Can Starbucks battle the beverage giants?

The coffee roaster takes on the $8 billion market for energy drinks.

By Wall St. Cheat Sheet Mar 22, 2012 1:56PM

Starbucks © Bloomberg, Getty ImagesSoft drink sales have been in a downtrend for much of the past decade, but the pace of the decline increased in 2011. According to data from Beverage Marketing, a research firm that covers the industry, the U.S. beverage market increased by only 0.9% last year, representing slower growth than in 2010. 


The weakness in soft drink sales is paving the way for companies like Starbucks (SBUX) to capitalize on changing taste buds.


Americans seem to be shifting away from unhealthful and expensive soft drinks. Earlier this month, the Center for Science in the Public Interest found traces of the chemical 4-methylimidazole in samples of various sodas belonging to Coca-Cola (KO), PepsiCo (PEP), Dr. Pepper Snapple Group (DPS) and Whole Foods (WFM). Although the FDA insisted the existing levels did not have any known harmful effects on human health, the discovery did not bode well for soft drinks. Many consumers already limit their intake of soft drinks because of sugar and high fructose corn syrup content. Beverage Digest, an industry newsletter, estimates that Coca-Cola, PepsiCo and Dr. Pepper Snapple all sold lower volumes in the U.S. last year.


Although shares in major soft drink companies are flat this year, shares of Starbucks continue to bubble higher, gaining 17% year to date. In addition to falling coffee bean prices, the coffee house giant continues to make strategic moves to help expand its global presence. The company announced Wednesday that it will expand its partnership with Green Mountain Coffee Roasters (GMCR) to produce and sell Starbucks' Vue coffee packs for use in Green Mountain's Keurig Vue single-cup coffee makers.


Starbucks also announced a new beverage for the $8 billion energy drink market. Starbucks Refreshers will aim to satisfy taste buds by combining real fruit juice with green coffee extract. The fruit-flavored drinks will also provide less of a caffeine kick than coffee drinks made from roasted beans. By the end of April, customers will find ready-to-drink Starbucks Refreshers at more than 160,000 points of distribution in the U.S.


In an effort to stay ahead of rivals like McDonald's Corp. (MCD) and Dunkin' Brands (DNKN), Starbucks also announced plans to create 150 jobs by investing nearly $200 million to build a new factory in Georgia and to expand an existing roasting plant in South Carolina. The company also plans to add almost 300 stores and remodel 1,700 existing cafes in 2012, helping to create more than 5,000 additional jobs. After the U.S., China will soon be Starbucks' second-largest market, with more than 1,500 stores by 2015.


Investors appear to be pleased with the new announcements from Starbucks. Shares of the company closed at $53.81 on Wednesday, a fresh all-time high. The addition of an energy fruit drink could provide strength for shares in the coming years. Beverage Marketing estimates that energy drink sales jumped 14.4% by volume in 2011, making it the fastest-growing segment in the beverage industry.


Eric McWhinnie is an editor at Wall St. Cheat Sheet. As of this writing, he did not own a position in any of the aforementioned stocks.


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1Comment
Mar 23, 2012 12:12PM
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I like the health play. would've entered a position on yesterday's news 
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