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Ground Zero for the Coffee Wars — Canada

Tim Hortons is expanding into frillier coffee drinks


Tim Hortons THITim Hortons (NYSE:THI) is an up-and-coming coffee stock focused mainly on the Midwest and Canada. For 15 straight quarters, sales have beaten totals from the previous year. Shares are up almost 20% in 2011 despite the summer volatility in the stock market. Things are looking up.

With an eye at continuing this kind of growth, Tim Hortons announced this week it will branch out from traditional coffee and pastries into lattes and mochas to appeal to more American tastes.

Look out, Starbucks (NASDAQ:SBUX) and Dunkin’ Brands (NASDAQ:DNKN).

You might not recognize the Tim Hortons name if you’re on the U.S. coasts. The company boasts about 4,000 stores in full, but only about 500 in the United States, focused mainly in urban markets of Midwestern border states like Michigan.

But it continues to push into the U.S. in force, unveiling a 900-store expansion plan in 2010 even as other companies were hunkering down in the wake of the recession.

Clearly there is untapped potential in the U.S. market and Tim Hortons is jumping in with a splash. Its new line of premium coffees starts at just $2, so the beverages appeal to American wallets as well as American tastes.

About 50% of the U.S. population — or 150 million Americans — drink espresso, cappuccino, latte or iced coffees. The specialty beverage market is booming at the rate of 20% a year.

This growth is what propelled Starbucks to dominance in the past decade and allowed for sweets shop Dunkin’ Donuts to grow rapidly and host a successful 2011 IPO to raise $424 million and fund future growth.

However, those fancy drinks represent a mere 10% of the nearly $20 billion coffee market in America. Plain coffee — with sugar, cream or just plain black — still is the biggest money maker.

That’s where Tim Hortons has a leg up. The coffee shop, like Dunkin’ Donuts, is well known for its coffee and donuts and not frilly and flavored drinks. Founded in 1964 by a former NHL player of the same name, Tim Hortons focuses its marketing efforts on its blue-collar roots.

A host of consumers prefer its mild coffee to the bold flavor of Starbucks. While specialty coffees like cappuccinos might have a higher price tag, the sheer volume of “plain” coffee sales can’t be understated. If THI can succeed in tapping into the specialty beverage market, it might provide an impressive platform to roll out its core business across the U.S.

Of course, that’s easier said than done. In addition to Starbucks and Dunkin’ Donuts, the popularity of McDonald’s (NYSE:MCD) McCafe coffees and countless independent coffee shops means a very saturated market in America.

But the chain is committed to revenue growth beyond its typical breakfast business. Last month, for instance, Tim Hortons unveiled a new dinner menu, including lasagna.

That’s fine, as long as THI doesn’t take its eye off the ball. According to company reports, Tim Hortons currently sells eight out of every 10 cups of coffee at so-called “quick service” restaurants in Canada, and 2 billion cups of coffee a year in North America. If it sacrifices its “everyman” branding and popular breakfast biz for a quick pop in sales, the stock could see rough days ahead.

Only time will tell whether lattes and cappuccinos perk up Tim Hortons sales, or whether it distracts this Canadian cult stock from its traditional business of serving up a sweet breakfast.

Jeff Reeves is the editor of Write him at, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.

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