The Coffee King Is Here to Stay

The Coffee King Is Here to Stay

Whenever we talk about coffee, Starbucks , Dunkin' Brands Group (NASDAQ: DNKN) and McDonald's (NYSE: MCD) catch our attention. With more than a 50% gain year-to-date, Starbucks remained one of the top buys in the restaurant industry in 2013. Will the coffee giant continue to outperform its peers going forward as well? The answer is a "strong yes" and here are the two reasons.

Strong earnings
In its fourth quarter of 2013, Starbucks reported earnings per share of $0.63, 37% more than its earnings of $0.46 per share a year earlier. Analysts at Thomson Reuters had expected the company to report earnings of $0.60 per share. In comparison with the last year, revenue also rose 13% to $3.8 billion.

Same-store sales grew by 7%, driven primarily by the company's biggest regions -- the U.S. and China, where comparable sales rose by 8%. The U.S. market is of foremost importance to Starbucks as it constitutes more than 75% of the company's business.

In the Asia-Pacific region, comparable-store sales rose 8%. This figure jumped 2% in Starbucks' Europe, Middle East, and Africa region.

Expansion across India & the U.S.
As Starbucks continues to post higher profits, it plans massive expansion throughout the globe. As part of this plan, the company announced that it will introduce a new hiring strategy that will focus on hiring veterans and military spouses. Starbucks will establish an internal infrastructure dedicated to matching the skill sets of veterans and military spouses with the specific talents needed at the company. The company will make sure that this talented bunch of individuals fit into the organization and add value to the company.

In contrast to most of the multinationals, which are slashing employees instead of hiring them, Starbucks has its eyes set on increasing its workforce. This indicates that Starbucks' management strongly believes that the company will continue to multiply its revenue just like it has done in the past. The company already anticipates that its workforce will grow to 500,000 in a few years' time.

Recently, Starbucks opened its much anticipated flagship store in one of the most populated cities of India-- Bangalore. This is the 30th store in India as Starbucks continues to make inroads into the Indian coffee market.

Howard Schultz has already said that the company will open "thousands of stores" in India in the near future, making it one of the biggest markets for Starbucks along with North America and China. He further mentioned that just like China, India provides a huge growth opportunity for the company. The emergence of a growing middle class, an inclination toward western culture, and steady infrastructure developments in India bode well for Starbucks' future in the region, he added.

According to analysts at Morgan Stanley, Starbucks has identified its "drive-thrus" as a major revenue source in the U.S. As a result, the company is continuing to add more drive-thrus across the region. In addition, Starbucks' new strategy of replacing its traditional pastries with La Boulange brand pastries and heating up its pastries before serving them is already paying off. Starbucks' new items such as soups, sandwiches, and Teavana teas are also seen as a huge opportunity in the region, according to analysts. That's why the company will add more than 1,000 Teavana cafes in the next few years.

How does it stack up against Dunkin' Brands and McDonald's?
Starbucks still has the largest market share in the coffee industry but rivals such as Dunkin' Brands and McDonald's are by no means far behind. Dunkin's third quarter results show the company's profits are on the rise, thanks to massive expansion in the U.S. In its latest quarter, the company's earnings per share grew 36% from the same quarter, last year. Revenue also increased 8% from the previous year's quarter.

As the holiday season approaches, Dunkin' has started to offer special discounts on its items. An example is Dunkin's Medium Hot and Iced Lattes that can be bought for just $1.99 until December 31.

Recently, Dunkin' Brands opened a restaurant that offered products from both Dunkin' Donuts and Baskin-Robbins in Atlanta, Georgia. Customers can enjoy Dunkin's world famous donuts and coffees, and relish Baskin-Robbins' wide variety of ice creams as well.

As the company keeps opening new locations around the U.S, investors believe that it will continue to grab significant market share. Dunkin' Brands seems slightly more expensive than Starbucks at this stage, but it's definitely worth it.

On the other hand, McDonald's and Kraft Foods Group will test McDonald's McCafe-branded packaged coffees at U.S. retailers in 2014. The tests will include packages of whole bean and ground coffee plus K-cups for Green Mountain's Keurig brewer. Since McCafe is popular in the U.S., its K-cups are set to become an excellent revenue source for McDonald's.

Just like most of the fast-food giants, 2013 has not been a great year for McDonald's amid tough competition. McDonald's continued to witness slow growth in its most important growth metric -- same-store sales. In November as well, the company's comparable-sales dipped 0.8% in its biggest market -- U.S. Because McDonald's faces competition from food chains such as Burger King, Wendy's, and Chipotle Mexican Grill, the company isn't expected to outshine its rivals by a great margin in the near future.

As Starbucks keeps on growing incrementally, its future looks better than ever. The company has rightly identified the Indian coffee market as its biggest revenue source in the years ahead. With steady investment in the region, the company's sales are bound to go even higher. Moreover, the company can finance its investments through its high level of cash on hand, which testifies to its strength.

Workforce expansion truly suggests that Starbucks plans on expanding further in its biggest market -- North America. Investments, especially in new drive-thrus, will certainly give Starbucks' sales a further boost in the U.S. In short, Starbucks has been a leader in the coffee industry and it will continue to be one of the best investments in its industry.

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Waqar Saif has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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