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Neither Starbucks, McDonald's Win Coffee War

Stocks in this article: SBUX GMCR

A homemade cup of coffeehouse-quality brew was the caffeine addict's drink of choice, as the National Coffee Association trade group's 2010 National Coffee Drinking Trends Study showed a jittery 86% of Americans preparing their coffee at home -- percolating 4% from last year. Of the 56% of Americans who drink coffee, the study found that 16% changed their drinking habits as a result of the economy. With 40% of all coffee consumed considered to be "gourmet," that meant a shift from the counter to the coffee aisle.

In the case of Minneapolis-based Caribou Coffee, while sales at coffeehouses increased 3.4% last year and comparable store sales dove 2.3%, commercial sales including K-cups jumped 42.4% in the same period. Commercial sales also leapt 4% as a percentage of total sales, a trend that continues as Caribou's commercial sales growth (51%) far outpaced that of its coffeehouses (4.4%) last quarter.

The same holds true for San Francisco-based Peet's Coffee (PEET), which lost to Green Mountain in a bidding war over single-cup coffee company Diedrich. The company has only 192 retail locations -- only eight east of the Mississippi River -- and gets nearly 35% of its net revenue from grocery and delivery sales. While the company's coffeehouse sales grew 7% last year, grocery and delivery sales of Peets Coffee by the pound nearly doubled that growth rate. Growth was even more disparate last quarter, when a 4% retail gain was minimized by a 22% hike in grocery and foodservice revenue.

Nearly a year after its brief stumble, Starbucks has received the message. The launch of its VIA single-serving instant product in stores and supermarkets helped Starbucks push third-quarter revenues up 6%, to $2.6 billion, increase same-store sales in the U.S. by 9% and improve its operating margin to 15.6% from 10.8%. Revenues have improved 7% year-to-date, while comparable store sales growth spun 180 degrees, from down 7% last year to up 7% this year.

For now, Green Mountain and its home-brew ilk have seized the spotlight, though their reign may be short-lived. Coffee prices hit a 13-year high last week, trading at nearly $1.99 a pound, forcing J.M. Smucker (SJM) to boost prices 9% on its Folgers, Millstone and Dunkin' Donuts coffees. Green Mountain followed suit, announcing plans to raise prices on its K-Cup offerings 10% to 15% next month. With Starbucks saying it will absorb the cost increase for the time being, it's possible the company may end up winning the same coffee war its instability started.

--Written by Jason Notte in Boston.



>To contact the writer of this article, click here: Jason Notte.

>To follow the writer on Twitter, go to http://twitter.com/notteham.

>To submit a news tip, send an email to: tips@thestreet.com.

Jason Notte is a reporter for TheStreet.com. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, The Boston Phoenix, Metro newspaper and the Colorado Springs Independent.
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