Monthly Notes On Coffee Industry: Starbucks & Keurig Green Mountain

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According to Bloomberg, the El-Nino, an oceanic disturbance, is brewing up in the Pacific Ocean and may threaten some of the crops, including coffee. Being considered as one of the strongest ones since 1997-1998 by the Australian Bureau of Meteorology, it is expected to bring floods in the Eastern African regions. [1] Moreover, it may affect major parts of South America, including Brazil. The El-Nino may affect some of the top coffee exporting and producing countries, leading to a drastic rise in  coffee prices.

Currently, the ICE coffee futures for December contract is at its 18-month low, with the price of 1 pound of beans close to 120 cents. [2]

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However, an increase in coffee prices will affect all the major companies that use coffee as a major raw material. Some economists are predicting up to a 107% rise in coffee prices. On the other hand, the El-Nino is expected to impact 18% of the Colombian crops as well, according to the National Growers’ Association Fedecafe. [3]

Here are updates related to some of the coffee companies covered by Trefis:

Starbucks

According to UBS analyst Keith Siegner, Starbucks’ single-serve sales rose nearly 41% y-o-y for the one month period ended September 5, 2015, primarily due to volume growth of 53% y-o-y over the same period. [4] Apart from the K-Cups (Single-Serve segment), the company’s traditional ground packaged coffee segment witnessed sales growth of 14% y-o-y during the 4 week period ended September 5, 2015, compared to the overall category’s 2.5% growth. This robust performance in the category was driven by 20% volume growth, compared to 14% growth in the prior 12 month period. Starbucks’ marketing strength, innovative products, and operational efficiency, led to an extraordinary growth during this stiff competition.

SBUX’s  stock rose from $51 to $58 during the first three weeks of September 2015. Our price estimate for SBUX stock is $55, which is roughly 5% below the current market price.

st sb

Keurig Green Mountain

Keurig’s stock has dropped more than 60% since the start of the year, due to the combined negative impact of declining brewer sales, unimpressive sales growth of the Keurig 2.0 brewers, and uncertainty regarding the exact timeline of the Keurig Kold release. The skepticism among investors regarding the company’s near-term growth led to a steep decline in the stock over a short period of time.

However, to keep its K-Cups sales strong, Keurig Green Mountain announced a deal with Campbell’s Soup Company, where the former is rolling out pods that will allow the users to brew a cup of Campbell’s Fresh-brewed Soups. [5] (See: Can the addition of Campbell’s soup bring relief for Keurig Green Mountain?)

GMCR stock bounced back from $52 to $60 during the first half of September 2015, before falling back to $55. Our price estimate for GMCR stock is $60, which is roughly 9% above the current price estimate.

gmcr st

 

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Notes:
  1. How El-Nino may drive up cost of coffee []
  2. ICE coffee futures, December, barchart.com []
  3. El-Nino drought threatens 18% of Colombian coffee crops []
  4. Starbucks sees K-Cup sales accelerate, UBS notes []
  5. Campbell’s Fresh-brewed soup, the first-ever hot soup made exclusively for the Keurig Hot Brewing system, now available on Keurig.com []