Starbuck's Launches New Chocolate Line

Includes: HSY, SBUX
by: William Trent, CFA

Starbucks launches chocolate line:

Starbucks Coffee Co. (NASDAQ:SBUX) has launched a line of chocolates laced with the flavors of its coffees and teas, such as Milk Chocolate Caramel Macchiato Truffles, and milk and dark chocolate infused with Tazo brand teas.The chocolates, which are made by The Hershey Company (NYSE:HSY), were launched this month at grocers and other retailers nationwide. For now, however, the chocolates are not available at Starbucks coffee shops.

When I wrote about Hershey’s, I said “at this point, even if Hershey’s problems don’t go away, merely not getting worse should be enough to get the shares back on track.”

One of Hershey’s problems has been market share loss to premium chocolates. A difficulty in fighting this is that Hershey’s own brand will not attract premium customers. Enter Starbucks, who has exactly the right kind of brand for the task at hand.

I’ve also said that the problem for Starbucks is in the licensed stores, which are typically located inside other retailers such as Safewa. These stores dilute the brand by failing to provide the “Starbucks experience.” Licensed products, on the other hand, can fit into the premium brand (if done right.)

That said, it seems clear to me that this partnership offers more to Hershey’s, whose $5 billion in annual sales come from chocolate products sold primarily at grocers and other retailers, than to Starbucks, whose $10 billion in annual sales come primarily through coffee products sold in its own coffee shops.

Disclosure: The author is long Starbucks (SBUX) at time of publication.