Get ready coffee drinkers around the globe...the single-cup coffee war is heating up......
Some of the main combatants in this battle include Starbucks (Nasdaq: SBUX) and Nestle ADR (OTC: NSRGY) with its Nespresso brand. The latest front in this battle sees Starbucks coming out this autumn with its own coffee maker branded Verismo in the North American market to compete directly with Nestle's Nespresso. These machines make espresso-based coffee drinks such as lattes in single-cup servings.
One of the first companies to suffer a wound from the fracas was not Starbucks nor Nestle, but Green Mountain Coffee Roasters (Nasdaq: GMCR). This company has been the leader in the United States for single-cup coffee makers with about a 75% market share for its Keurig single-cup brewing system machines. In the first quarter of this year, GMCR sold 4.2 million of the machines which is more than half the 6.5 million brewing machines sold in the entirety of the last fiscal year.
However, the company really doesn't make its money on its machines. Green Mountain's business is built on proprietary technology that merges home coffee and its K-cup pods. It sells its machines at cost, for as little as $100 and makes its profit on the individual pods (such as for Starbucks coffee) which retail for 60-80 cents each.
There will be a major difference between the Keurig machine and the one Starbucks is bringing out. Green Montain's is a low-pressure machine that produces only brewed coffee while Starbucks' machine will be a high-pressure machine which gives it the opportunity to deliver Starbucks-quality espresso beverages at home.
The machines will be produced in partnership with a German company, Krueger. Starbucks has yet to say how much these machines will cost but that the price of the capsules will be “comparable” to existing single-cup serving coffee products already on the market. Last November 1, Starbucks launched sales of Starbucks brand K-cups packs which were a raging success. Within two months of launch, Starbucks had sold 100 million of the packs.
Not to be forgotten is Nestle's Nespresso which dominates the European market for single-cup coffee makers. Sales of Nespresso last year rose by a heady 20% to more than $3.8 billion. Nespresso's profit margin is a very enviable 20%-30%. Nestle achieved those results by geographic expansion (including into the US), spending on advertising (such as with George Clooney), and setting up more than 300 boutique coffee stores around the world that reinforce Nespresso's image as a high-quality, premium brand product.
Nespresso's home turf of Europe may well be the most interesting battleground. Starbucks, which is already revamping its European operations, is soon expected to announce the European launch of its coffee capsule packs. But it faces a marketing juggernaut in Nestle which plans to open 40 more outlets this year including large stores in London and San Francisco to compliment its huge store in Paris.
It is unlikely that Starbucks will be able to beat Nestle and Nespresso on its home turf. Its success in the single-cup coffee war should come at home in the United States. It will be interesting to see if Starbucks can cut into the dominant market share in the US that Green Mountain Coffee Roasters currently holds.
This article was originally written for the Motley Fool Blog Network. Please check out my articles daily at http://blogs.fool.com/tdalmoe/.
Showing posts with label starbucks. Show all posts
Showing posts with label starbucks. Show all posts
Thursday, April 12, 2012
Tuesday, March 13, 2012
Starbucks' Overseas Operations Percolating
In 2008 Starbucks operations in the United States were not in good shape, forcing its founder Howard Schultz to return to the company and revitalize the business. Mr. Schultz was largely successful in his effort, resulting in roughly a sixfold gain in the stock since then.
But this focus on the U.S. came at the cost of ignoring its stores in the other regions of the world. Its European stores in Starbucks' first fiscal quarter accounted for less than a tenth of total revenues.
So now Starbucks is launching the same sort of effort towards its stores in Europe. Sales and profits for stores in this region continue to grow but their performance badly lags that of the company overall. For instance, operating margins at these stores are only 6.5%, well below the Americas' region operating margin of 22%.
The company has started a very aggressive marketing campaign which includes a promotion for free drinks. Starbucks is also rolling out a number of new offerings on its menu which cater to local tastes such as a lighter espresso in France. This campaign is sure to crimp operating margins over the short-term. The hope is that over the longer term, these changes will turn the tables on the European competition which has had little to fear from Starbucks since 2008.
However, Starbucks is not struggling in all of its overseas markets. Its Asian operations are percolating, with operating margins more than double that of Europe, on half the revenues.
The star market for Starbucks in Asia is China, where it operates more than 500 stores. Its chairman Howard Schultz called the Chinese market “the most profitable in the world”.
And with good reason. Operating margins in China came in at 34.6% in the first quarter, more than 5 times that of Europe. Its Chinese stores typically generate between one-half and two-thirds the sales of U.S. stores but are more profitable than those in the United States where operating margins were 21.8% in the first quarter. That is thanks no doubt to cheaper labor, rent and utilities.
Starbucks certainly has plenty of room for growth in the Asian region. Revenues from Asia accounted for a mere 5% of total sales (the Americas accounts for 75% of total sales) although sales in the region did rise 38% in the latest quarter from the same year-ago period.
