In the world of java, Starbucks Corp. (NASDAQ/SBUX) is the growth stock for coffee houses. Nothing else comes remotely close. The company has over 10,000 retail outlets and can be found at nearly every street corner in any major U.S. city.
What is impressive has been the consumer’s willingness to pay as much as $5 for a large cappuccino or latte. Add in one of those delicious soy-based banana muffins and you are out $7. This is how Starbucks built its coffee empire since starting up just over 10 years ago by Howard Schultz. Some companies have tried to emulate Starbucks, but to no avail. Its brand recognition is massive and global in nature. Even in China, consumers are willing to pay over $4 just to see what the fuss is all about. In comparative terms, that is more than the average Chinese makes in a day.
Now Wendy’s International Inc. (NYSE/WEN) is trying to generate some interest to rejuvenate its business, which has quickly fallen behind fast food king, McDonald’s Corp. (NYSE/MCD). There is also news that second tier fast food chain, Burger King Holdings Inc., is looking at an IPO.
In the case of Wendy’s, it is planning to offer up to 29 million shares of its coffee and donut chain, Tim Hortons, in soon to be IPO. Tim Hortons, established in Canada to great success, has been more of a struggle in the ultra competitive U.S. market. Timmy’s, as it is referred to in Canada, has 2,597 stores in Canada and only 288 stores in the United States. Essentially, it is a Canadian company.
In the U.S., Tim Horton’s wouldn’t make it on the radar of most investors and probably won’t. Starbucks is king and will not be pushed from its perch. The trend in the U.S. for coffee houses is somewhat mature, which is the reason Starbucks is looking at China to boost its growth.
Tim Hortons says its wants to expand its number of stores in Canada to between 3,500 and 4,000, while adding just over 2,000 stores in the U.S.
My feeling is Tim Hortons will find it difficult in the mature U.S. market, especially since it is not recognizable by the majority of Americans. But, drive in Canada and you see a Tim Hortons everywhere and you have to wonder how much more it can expand in Canada.
The reality is Tim Horton is ambitious, but it will take a lot more than donuts to attract coffee drinkers in the U.S. I question the potential of Tim Horton’s as an IPO and would stay with the market leader in Starbucks.