Portfolio Caffeine
Portfolio Caffeine
The effects of caffeine on the central nervous system were
first discovered in the 6th century in the Ethiopian highlands
by a sheepherder called Kaldi. After his sheep ate red berries
from a coffee tree, they seemed a bit jumpy and had difficulty
sleeping.
The berries next made their way to a local monastery where the
Abbott made a drink by mixing the beans with water into a
concoction that kept him alert through the long hours of evening
prayer.
Coffee most likely made its way to Asia in the latter half of
the 17th century when a Dutch trader brought a seedling from
Yemen to Java where the soil proved hospitable leading to a
thriving and profitable industry to this day. Vietnam is now
the world’s second largest coffee producer while India and
Indonesia are in the top ten.
Despite substantial coffee production in Asia, much of the
growth in the popularity of coffee in this predominantly tea
drinking region can be attributed to instant coffee and the
marketing efforts of Nestle. It rolled out the first
commercially viable instant coffee in 1938 and it spread to Asia
becoming a prestigious alternative to tea.
As incomes rose in Japan, coffee consumption grew as well making
it the third largest consumer in the world. This is a trend that
could continue in countries with rising disposable incomes such
as China.
Coffee is now big business and as a world commodity is second to
only oil.
This size and growth potential for a habit forming product like
coffee sure sounds like an investment opportunity to me. But
how should you play the rise of coffee in Asia.
Since it takes about 4-5 years for a coffee tree to bear
cherries, investing on the production side is not for the faint
of heart due to hard to predict coffee price fluctuations. As
one of the largest coffee plantation companies in Asia, Tata
Coffee Ltd. of India, is worth a good look especially since it
is an integrated coffee company with roasting, exporting and
retail operations.
Nestle is also a possibility since it is the leader in instant
coffee in China and many parts of Asia. A drawback is that the
coffee business represents only roughly 10% of the sales of this
diversified food powerhouse.
The most attractive option is to invest in the retail coffee
market which is highly fragmented. Starbucks (SBUX) is the
global leader with 10,500 retail outlets of which 3,500 are
outside North America. Starbucks began in Asia with its first
store in Japan in 1996 and now has 165 stores in mainland China,
221 in Hong Kong, Taiwan and Macau, 595 in Japan, 64 in
Australia and 34 in Singapore.
Starbucks is a classic growth story. It added over 1,000 stores
last year and plans 1,800 more in the fiscal year ending
September 2006. 35 million people visit a Starbucks store each
week and it has operations in 37 countries.
Its global goal is to reach 30,000 outlets with half of them
located overseas. China could perhaps become its second largest
market after America.
The core of Starbucks is its premium branded coffee but it
offers much more. It has become a second gathering place outside
of work and home. Starbucks Entertainment produces CD’s and is
considering providing music download facilities in its stores.
I am one of the millions around the globe that use Starbucks as
a second office. During my last visit, I got behind a gentleman
who added several pricey pastries, and a CD to his coffee for a
whopping bill of $27.
One caveat for investors is that sales growth expectations are
high and any significant disappointment would likely hit the
stock rather hard. Another is that its China expansion may run
into some difficulties though I have been impressed with its
incremental strategy since its first store in Beijing opened in
1999.
With its financial strength, knowledge of markets and attention
to detail, Starbucks seems to have the recipe for success in the
fragmented retail coffee business. Since it is opening 4-5
stores a week, competitors will need to scale up rather quickly
to pose a threat to its growth. Copycats are a problem though.
Starbucks recently gained a key judicial victory when it won a
court case against a Chinese company that infringed on its
copyright.
Meanwhile, back in Ethiopia, another Starbuck’s knock-off called
Kaldi’s does a brisk business. While Starbucks is not amused, it
cannot help but be flattered by the imitation in the very
birthplace of coffee.
Carl Delfeld is head of the global advisory firm Chartwell
Partners and editor of the the “Chartwell Advisor” newsletter.
He served on the executive board of the Asian Development Bank
and is the author of “The New Global Investor.” For more
information go to http://www.chartwelladvisor.com or call
877-221-1496.
