Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Instant (Coffee) Karma: Will it be good for Starbucks or new rival Nestle?
Since it was founded by Howard Schultz a little more than twenty years ago, Starbucks (SBUX) has grown at a blistering pace, establishing itself as the world’s leading retailer and roaster of specialty coffee. But the Seattle, Washington-based restaurant operator largely ignored the lucrative instant coffee market. That all changed in 2009, when the company, experiencing the first real slump in its storied history (same-store sales languished in negative territory for several quarters), debuted its Via Ready Brew coffee line in North America.
Via products are well suited for today’s tough employment climate and generally tumultuous economic times, since they offer cash-strapped consumers quality coffee at less than $1 a cup. (A trio of single-serve Via packets sells for $2.95 at Starbucks locations; 12 packets sell for $9.95.) They also, importantly, open up a huge new revenue opportunity for the company at a time when domestic saturation is becoming more of a reality and same-store sales are still struggling to return to historical (mid-single digit) levels. Indeed, the instant coffee market, currently estimated at a hefty $21 billion globally, is thriving by all accounts. And instant coffee sales represent the majority of total coffee sales in many international markets, like Japan and the U.K., where Starbucks is looking to leverage its iconic brand name.
Of course, nothing, especially profits, comes easy in the cutthroat corporate world. While Starbucks increasingly competes with the likes of McDonald’s (MCD) and Dunkin’ Donuts in the restaurant space, the firm will now, with its Via offerings, be going head-to-head with giant packaged-food makers, including Nestle and Kraft Foods (KFT). Nestle, in particular, will likely prove to be a formidable rival.
The Swiss food outfit, which produces the established Nescafe Taster’s Choice line, is top dog in the instant coffee market at present. And it has already launched an aggressive advertising campaign attacking the new Via line as bland and overpriced relative to its own instant brand. (“Starbucks Via,” reads one of Nestle’s prominent billboard ads in Starbucks’ hometown of Seattle, “Four times our price, a fraction of our flavors.”) It’s even, taking a page from Starbucks’ own playbook, handing out free Taster’s Choice samples in major cities across the United States.
The two companies, meanwhile, are set to step up their rivalry in another arena, the ready-to-drink (RTD) cold coffee market. Starbucks’ participation in the smaller (compared to instant) RTD space has been limited until now, confined mostly to the firm’s bottled Frappuccino coffee and DoubleShot espresso drinks, which are category leaders here in the U.S. But the company recently announced plans to enter the $550 million European RTD coffee segment with the help of Swedish-Danish dairy products cooperative Arla Foods. (Arla will manufacture and distribute the Starbucks-labeled beverages throughout Europe.)
This move, again, pits the coffee chain against Swiss competitor Nestle. While the latter’s Nescafe canned products, like Nesfrappe and Xpress, have failed to excite consumers in the United States, they are a big success in European markets, where iced coffee drinks are far more popular and can be found in most large supermarkets. They are also known, thanks to years of multimedia marketing campaigns, as offering an attractive price/value proposition. As such, Starbucks will have a tough go of it, we think, attracting a loyal following on the other side of the Atlantic. That said, we wouldn’t bet against the coffee behemoth from Seattle just yet. With Howard Schultz back in charge (he returned to the CEO spot in early 2008), the company is in sharp turnaround mode and seems to have its fighting spirit back.