive 51% sales growth rate in K-cups, outpacing the overall category growth of 46%.
Naturally, Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) also comes out as a big winner as the single-cup coffee category is valued at $8 billion and has grown nine times faster than the overall coffee category during the past year. Sales of K-cups now accounts for nearly 30% of total coffee sales. Green Mountain Coffee Roasters has agreements with many other coffee and tea manufacturers such as Dunkin Brands Group Inc (NASDAQ:DNKN), Lipton, Snapple, and Smuckers.
Competition
A cheaper alternative to investing in Starbucks shares can be Dunkin Brands Group Inc (NASDAQ:DNKN), which has the same ambitious expansion plans to grab market share wherever possible both domestically and internationally. Dunkin Brands Group operates mostly out of the northeast, but has recently unveiled expansion plans to expand out west. The company has also been expanding its menu items and selling K-cups to capture the at-home brewing market. Dunkin Brands Group is franchised, so the company doesn’t have to put up capital to open a new store or embody most of the operating costs of running stores, which translates to a much higher operating margin (42.09% compared to Starbucks 16.44% reported in the second quarter of this year).
Finally, Dunkin Brands Group Inc (NASDAQ:DNKN) continues to see strong international growth with over 10,000 locations in China alone. While Dunkin Brands Group will likely never catch up to the size and scope of Starbucks, investors will likely see a return on their investment.
In 2013, both Dunkin Brands Group and Starbucks yielded around a 50% return, greatly outperforming the S&P 500. While this trend is likely to continue, I believe Starbucks will offer a superior return over the long run due to its much larger size and reach.
Conclusion
Looking forward to 2014 and beyond, investors can reasonably accept management’s revenue growth projections of 10% to 15%, driven by a continued expansion of the global empire both domestically and in key international markets. The company is also projecting 2013 EPS growth of 15%-20%, a number which, at the rate the company is expanding, can be sustained until at least 2015.
The article Why Starbucks Is a Good Bet for the Long Run originally appeared on Fool.com and is written by Jayson Derrick.
Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of Starbucks.
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