What Green Mountain's Results Mean for Starbucks and McDonalds

Starbucks (SBUX) is struggling as consumers spend less while McDonald’s (MCD) tries to ramp up to premium coffee offerings. Premium coffee dealer Green Mountain Coffee Roasters reported rising sales and a positive outlook in its FQ4. The company's quarterly results shed some light on trends that are impacting the industry:

From Green Mountain Coffee Roasters Inc. FQ408 conference call:

Consumers are cutting down and looking for more value, but don’t want to give up their premium coffee:

In August, we launched a new compact 12-count K-Cup package designed to expand our supermarket footprint with ten varieties of coffee. We now have 2,600 supermarket locations selling K-Cup portion packs… K-Cups now have a 33% share of single cup coffee sold in grocery stores… Particularly impressive when you realize that we are only selling our coffee today in about 10% of this nationwide market.

In Q4 we started to see some belt tightening out there in the marketplace and this belt tightening continues… [But] we think that we’ll be able to grow our business going forward during the fiscal year 09.

Good news for McDonald’s, which is now featuring premium coffee in their restaurants:

We’re seeing the migration from bulk coffee to packaged coffee and we’re still seeing a very strong package coffee business really across the whole base. A lot of the consumers that may have purchased Folgers and Maxwell House in the past are maybe moving up into premium specialty coffee. It is a high switch category.

Coffee price:

Coffee is the single largest expense we have comprising about 20% of our cost of sales.

Over the past four years, we’ve seen the price of commodity coffee almost double. While we don’t purchase this grade of coffee, it does translate to higher coffee costs for us… We anticipate that for fiscal 2009, our coffee cost will be similar to fiscal 2008.

Q: Is that just timing of hedges where the first half of the year [prices] will be a lot higher than they were first half of last year and then second half a lot lower?

A: Correct. In fiscal 2008, we had lower coffee costs in quarter one and two and then we saw a tremendous increase in back half of the year and then with forward buy that we’ve done, we didn’t buy at the highest point, so we leveled off some of those peaks, but we will see higher costs in Q1 and Q2 and see it come down in the back half of the year.

Right now we see the coffee market coming down and if that stays low like that, we’ll see some opportunities later in the year.

Outlook:

The trends that we reported for the calendar quarter, those trends are continuing into the months of October and November, beyond the quarter we’re reporting to you.

 

Comments

[Kevin_S:]

Companies that make a lot of cash even in weaker market - SBUX, AAPL, INTC, MSFT, PFE, MCD, .... so you don't really lose any money if you hold those stocks. When the market begins to turn, you can't buy them cheap anymore.

2008 Nov 13 09:31 AM