Will fall­ing cof­fee de­mand hurt Keurig Green Moun­tain and Star­bucks?

Financial Mirror (Cyprus) - - FRONT PAGE - By Wil­liam Bias

On Mon­day morn­ing, Reuters cited a USDA re­port that in­di­cated that forecast cof­fee con­sump­tion in the United States will fall to “23.7 mil­lion 60-kg bags in the up­com­ing 2015/16 sea­son,” which rep­re­sents a 1.25% de­cline from the “year that ends in Septem­ber.” Reuters gave in­di­ca­tion of the pop­u­lar­ity of sin­gle serve pods such as Keurig Green Moun­tain Inc.’s (NAS­DAQ: GMCR) K-Cups.

Peo­ple for­merly brew­ing cof­fee in tra­di­tional cof­fee ma­chines typ­i­cally utilised more cof­fee grounds than they needed. The sin­gle serve pod en­ables con­sumers to make the ex­act amount needed. This means less waste and a smaller im­pact on the en­vi­ron­ment, which caters to the pref­er­ence of the mod­ern green con­sumer.

If history is any in­di­ca­tion, more ef­fi­cient cof­fee con­sump­tion will only help Keurig. In the most re­cent quar­ter, Keurig saw its pod sales in­crease 7%. A 14% in­crease in serv­ing vol­ume and a 1% price in­crease con­trib­uted to rev­enue ex­pan­sion in that seg­ment. In fis­cal 2014, Keurig Green Moun­tain saw its por­tion pack sales ex­pand 13%, with an 18% con­tri­bu­tion from vol­ume. Keurig cof­fee also pos­sesses a pretty di­verse K-Cup prod­uct line, selling teas and hot cho­co­late, and it will in­tro­duce the Keurig Kold sys­tem later this year.

How­ever, there are in­di­ca­tions that this trend may re­verse or slow­down. In the most re­cent quar­ter, Keurig saw its brewer and ac­ces­sories sales de­crease 23%. In fis­cal 2014, the com­pany saw its brewer and ac­ces­sories sales con­tract 1%. Fewer peo­ple pur­chas­ing the brew­ers could mean a lev­el­ing off, or even a de­cline, in pod pur­chases over the long term.

If do­mes­tic de­mand for cof­fee con­tin­ues to de­cline, Star­bucks Corp. (NAS­DAQ: SBUX) pos­sesses a fairly di­verse prod­uct port­fo­lio with its teas, cold re­fresher drinks, craft car­bon­ated so­das and smooth­ies that fall within its core com­pe­tency of bev­er­ages.

More­over, the com­pany har­bours a strong cul­ture of in­no­va­tion. Star­bucks likes to keep the con­sumer and the public en­gaged with new prod­ucts.

Glob­ally, cof­fee con­sump­tion fore­casts are trend­ing up­ward, ac­cord­ing to the USDA re­port, which means Star­bucks, with its global reach, will ben­e­fit. Con­versely, Keurig mostly op­er­ates in the United States and Canada.

Wall Street feels that Keurig pos­sesses greater po­ten­tial due to its low val­u­a­tion. Thom­son/First Call has a mean tar­get price of $116.69 per share, which rep­re­sents a 40% in­crease over its cur­rent stock price.

How­ever, Wall Street feels that Star­bucks has al­ready run its course. The con­sen­sus tar­get price is pegged at $55.40, a mere 2% over its cur­rent stock price.

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