News is out today that McDonald's (MCD) has filed a trademark for the use of its name in the ground coffee beans segment. Rumors are already swirling that McDonald's plans to sell bagged coffee in retail outlets and its own stores nationwide. McDonald's has already improved its coffee sales with the introduction of the McCafe brand. Now it appears that McDonald's is placing another big bet on the growing at home coffee market and also once again taking it to large coffee rivals like Starbucks (SBUX) and Dunkin' Donuts (DNKN). A company spokesperson for McDonald's said, "We register a lot of trademarks, that's nothing new for us."
Starbucks began selling bagged coffee in 1998, through a partnership with Kraft Foods. Starbucks now handles sales on its own and has a market share of premium coffee in grocers, drugstores, and mass market stores of over 28%. Whole bean sales make up a small 4% of Starbucks sales, but have been a growing source of revenue.
Here is a look at the current stock prices of the three companies:
|2012 eps estimates||$5.42||$1.78||$1.26|
|2012 Price Earnings||16.8x||27.6x||23.6x|
|2012 eps estimates||$5.96||$2.13||$1.51|
|2013 Price earnings||15.3x||23.0x||19.7x|
In the second quarter, McDonald's reported strong sales across all regions. Global comparable same stores increased 3.7%. Sales were positive in all geographic regions. Revenue was flat at $6.9 billion, up 5% on a constant currency basis. Earnings per share were reported at $1.32, a two percent loss from the prior year.
McDonald's has over 33,000 locations in 119 countries. Dunkin' Donuts has 5800 stores, while Starbucks leads the way for coffee companies with 6800. McDonald's has seen its McCafe brands make up close to 6% of total sales. At home coffee sales are a huge $10 billion market, and even a sliver of the market could turn into nice revenue for McDonald's and strong cross promotional efforts.
This move by McDonald's will be closely followed by Wall Street and also competing coffee brands. Along with Starbucks and Dunkin' Donuts mentioned above, these are the other companies that could see a negative impact from McDonald's retail entry:
· Mondelez (MDLZ) sells Gevalia, a leading coffee brand in the Nordic region. The premium coffee, which was previously only available to US consumers through online sales, is now available in retail outlets
· Smuckers (SJM) sells the Dunkin' Donuts bagged coffee in retail stores after acquiring the business from Procter & Gamble. Smuckers shares recently hit a new fifty two week high on the strength of sales in its coffee brands. Dunkin Donuts represented $350 million of last year's fiscal sales for the company. Smuckers also owns the Folger's coffee brand, one of the leading at home brands. Sales of Dunkin' Donuts increased 11% in the first quarter this year.
This possible new entry by McDonald's could make shares a bargain. Shares have fallen over 8% on the calendar year. As you can see from the chart above, shares are cheaper on a current price to earnings and future price to earnings ratio. McDonald's also has the higher dividend yield, and recently raised the payout amount by 10%. The big winner in the deal is McDonald's, and the biggest loser could be Smuckers. Smuckers is growing its coffee business and has the rights to the Dunkin' Donuts branded coffee beans in stores.
McDonald's shares should be bought under $90 and should return to the $100 level by the end of the year. New details about ground coffee beans being sold could provide some nice one day pops for investors along the way. If you have been holding Smuckers shares, it might be time to take some profits off of the table.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.