Competition in the Coffee Industry is Heating Up

When it comes to investing in food and beverage companies, it is becoming increasingly more important for investors to consider which companies can expand operations and pass rising commodity costs to customers.  Over the past three years, companies such as Starbucks (NASDAQ:SBUX), Yum! Brands (NYSE:YUM) and McDonald’s (NYSE:MCD) have outperformed the market with returns of 371 percent, 92 percent and 66 percent, respectively.  However, there is more competition coming in the coffee industry that could dampen shares.

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On Wednesday, Dunkin’ Brands Group Inc. (NASDAQ:DNKN) announced plans to double its locations in the U.S. over the next two decades.  Currently, the coffee and donut company operates 7,000 stores across the country, and more than 80 stores in China (NYSE:FXI).  Dunkin’ went public last year and is seeking to expand its field farther westward from its traditional base in the northeast of the U.S.

  • According to industry research firm IBISWorld, Dunkin’ controls about 23 percent of the coffee and snack-shop market.  The company’s closest competitor is Starbucks, which controls about 32.6 percent, and operates about 11,000 stores in the U.S.  Meanwhile, Green Mountain Coffee Roasters (NASDAQ:GMCR) continues to lose market share, and will lose its patent protection for the K-Cup this year.  The share of coffee dollar sales held by Green Mountain’s single-serve products for the four weeks ended Nov. 27 declined to 8.4 percent, down 0.4 percentage points from the previous four-week period, according to a Bloomberg Industries analysis of data from researcher SymphonyIRI Group.
  • As Dunkin’ looks to expand, Starbucks is raising prices 1% in the U.S. Northeast and Sunbelt regions.  “These adjustments are the result of balancing the cost of doing business with competitive dynamics in these markets,” Starbucks spokesman Jim Olson told Reuters.  Starbucks previously said it expects rising commodity costs to lower fiscal 2012 earnings by about 21 cents per share.  Denny’s is also considering menu price increases this year.
  • Coffee shops will also receive more competition from non-traditional coffee sources such as McDonald’s.  An independent study last year revealed that customers who receive their morning coffee from McDonald’s were more loyal to the fast-food restaurant than customers that went to Starbucks and Dunkin’ Donuts.

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com