Starbucks Investors Shouldn't Be Bugged by This
By now you may have heard about Starbucks' (NAS: SBUX) "bug" problem, i.e., the controversy erupting around the company's use of crushed insects as coloring in some of its drinks. Here's why it's all just a storm in a coffee cup, and why Starbucks is a better investment than ever.
The squeamish should turn away now
It started this month, when a vegan website alerted its readers to the fact that Starbucks was coloring its Strawberry Frappuccinos with the remains of dried, crushed cochineal beetles. Found mainly in Mexico and South America, their ground-up remains provide the signature red color for the popular Starbucks drink.
Cochineal extract, as it's known, is a common food coloring, one that's been around since the 15th century and one currently approved by the federal government as a food dye. It can be found in a wide array of foods including meats, cheeses, desserts, and juices. Any company trying to get away from artificial food dyes might turn to cochineal extract as a substitute, and that's exactly what Starbucks is doing here.
Filthy lucre and doing the right thing
Starbucks made the ingredient change at the beginning of this year, and it was a bold move. The company's Frappuccino business is a lucrative one, valued at $2 billion per year globally. Changing a successful food or drink formula can be dangerous. New Coke, anyone? Starbucks has a real commitment to doing the right thing and is showing it here, something investors should be happy about.
Consumers are becoming more and more socially conscious, and want the goods and services they use to measure up. The added expenses a company incurs from paying workers a little more, monitoring resource sourcing, or trying to make its products healthier are small downsides when compared to the potential upside of increased business. And where's there's business upside, there's investor upside.
But socially responsible action isn't the only reason to like Starbucks right now. The company is on the move, expanding into new markets and rethinking its approaches to the old. In the U.K., the company recently announced it will open 300 new cafes over the next five years as well as offer customers there a free, extra shot in their drinks. A lower-priced cappuccino for austerity-gripped Greece is also a shrewd move.
Happily for Starbucks, two of its potential rivals aren't a major issue there. With less international exposure than Starbucks, Dunkin' Brands (NAS: DNKN) lacks the necessary presence to be any significant threat. And though McDonald's (NYS: MCD) has upped its coffee game in recent years, for most consumers the golden arches and the green mermaid still serve two distinct needs. That's not to dismiss the potential threat from McDonald's abroad, only to say that both have been able to happily coexist while still growing in other markets.
Tea for two
Starbucks is also expanding boldly but intelligently into India. The company recently entered a 50/50 joint venture there with Tata Group, the Indian conglomerate as famous for its cars and hotels as for its tea. Tata will be an ideal cultural and business guide for the American-born coffee company.
As for China, Starbucks sees the market becoming only more and more important. In a recent press release, the company said, "China will remain the focal point of [our] international expansion efforts" and predicted that "operations in China will be [our] second largest, outside of the United States, by 2014."
Brewing up big profits at home
Last month, Starbucks announced it will begin selling a home espresso machine that will go on sale in the fall, just in time for Christmas. What makes this machine different from others that have been on the market for years is the technology, specifically "a patent-pending, high-pressure extraction capability" that will let consumers brew cafe-quality beverages at home.
The Verismo System, as it will be known, is definite competition for Green Mountain Coffee Roasters (NAS: GMCR) and its Keurig K-Cup system, as much as CEO Howard Schultz maintains that it's not. "This is not about any disappointment with Green Mountain," said Schultz, in reference to its three-year-old partnership with Green Mountain. "It's about controlling our own destiny. [Starbucks and Green Mountain] can and ... will co-exist."
Crushed bugs and other great investments
One of the ironies of the beetle controversy is that Starbucks -- in trying to rid its food of artificial ingredients -- was truly attempting to do the right thing. To its credit, the company immediately owned up to the switch but hasn't said it will stop using the cochineal extract. Theoretically, if the company switched from one dye to another, it can do so again.
The stock price dipped briefly last Thursday, but is now higher than before. Maybe the company is gauging how far the reaction will go. Regardless, I think this will all blow over soon one way or another, and Starbucks' caffeine-fueled profit ride will continue unimpeded. I still think it's a smart play for the long-term investor. There's another investment idea we here at The Motley Fool think is downright brilliant. Read all about it in this special free report: "The Motley Fool's Top Stock for 2012." Get it while the stock is still hot by clicking here now.
At the time this article was published Fool contributorJohn Grgurichhas never had a strawberry Frappuccino, but will now for sure. Follow John's dispatches from the bloody front lines of capitalism on Twitter @TMFGrgurich. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, McDonald's, and Green Mountain Coffee Roasters. Motley Fool newsletter services have also recommended creating a lurking gator position in Green Mountain Coffee Roasters and writing covered calls on Starbucks. The Motley Fool has a gripping disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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