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Is Caffeine Your Vitamin? Dividends From Your Daily Addiction

Some of the largest companies in the world right now are competing over your coffee addiction dollars. Starbucks, Dunkin’ Donuts, Keurig, McDonald’s and Kraft (now Mendelez Int.) are competing in a volatile coffee futures price environment. In the end, only one company will corner the market for one of the most addictive substances and you as an investor need to know which ones are winning and which ones are losing.

Coffee Futures Price History

The price of coffee has been in a sustained bear trend since 2011. The market recently hit an annual low of $122.25, declining from its 2014 high of just over $200. According to a recent article by the Wall Street Journal, there are major fears in the market regarding an oversupply of coffee. Brazil, the world’s top producer of coffee, suffered the worst drought in decades last year but is now showing excellent conditions for coffee farming. Another factor weighing on the coffee market is the weakness of the Brazilian real against the dollar. The dollar has gained 7.3% against the real this month alone which creates economic incentive to increase exports to the U.S.

Coffee Supply and Demand

Coffee production has increased since 2011 but has declined since its peak in 2012. Brazilian production has been the most hard hit, with the production of Brazilian Naturals down by -7% year-over-year.

Demand for coffee is also steadily rising, with growth in Africa and Asia/Pacific leading the world. North America is still leading growth in developed countries, while Europe and Central American growth have gone sideways. According to the International Coffee Organization, “The world is drinking more coffee, with demand likely to rise almost 25% in the next five years.”

Companies Currently Benefiting from Upward Moves in Coffee Prices

Starbucks Corporation (SBUX )

Starbucks is a global leader in retail coffee. As of December 28, 2014, the company had 21,878 stores worldwide and employed over 115,000 people. While primarily a coffee store, Starbucks has diversified its product offering over time and now offers fresh food, coffee merchandise, handcrafted beverages, ready-to-drink bottled drinks and single serving “K-cups”. SBUX currently operates the brands “Starbucks Coffee”, “Seattle’s Best Coffee”, “Teavana”, “Tazo”, “Evolution Fresh”, “La Boulange” and “Torrefaione Italia Coffee”.

Impacts of Coffee Futures Prices on the Company:

Starbucks is poised to gain from upward moves in coffee futures prices. The company has taken steps to hedge its exposure to coffee futures prices near annual lows in prices. Further, the product prices at Starbucks are slow to move down in response to cheaper coffee prices, implying that Starbucks gains increasing revenue when in low coffee price environments.

Keurig Green Mountain Inc. (GMCR)

Keurig Green Mountain Inc. produces and sells specialty coffee, coffee makers, teas and other beverages in the U.S. and Canada. The company operates under various brands such as “K-Cup”, “Vue”, “Rivo”, “K-Carafe”, and “Bolt Portion Packs”. Keurig employs 6,600 people globally and has a 90% retention rate for its customers.

Impacts of Coffee Futures Prices on the Company:

Keurig’s stock price is highly correlated with the price of coffee futures. Like Starbucks, the company is slow to lower the costs of its products as coffee prices fall and has hedged future coffee production needs at attractive rates. Keurig will continue to produce larger than normal revenue streams while it is in a low coffee price environment.

Companies Currently Damaged from Upward Moves in Coffee Prices

J.M. Smucker Co. (SJM )

J.M. Smucker Co. manufactures and markets branded food products worldwide. The company operates through four segments: U.S. Retail Coffee, U.S. Retail Foods, U.S. Retail Pet Foods, and International, Foodservice and Natural Foods. SJM markets its products under the “Folgers”, “Dunkin’ Donuts”, “Smuckers”, “Jif”, “Crisco”, “Pillsbury”, “Uncrustables”, “Douwe Egberts”, “Folgers Gourmet Selections”, “Millstone”, “Cafe Bustelo”, “Cafe Pilon”, “K-Cup”, “Adam’s”, “Laura Scudder’s”, “Hungry Jack”, “Eagle Brand”, “Magnolia”, “Robin Hood”, “Five Roses”, “Santa Cruz Organic”, “R. W. Knudsen Family”, “truRoots”, “Meow Mix”, “Milk-Bone”, “Kibbles ‘n Bits”, “Natural Balance”, “9Lives”, “Pup-Peroni”, “Gravy Train”, and “Nature’s Recipe” brand names. While J.M. Smucker Co. does not own these brands outright, the company has entered agreements to produce and package many of the leading products for the brands listed above.

Impacts of Coffee Futures Prices on the Company:

In recent news, J.M. Smucker Co. lowered prices on its packaged coffee products sold under the “Folgers” and “Dunkin’ Donuts” brands. The price decline comes after an increase of 9% in these brands last June. The price decline implies the company is attempting to gain back some of the sales declines lost during the price increase. Further, the company is negatively correlated with coffee futures, implying that when coffee futures go up, SJM goes down and vice-versa.

McDonald’s Corporation (MCD )

McDonald’s Corporation operates and franchises McDonald’s restaurants in the U.S., Europe, Asia/Pacific, the Middle East, Africa, Canada and Latin America. The company’s restaurants offer various food products, soft drinks, coffee and other beverages. As of December 31, 2014 it operated 36,258 restaurants, serves 69 million people a day and employs more than 1.7 million people.

Impacts of Coffee Futures Prices on the Company:

Since the release of McCafe in 2008, McDonald’s has stepped into the coffee sector and become a large player in the space. McDonald’s recently expanded their coffee portfolio further and added bagged coffee for retail stores. McDonald’s is negatively correlated with coffee futures prices and its stock price takes a hit when coffee prices increase.

Mondelez International Inc. (MDLZ )

Mondelez International Inc. manufactures and markets snack food and beverage products worldwide. The company offers biscuits, including cookies, crackers, and salted snacks, chocolates, gums and candies, cheese and grocery products, and powdered beverages and coffee. Mondelez’s primary brands are “LU”, “Nabisco”, “Oreo”, “Cadbury”, “Milka”, “Trident Gum”, “Jacobs Coffee”, and “Tang Powdered Beverages”. The company sells its products to supermarket chains, wholesalers, supercenters and other retail food outlets through various channels. MDLZ was formerly known as “Kraft Foods Inc.” and changed its name in October 2012. Mondelez International employs 104,000 people worldwide.

Impacts of Coffee Futures Prices on the Company:

Mondelez International recently reduced their exposure to the coffee futures market by selling off their coffee business Jacobs Douwe Egberts. Jacobs previously represented around 16% of Mondelez’s revenue stream. While MDLZ still owns 44% of Jacobs, the sale should be seen as a significant bear signal to the coffee sector at large.

Dunkin’ Brands Group Inc. (DNKN )

Dunkin’ Brands Group, Inc. develops, franchises and licenses quick service restaurants under the “Dunkin’ Donuts” and “Baskin-Robbins” brands worldwide. The company operates through four segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S. and Baskin-Robbins International. As of December 27, 2014 the company had approximately 19,000 distribution points globally. DNKN’s restaurants offer hot and cold coffee, baked goods, donuts, breakfast sandwiches and ice cream.

Impacts of Coffee Futures Prices on the Company:

The investment community considers Starbucks and Dunkin’ Donuts to be rival coffee houses. Recenty, produced an article comparing the two and suggested that Starbucks was the better investment. Further, there is more caffeine-per-dollar in a Starbucks cup of coffee than in a Dunkin’ Donuts cup, which when considering the addictive nature of caffeine, doesn’t bode well for Dunkin Donuts’ value offering.

The Bottom Line

Investors can take advantage of the so-called coffee war by paying attention to which companies are doing well and which aren’t in the current price environment.

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