The company has plans for aggressive expansion in the region. Foremost among the target markets will be China where there will be a rapid roll-out of stores. Mr. Schultz said, “We will open thousands of stores in China over the next few years.”
Starbucks also has its sights set on Asia's other emerging economic giant, India. It recently announced an $80 million 50/50 joint venture with Tata Global Beverages to bring its coffees to India. India is definitely a growth market. Its food services retail market generated about $8.2 billion last year and is forecast to grow more than 10% annually over the next five years by retail market consultancy, Technopak.
The goal of its Indian venture (which plans to have as many 50 stores open by year end) is to eventually equal the success the company has enjoyed in China. But it will face stiff competition from domestic rivals such as Cafe Coffee Day which is backed by U.S. private equity firm KKR. Not to mention all the small, local tea stalls that sell the Indian favorite, chai – a sweet, milky tea.
It is interesting to note that Starbaucks' biggest rival – Dunkin Donuts, part of Dunkin Brands Group (Nasdaq: DNKN) – also recently announced its entry into the Indian market with a local partner, Jubilant FoodWorks. Jubilant is the local partner for Domino's Pizza in India.
Dunkin will open its first store in June, several months ahead of the planned opening of the first Starbucks store. The company, however, will not focus on the coffee part of its business. Instead, it will focus on food and brand itself as an all-day eatery. Dunkin believes it will face less competition in this niche of the Indian market.
The goal of both Starbucks and Dunkin is to reduce the revenue dominance of the U.S. market and have rapidly growing sales overseas, particularly from the large emerging economies of China, India and others. Shareholders surely hope they succeed.
This article was originally written for the Motley Fool Blog Network. See all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
But this focus on the U.S. came at the cost of ignoring its stores in the other regions of the world. Its European stores in Starbucks' first fiscal quarter accounted for less than a tenth of total revenues.
So now Starbucks is launching the same sort of effort towards its stores in Europe. Sales and profits for stores in this region continue to grow but their performance badly lags that of the company overall. For instance, operating margins at these stores are only 6.5%, well below the Americas' region operating margin of 22%.
The company has started a very aggressive marketing campaign which includes a promotion for free drinks. Starbucks is also rolling out a number of new offerings on its menu which cater to local tastes such as a lighter espresso in France. This campaign is sure to crimp operating margins over the short-term. The hope is that over the longer term, these changes will turn the tables on the European competition which has had little to fear from Starbucks since 2008.
However, Starbucks is not struggling in all of its overseas markets. Its Asian operations are percolating, with operating margins more than double that of Europe, on half the revenues.
The star market for Starbucks in Asia is China, where it operates more than 500 stores. Its chairman Howard Schultz called the Chinese market “the most profitable in the world”.
And with good reason. Operating margins in China came in at 34.6% in the first quarter, more than 5 times that of Europe. Its Chinese stores typically generate between one-half and two-thirds the sales of U.S. stores but are more profitable than those in the United States where operating margins were 21.8% in the first quarter. That is thanks no doubt to cheaper labor, rent and utilities.
Starbucks certainly has plenty of room for growth in the Asian region. Revenues from Asia accounted for a mere 5% of total sales (the Americas accounts for 75% of total sales) although sales in the region did rise 38% in the latest quarter from the same year-ago period.
The company has plans for aggressive expansion in the region. Foremost among the target markets will be China where there will be a rapid roll-out of stores. Mr. Schultz said, “We will open thousands of stores in China over the next few years.”
Starbucks also has its sights set on Asia's other emerging economic giant, India. It recently announced an $80 million 50/50 joint venture with Tata Global Beverages to bring its coffees to India. India is definitely a growth market. Its food services retail market generated about $8.2 billion last year and is forecast to grow more than 10% annually over the next five years by retail market consultancy, Technopak.
The goal of its Indian venture (which plans to have as many 50 stores open by year end) is to eventually equal the success the company has enjoyed in China. But it will face stiff competition from domestic rivals such as Cafe Coffee Day which is backed by U.S. private equity firm KKR. Not to mention all the small, local tea stalls that sell the Indian favorite, chai – a sweet, milky tea.
It is interesting to note that Starbaucks' biggest rival – Dunkin Donuts, part of Dunkin Brands Group (Nasdaq: DNKN) – also recently announced its entry into the Indian market with a local partner, Jubilant FoodWorks. Jubilant is the local partner for Domino's Pizza in India.
Dunkin will open its first store in June, several months ahead of the planned opening of the first Starbucks store. The company, however, will not focus on the coffee part of its business. Instead, it will focus on food and brand itself as an all-day eatery. Dunkin believes it will face less competition in this niche of the Indian market.
The goal of both Starbucks and Dunkin is to reduce the revenue dominance of the U.S. market and have rapidly growing sales overseas, particularly from the large emerging economies of China, India and others. Shareholders surely hope they succeed.
This article was originally written for the Motley Fool Blog Network. See all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
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