Investors could find themselves chasing a caffeine high going into year’s end as the tech sector’s strength looks to spread to other parts of the market. Undoubtedly, some coffee stocks seem overdue for a jolt as consumers look to get through the macro pressures that have hurt their purchasing power. Inflation appears to be on the road towards normalization, but don’t expect rates to free-fall just yet. In any case, it seems like market sentiment and anticipation of a “break” in rates could be enough to drive consumption.
Either way, the very high-end consumer seems alive and well, with enough disposable income to purchase some of the higher-end brands out there. Regarding the coffee scene and the morning crowd, I expect the premium coffee stocks — think Starbucks (NASDAQ:SBUX) — could have what it takes to disrupt its new, lightweight disruptors on the scene. As premium brands (and prices) triumph over their lower-cost counterparts, budget offerings continue to win consumers’ hard-earned dollars.
Let’s look at three players among “growthy” coffee stocks that could have what it takes to heat up at a higher rate than the rest of the restaurant industry.
Starbucks (SBUX)
Starbucks is the king of coffee stocks, with brand power that extends well beyond the American borders. As the company looks to expand in China, Starbucks stands out as one of the growth stocks in this market that seems less appreciated. Additionally, Starbucks’ recently shuttered non-performing stores. This focus on efficiency could begin to pay off as the firm looks to allocate more capital towards innovative initiatives that could help drive margin growth over time.
Despite the impressive growth prospects that could kick in as soon as 2024, many investors still seem wary of Starbucks’ union concerns. Union buzz may be a big deal over the near term; however, as Starbucks looks to introduce innovations across its stores, it stands to make baristas more productive and efficient over time. As to when robots will automate your Starbucks order, I have no idea. But it may not be as far off as we think.
For now, I’m enthused by the better-than-feared Q1 result, as consumers begin placing larger, pricier, and more customized orders, even following its “judicious” price hikes. Hats off to management for not scaring away demand after inflation-induced price increases.
With a premium brand, it’s not hard to imagine Starbucks boasting the best pricing power of its peers in the coffee scene. That’s an advantage that will be impossible for its rivals to replicate, as some opt to go down the route of discounting amid macro headwinds.
Luckin Coffee (LKNCY)
As impressive as Starbucks’ growth potential in China is, there is competition for national dominance. And right now, Luckin Coffee (OTCMKTS:LKNCY) seems like the rival to beat. Though the firm experienced a massive fall from glory back in 2020, eventually being delisted from the U.S. exchanges before the stock enjoyed a gigantic comeback, doubling up many times (around 2,400%) from trough to peak.
Undoubtedly, if you shied away from the over-the-counter markets, odds are you missed out on Luckin Coffee and its impressive comeback. In China, Luckin may be outselling Starbucks, but as Starbucks takes its expansion to the next level, the “Luckin lead” may prove short-lived. In any case, Luckin stock looks intriguing after pulling back 35% from its 2023 high.
With growing brand affinity and more competitive prices, Luckin may have the lower end of the high-growth Chinese market covered. In any case, China has a growing taste for coffee, perhaps enough that there will be more than one winner in the Chinese coffee scene. As to whether Luckin stock can resume its massive comeback remains to be seen.
Dutch Bros. (BROS)
In more ways than one, Dutch Bros. (NYSE:BROS) stands out as a potential disruptor as it looks to take a different angle to draw in crowds needing a morning caffeine fix. The company doesn’t just sell coffee; it offers a wide range of tasty cold beverages that are as delicious as they are caffeinated. As the company moves forward with its expansion, seeking to grow its store count by 150-165 new locations this year, Dutch Bros. stock could be in a spot to turn the tides.
Indeed, shares have been relatively sluggish since peaking back in 2021. Now down around 64% from its high of $27 and change, Dutch Bros. stands out as a comeback play. If you believe in management and are a fan of its beverages, shares look like a compelling value play. Though the brand power may not be anywhere close to the level of a Starbucks, the relative lightweight seems to be doing many things right.
The stock recently got an upgrade (to “Buy” from “Hold”) from Stifel, thanks in large part to product innovation. Sure, it’s got menu innovation down, but is that enough to gain ground in the competitive coffee scene? I guess only time will tell.
On the date of publication, Joey Frenette owned shares of SBUX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
