Winners, losers in coffee wars

Here's how price cuts at Smucker and Kraft could work out for the top players.

By InvestorPlace May 22, 2012 10:09AM

By Will Ashworth


The coffee wars escalated last week when J.M. Smucker (SJM) lowered its prices by 6% for Folgers and the rest of its brands sold in grocery stores. Immediately, investors began speculating who else would follow suit.


Just a few days later we got our answer as Kraft (KFT) announced it too was lowering prices by 6% for its Maxwell House and Yuban brands and by 10% for its Gevalia brand, which Kraft already was selling in Scandinavia to replace sales lost when it and Starbucks (SBUX) ended their relationship in 2011.


With arabica bean prices dropping by almost 30% in the past year, winners and losers should be sorted out. Let's see who they are.


Starbucks took over the sale and distribution of its packaged coffee on March 1, 2011. Since then, SBUX stock has increased 68% compared to 27% for Kraft. Most of Kraft's gain is due to its split later this year into two companies. Maxwell House, Philadelphia and Kraft's other slower-growth brands will be part of a North American grocery business under the Kraft moniker, while its higher-growth brands -- like Cadbury -- will operate as the newly created Mondelez International division, assuming shareholders rubber stamp the move in a vote Wednesday.


Whatever happens, it appears Folgers' move was meant to provoke a reaction from Kraft -- and that's exactly what happened. Folgers wants to take market share from Maxwell House, and I don't see how Kraft comes out of this unscathed.


However, over at Starbucks, I can say with much certainty that it won't be rolling back prices in either its channel development segment (formerly its consumer products group) or in its own stores. Customers have gotten used to paying current prices. So, it should benefit now from lower wholesale coffee prices, then it will simply hold the line on future price hikes when wholesale prices rise again.


It's been more than a year since Starbucks took back its consumer business, and sales have been brisk, up 56.4% to $781.9 million in the first six months of its fiscal year through April 1. I can see this business, which currently accounts for approximately 12% of revenue, growing to 20% of overall revenue. I just don't see the Folgers-Kraft price war affecting Starbucks in the slightest.


Green Mountain Coffee Roasters (GMCR), on the other hand, seems like it's in a heap of trouble. In March, Starbucks announced that it will be introducing Verismo, its own single-cup coffee machine, later this year, which will allow users to make espresso drinks in addition to regular brewed coffee. The news tanked Green Mountain's stock.


Supporters of Green Mountain mistakenly believe Starbucks is late to the party and that Green Mountain holds an insurmountable lead in the single-serve market. While the latter statement might be true, it made no sense whatsoever for the world's biggest coffee retailer to not have its own single-cup machine.


Starbucks CEO Howard Schultz rightly worked a deal with Green Mountain so Starbucks could sell its coffee in K-Cups for use with GMCR's Keurig machines because they're popular and distribution in consumer goods is everything. How else do you account for Starbucks' 56.4% increase in grocery store revenue?


This simply was a business decision by Starbucks to bide its time until it could eliminate the middleman. With patents ending this fall, Starbucks could opt to sell its own coffee pods for use in Keurig brewers.


In my opinion, lower coffee prices only exacerbate the situation for Green Mountain because the price drops commoditizes its product at a time when its most important customer is ready to go it alone. I don't see this ending well for the Vermont company.


Lastly, in addition to Folgers and Starbucks, another potential winner from lower coffee prices is Peet's Coffee & Tea (PEET), which saw first-quarter profits drop 39% as a result of roasting prices that were 44% higher in first quarter compared to last year. But this time next year, Peet's likely will report the exact opposite as lower prices in the future lead to higher profits. Much like Starbucks, Peet's likely will leave prices alone, opting to keep them consistent.


So in the end, it appears Starbucks, Folger's and Peet's will benefit from lower prices, while Kraft and Green Mountain suffer. But no matter what happens with prices, I'd stay away from Green Mountain. It's in deep pain -- just ask David Einhorn.


