More than 70% of Americans drink at least one cup of coffee every week, according to the National Coffee Association. Two-thirds of them drink one cup a day. Coffee drinkers aged 25 years and older remain the industry’s biggest growth market.
Yet coffee prices are at an all-time high as last year’s drought in Brazil, the world’s largest coffee bean producer, impacted crops. Consumers should soon feel the impact at the grocery store and at the corner coffee shop.
That could hit the biggest coffee chains in the country. Let’s sit back, grab a cup of joe, and see which coffee stocks are the best investment today.
The largest coffee slinger is Starbucks (SBUX). With more than 18,400 U.S. locations and almost 21,800 international, Starbucks is the biggest coffee-centric chain, ahead of Dunkin, which has 13,200 locations worldwide.
Starbucks generated $36.2 billion in revenue last year, up 0.6% year-over-year, as it suffered a 4% decline in comparable store sales. It was worse in the U.S. as comps fell 6% due to transactions tumbling 10%.
Amid rising costs, the coffee chain cut back on promotions, which caused customers to turn away. Long wait times was another bottleneck that soured coffee drinkers on visiting.
Yet Starbucks has a new CEO in Brian Niccol, who made Chipotle Mexican Grill (CMG) a hot commodity, and he is making changes.
He eliminated the nickel-and-dime policy of charging for non-dairy milk alternatives, cutting down the menu by about 30% while introducing new items, and is limiting the number of mobile order items to 12 to cut down on long wait times.
Starbucks is something of a turnaround story. Its stock has trailed the S&P 500 over the past decade, generating total returns of 198% to investors versus a 247% return by the index. If coffee prices rise as much as feared, it could impact margins, which have begun recovering.
Although McDonald’s (MCD) is primarily known as a burger joint, coffee is an important component of its business.
The McDonald’s breakfast menu remains a critical part of the restaurant’s overall growth store. Coffee is a prime reason the restaurant operator has as much as a 35% share of the breakfast market.
Yet despite this key role, the overall health of McDonald’s has been ailing. Best known for cheap, tasty meals, inflation has impacted sales. It’s no longer seen as the go-to chain for affordability.
Like Starbucks, it has been having difficulty getting customers to return to its restaurants. Same-store sales were essentially flat globally, but down 1.4% in the U.S. But the chain recognizes there is a problem, with CEO Chris Kempczinski telling analysts, “We will stay laser-focused on providing an unparalleled experience with simple, everyday value and affordability that our consumers can count on as they continue to be mindful about their spending.”
It might be surprising then the stock isn’t performing as badly as you might expect. While shares are up 6% year-to-date, they are less than 3% below their all-time high hit last year. And over the past decade, MCD stock has outperformed the S&P 500 by quadrupling in value.
This is more of a get-back-on-track play with not so far to go.
In contrast to Starbucks and McDonald’s, drive-thru coffee shop Dutch Bros (BROS) is hitting on all cylinders. It just reported robust fourth-quarter earnings that blew away Wall Street expectations.
It is one of the fastest-growing chains in the country and recently opened its 1,000th store. While that still puts it well behind Starbucks and Dunkin, because it only operates in 18 states so far, it indicates it has a long runway of expansion ahead of itself.
Dutch Bros restaurants are typically only 800 square feet to 1,000 square, where as the average McDonald’s is four times larger while a Starbucks is about twice as large (more recently it has built more smaller sized stores of just 400 sf to speed up wait times).
What this means is the drive-thru chain can fit its stores in more locations than other chains can. Although it needs a large lot size to accommodate more cars, it has often has two lanes at each location to keep traffic moving.
It’s paying off. Sales surged 35% in the most recent quarter, handily outstripping analyst expectations, while per-share profits nearly doubled to $0.07. Same-store sales were up almost 7% year-over-year.
For investors looking for a hot coffee stock to buy, there doesn’t seem to be any reason to look further than Dutch Bros.
