Starbucks Corporation (SBUX) is often lampooned for its ubiquity; the coffee chain seemingly exists wherever we find commerce itself. So how could SBUX stock possibly be a source of greater growth than Keurig Green Mountain Inc (GMCR), the smaller coffeemaker behind the iconic K-Cup?
Starbucks, with a market capitalization of $60 billion, is about three times the size of GMCR. All else being equal, you’d expect GMCR stock to offer better growth prospects than the far more mature SBUX.
The performances of the two stocks in 2014 might serve to reinforce that bias, with GMCR stock up more than 75% year-to-date and SBUX stock logging some lousy, market-trailing 3.5% gains.
Don’t Underestimate A Killer Track Record
Starbucks CEO Howard Schultz has turned Starbucks into a coffee empire, but he did it one storefront at a time. In 1987, Schultz’s company Il Giornale acquired Starbucks. Back then, the store count was 17. Today, there are more than 20,500 Starbucks locations globally.
Management matters, and Howard Schultz is one of the best in the biz, as SBUX stockholders know by now. That’s not an indictment of GMCR management, but GMCR’s explosive growth story is a little different from Starbucks’. The engine of Keurig Green Mountain’s growth was its patented K-Cup design, not a successful and rapid expansion of brick-and-mortar retail locations.
Unfortunately for GMCR, that K-Cup patent expired in 2012, and while GMCR stock has appreciated significantly since then, Starbucks has its own brewing machine and sells its own version of the K-Cup, the Verismo pod.
SBUX Uses Tech As A Tool
While retail locations of Starbucks probably aren’t going to double anytime soon, Schultz is looking to other avenues for growth. The Starbucks mobile app, for example, has been wildly popular with tech-savvy coffee drinkers seeking a convenient way to order. This should help the payment volume at SBUX, and with the company adding food options as well as adding beer and wine options to 3,000 locations, Starbucks could become the new trendy place to eat and be seen in your neighborhood.
That might be stretching it, but at least Starbucks is showing off its open-mindedness with the endeavor.
GMCR, on the other hand, is fighting an uphill battle against technology. Avid “coffee hackers” recently revealed a way to trick a Keurig 2.0 machine into thinking unlicensed coffee pods are approved, licensed K-Cup brands. While Keurig tried to avoid atrophy at the expense of knockoffs by putting small radio frequency emitters in official K-Cups, apparently all you have to do is tape an official lid to your Keurig 2.0 and go to town using the cheaper, unlicensed brands.
That hack could be a big problem for GMCR stock because the company relies on the old “razor-and-blade” business model, selling coffee machines at a reasonable price but then relying on the recurrent K-Cup sales for the majority of its revenue.
Keurig Green Mountain has also not proven its viability as a brick-and-mortar retailer, so while Starbucks can easily move into GMCR’s arena, it will be much riskier and costlier for GMCR to disrupt Starbucks. While it’s true that GMCR is growing slightly faster than Starbucks — analysts expect FY 16 sales growth of 15.9% and 11%, respectively — SBUX stock just doesn’t carry the same long-term risks that GMCR stock does.
Consider the fact that SBUX also pays a 1.5% dividend to GMCR’s measly 0.8% and trades at a lower P/E multiple, and there’s more than enough evidence to show SBUX stock is better bang for your buck.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.