As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


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35Comments
May 22, 2012 11:36PM
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Starbucks should merge with Apple; their products are overpriced by about 100%, which is why I've never purchased anything from either of them.
May 22, 2012 9:44PM
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Personally, I could care less who wins the coffee battle there.  Bean prices went down by 30% and I'm still paying $10 for a can of coffee?  Maybe I'll switch to kool-aid.
May 23, 2012 12:33AM
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Seems to me that the real losers in the coffee wars are those who sucker themselves into buying grossly overpriced hot liquid that tastes like diesel fuel in a cup at hoity-toity coffee shops.
May 22, 2012 8:19PM
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Speaking of K-cups and coffee wars, has anybody figured out a way to make the throwaway cups recyclable or even environmentally friendly? 
May 22, 2012 9:09PM
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My husband prefers his coffee much stronger than I do so we are able to use the single serve twice. That cuts our price per cup in half. Also we take them apart after we've used them. I recycle the plastic cup and compost the coffee and filter. A bit messy but worth it to reduce pollution. 
May 22, 2012 9:55PM
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Oh. great the coffee gestapo is here.
May 22, 2012 9:42PM
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I've traveled aroune the world and in Germany they have coffee shops that just draw you in. smell of coffee is marvelous to your senses. Starbucks coffee stands just reeks with foul odor. If I had a business that smelled like I would be ashamed of it. I can tell the difference between real coffee and garbage.
May 22, 2012 9:23PM
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This article is great to point out the winners and losers on Wall St, but with coffee bean prices dropping like this, one sector of the coffee trade  will come up a loser for sure - the coffee farmer. Usually a family operated small farm that will take the biggest hit as usual. BUY FAIR TRADE COFFEE 
May 22, 2012 9:06PM
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Starbucks is so over priced as to be laughable, except people keep spending ridiculous amounts of money for coffee, flavored and otherwise. Tried Starbucks grind your own and it was about the equivalent of basic Maxwell house. Maybe. Best cup of coffee from a chain? McDonalds, hands down, if it's fresh.
May 23, 2012 7:35AM
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Our family buys what ever is on sale...

IF SALE PRICE IS LOW ENOUGH, WE BUY A BUNCH AT THAT TIME...

Drinking some of that, good to the last drop stuff, as I type...lol

May 23, 2012 7:28AM
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Buying coffee brewed outside is a crap shot, because the quality and taste depends heavily on the water they use and the age of the beans.  I grind mine at home, then brew it with filtered water and drink it immediately.  Although I'm a sucker for JBM, I also enjoy "Eight O-Clock" and "Peet's".  Basically, whatever you buy will taste best made at home.
May 23, 2012 6:40AM
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I can't wait to hear how the hamburger war is doing.
May 23, 2012 9:09AM
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Having had coffee from Mexico to Las Vegas and around to the Florida Key's, I have but one thought. If you are not drinking Community Coffee's Dark Roast, you are just not getting a great coffee taste. The sick flavors produced in todays coffee shops are a slap in the face of real coffee drinkers. It is equal to wrapping a great Cuban cigar in toilet paper for an afternoon smoke. Yuck!! Staryuppybucks wouldn't know coffee if it were in Columbia. Just one mans thought.
May 22, 2012 9:56PM
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I usually  buy fair trade, shade-grown organic coffee - no pesticides with your cup o' joe, they don't screw over the farmer, and they don't mow down rainforests to plant the coffee.  Green Mountain offers that, but the Keurig coffee just doesn't do it for me...it pales in comparison to the rich taste of freshly brewed French pressed coffee.  I usually go for Caribou Coffee - they have some nice offerings. 
May 23, 2012 8:40AM
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Years ago I drank a cup of Kona on Oahu. Ruined me for life because even if you buy it here at 24 bucks a pound it does not taste the same and the blended stuff is crap. Found out later they roasted their beans daily at the hotel and used thier own filtered water. Dont ya love Starbucks we will just belay future price increases? Yah right as long as the boomers still drink that garbage they will always raise prices.
May 23, 2012 1:44AM
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The only way to consistantly get good coffee is buy directly from a local roaster or buy quality green beans and roast them yourself in small quantities.From the second to the fifth day after roasting the coffee is at its peak regardless of how it is packaged or stored. Brew coffee imediately afdter grinding and use beans within one week of roasting.. 6dogs and berecca are right. Y I Never may be right too: try fresh roasted fresh ground Eithiopian Limu or Jamaca Blue Mountain for a week and you will be hooked to the point that you promptly give up all other drugs and alcohol.....-.
May 23, 2012 8:05AM
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I have found a wonderful coffee at Costco....Kirkland Brand Columbian Coffee.  I have fallen in love with it.  Try it sometime, it is very good.
May 23, 2012 9:31AM
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I always bought Maxwell House as first choice, then Folgers. When the price kept going up I switched over to Master Chef at Wal Mart for half the price. For the money its a far better deal for a cup of coffee in the morning.
May 23, 2012 12:18AM
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I personally have not drunk mainstream coffee for years.
IE Folgers or Maxwell house. To me that is like drinking colored water. I usually make a pot of Cafe Bustello or Seattle's Best, Both are cheaper, one is an espresso grind and the other a french roast. Both are full bodied and make a terrific cup of coffeee/
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