MARCH MADNESS: Coca-Cola (KO) vs. Starbucks (SBUX)


Round 2 of Stock Market Madness 2015 matches two titans of the beverage industry — the king of soft drinks, The Coca-Cola Co (NYSE:KO), versus the coffee king Starbucks Corporation (NASDAQ:SBUX).

march-madness-250It’s a classic battle between the veteran champion and the younger, more nimble powerhouse.

Over the past 12 months SBUX is up more than 29% while the heavyweight Coca-Cola is up only 6% and is actually trailing the market’s 14% return in the period.

But, will this performance continue, or can KO come from behind, to be the smart money pick?

Coca-Cola (KO)

Coke is no longer just the king of soft drinks; it truly is the beverage king. Besides alcohol, Coke sells every category of beverage out there. KO offers soft drinks, bottled water, juices, teas, energy drinks — and even coffee. This diversity of products allows KO to continue growing even though customer preferences are changing.

As Coke experiences lower volume sales of soft drinks in the U.S., the other products the company has invested in can help slow the reduction of overall sales. But while KO has many other products besides soft drinks, it is still the No. 1 seller and the category that brings in the bulk of the revenue. Coke needs to continue expanding outside the soft drink business if the 129-year-old company wants to continue on for another century.

KO reached outside soft drinks with tea and coffee products, most recently with its stake in Keurig Green Mountain Inc (NASDAQ:GMCR). The small stake Coke has taken in the at home coffee brewing company gives KO the ability to not only expand its product offerings but also build a tighter relationship with the customer. The relationship is particularly important as Keurig works on a cold brewing device that would allow customers to make iced beverages at home.

Now, let’s look at the competition.

Starbucks (SBUX)

While Coke is expanding its portfolio into new beverages, the SBUX is expanding into food. Starbucks’ moves to bring edible items to its coffee houses should help push sales higher in the coming years, but that’s if the company does its right. Serving food is much more complicated and carries bigger expenses if it is not done correctly, but SBUX perfected the coffee experience — so now it’s time to accomplish something else.

And that may be the biggest advantage SBUX has over KO. Starbucks is still a very young, vibrant organization. It’s not hard to image SBUX as a place one could get both high-quality food and beverages, regardless of the time of day.

SBUX could easily move into the quick-serve food industry and become the next Chipotle Mexican Grill, Inc. (NYSE:CMG). It already has the locations and a customer base that will pay higher prices for higher quality. Plus, SBUX has the confidence and trust from customers — two traits that are extremely difficult for a business to gain.

Our Second-Round Pick: SBUX

While Coke is the older of the two beverage companies, it just don’t move as fast as the younger SBUX. If KO wants to combat its lower soft drink sales it needs to rapidly move into other beverage categories — and up until this point, the company has just not moved fast enough.

SBUX is still nimble despite being valued at $72 billion. I believe still has a long road of growth ahead of itself.

Head back to the Stock Market Madness bracket to make your vote and check out other previews!

As of this writing, Matt Thalman was long SBUX. You can follow him on Twitter at @mthalman5513.

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