US consumption spending accounts for over two-thirds of the country’s gross domestic product. A favorable trend in consumer spending on non-durable goods is a positive indicator for the non-alcoholic beverage industry.
Coca-Cola and PepsiCo’s wide distribution network gives them significant pricing power. Carbonated soft drinks have similar prices due to the intense competition in the industry.
Soft drinks contain considerable amounts of sugar, which is a form of carbohydrate. Consumption of excess sugar releases a hormone called dopamine, which induces pleasure in the brain. Caffeine, another key ingredient, stimulates the nervous system.
The non-alcoholic beverage industry broadly includes soft drinks and hot drinks. In the US, soft drinks, or liquid refreshment beverages, lead food and beverage retail sales. In this series, we’ll focus on the soft drinks market.
Manufactures and markets packaged food products
The performance of the coffee industry as a whole is less affected by coffee commodity price movements than the typical investor might expect.
Over 70% of Dunkin’ Revenues are generated from Dunkin’ Donuts U.S. segment franchise fees.
Coffee industry so far: Dunkin beat both analysts’ earnings and revenue estimates; Starbucks beat earnings estimates in 1Q14 by two cents (2.7%).
Dunkin’ Brands Group, Inc. is a quick-service restaurant chain and operates in an industry of coffee retailers such as Starbucks (SBUX) and Krispy Kreme Donuts (KKD).
It’s no big secret that Dunkin’ Donuts has the highest relative leverage in the industry. Leverage comes with a number of risks— a substantial risk is the interest paid on debt.
Dunkin’ Brands’ gross margin has been declining, but at the same time, operating margins have been on the rise. Gross margin is largely affected by increases in the production costs of ice cream.
The coffee industry is difficult to understand in terms of the relative valuation. Industry stock prices per share range from 46.0x to 15.4x earnings per share, with the average at 26.4 times earnings.
Dunkin’ Donuts’ main competitor on the coffee sales front is Starbucks, which sells coffee from its company-owned fleet of retail locations.
Dunkin’ Brands have had an international presence since 1961’s introduction into the Canadian market. Currently, their key markets for both brands are in Asia and the Middle East.
Dunkin’ Brands has a very low capital requirement relative to the rest of the coffee retail industry. This is due to its business model, centered around establishing franchises across the world.
Dunkin’ Brands Group doesn’t typically supply products to its franchises. Revenues derive from royalty fees as opposed to product distribution.
Dunkin’ Donuts has pursued an increasingly aggressive expansion strategy since its IPO. The key to this strategy is its franchise-centered business model.
Dunkin’ Donuts is an industry leader of the quick-service restaurant (or QSR) concept. Its products include coffee, donuts, bagels, muffins, and breakfast sandwiches.
Starbucks (SBUX) appears to be undervalued relative to its closest competitors based on forward PE (price-to-earnings) and estimated earnings growth.
In addition to international expansion, Starbucks executives push the importance of the consumer experience. Essentially, the firm is dynamically changing its impressions by always offering something new.