Halfway around the world, a war has nearly surfaced in Ukraine. At home, there’s an ongoing conflict between the two main political parties on everything from the budget to foreign policy to how best to grow the economy. These conflicts easily make the headlines each day; however, one war that doesn’t make front-page news is the war brewing each morning when consumers grab that cup of java to get their day going.
Sometimes, the choice is a no-brainer but often, it could be dependent on the day at hand or what happens to be closest. Whatever the case may be, when you grab a cup of coffee on the go, you’re participating in the steaming hot competition for business in the coffee market—and it’s only likely to intensify.
The U.S. coffee market had long been shared between two major players. We have Starbucks Corporation (NASDAQ/SBUX) at the premium end, catering largely to the middle-class and upper incomes. For the everyday Joe, there’s “Dunkin’ Donuts,” operated by Dunkin’ Brands Group, Inc. (NASDAQ/DNKN), which also operates the “Baskin-Robbins” brand.
For me, it’s all about the taste and what I feel like drinking that particular day. If I really need a wakeup call, I tend to swing toward Starbucks; but on calmer days, I tend to gravitate towards the milder Dunkin’ Donuts coffee, especially if I also have a craving for a donut.
Yet the coffee market is about to get even more crowded with more decisions to make each morning. Upstart Canada-based Tim Hortons Inc. (NYSE/THI) is quickly becoming the third player in the U.S. coffee market as the chain is nearing 900 stores in the United States. But Tim Hortons is not an unknown, as the company is the biggest coffee operator in Canada with more than 3,500 stores in that country with its sights on aggressive expansion into the United States. Starbucks is also becoming a major player in Canada and abroad, with more than 20,000 stores worldwide.
In my view, Tim Hortons is probably more of a threat to Dunkin’ Donuts than Starbucks due to their similar business model of selling no-frills, affordable coffee and donuts versus that of Starbucks. The Tim Hortons brand is also on the milder side when it comes to coffee, similar to the product offered by Dunkin’ Donuts and the fourth coffee player, McDonalds Corporation (NYSE/MCD). McDonald’s is also quickly growing its market share in the competitive coffee market, as the fast food seller has been focusing on selling decent “premium roast” coffee.
As an investment, the market leader, due to its global branding, is Starbucks, which has stores in Asia, Europe, and Latin America. You simply cannot go wrong with Starbucks.
On the second tier, after Starbucks, it’s close, but I would favor Tim Hortons, especially if it can grow its footprint in the huge U.S. market. At this time, the company’s reach in the U.S. is well behind that of Dunkin’ Donuts, which has more than 10,000 stores across the country.
The valuation of Tim Hortons is also more attractive, trading at 17.47-times (X) its 2014 earnings per share (EPS) with a price/earnings-to-growth (PEG) ratio of 1.63, compared to Dunkin’ Donuts, which is trading at 24.38X its 2014 EPS with a PEG ratio of 1.75.
Whatever your decision on what to drink, watch for the coffee wars to intensify on the stock market between the three major players. Of course, you may want to keep an eye on McDonald’s, as it could easily steal some market share in this area. (Read “McDonald’s Proving Position as ‘Best of Breed’ in the Fast Food Sector.”)