Starbucks Corporation (SBUX), Dunkin Brands Group Inc (DNKN): Coffee’s Curse

Coffee brewers are looking (and smelling) good. On top of high growth, investors should take note of these companies’ income statements. If brewers keep prices consistent while futures fall, it should mean one thing: higher margins. That’s great news for shareholders, because higher margins lead to larger profits.

A Kraft brew

On-the-go coffee consumers are out of luck, but there are some advantages to brewing your own coffee. Prepackaged coffee makers J.M. Smucker and Kraft Foods (NASDAQ:KRFT) dominate grocery store shelves.

When you hear J.M. Smuckers, you probably think of jelly. On top of jams, preserves and hundreds of other products, Smuckers sells prepackaged coffee under the brand name Folgers and is licensed to sell Dunkin Brands Group Inc (NASDAQ:DNKN) brand coffee.

Unlike brewers, Smuckers lowered its prices on coffee three times since futures plummeted. The reductions have compounded, and Smuckers products now cost customers 6% less. Consumers responded, last quarter Folger’s sales increased 3% and Dunkin Brands Group Inc (NASDAQ:DNKN)’s sales grew by 11%.

To stay competitive, Kraft Foods followed suit, dropping its coffee prices by 6% as well. Kraft sells its coffee under the brand names Maxwell House and Yuban. Kraft holds the 4^th largest market share with 6.8% after Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) and Starbucks Corporation (NASDAQ:SBUX).

Coffee sales are up across the industry, providing a boost to most manufacturers’ share prices. Unfortunately, Kraft has fallen due to problems related to its spin-off from Mondelez International Inc (NASDAQ:MDLZ). The company is working through an inventory buildup, but saw sales slide last quarter after Kraft reported an 11% drop in revenue. As the company begins to find its feet again, decreasing coffee prices might just pick this stock back up.

The fine grind

According to the Wall Street Journal, coffee prices are quickly falling towards the cost of production. At that point, it would cost farmers more to grow coffee than to not grow it. Logically, prices will rise or farmers won’t grow.

Worldwide coffee demand is increasing. Eventually reserves will decrease, and prices will rise. However, until that day comes, high growth and low costs make coffee brewers and packagers very attractive investments. The money you spend on morning coffee might just find its way back into your pocket.

This article was written by Joshua Sauer and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned.The Motley Fool recommends McDonald’s and Starbucks. The Motley Fool owns shares of McDonald’s and Starbucks.

The article Coffee’s Curse originally appeared on Fool.com.

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