It may be hard to believe, but coffee stocks haven’t always been the cash cow investment that they are today.
These days, there’s a Starbucks on every corner and often many more within a short walk. It can be hard to remember the era of drip coffee or instant coffee, hastily made and consumed over the kitchen counter before bolting out the door to the office.
So how did we get here? Well, the simple fact is that Americans are drinking more coffee than ever. A 2018 study from the National Coffee Association, which surveyed 3,000 Americans, found that 64 percent drink a cup of coffee a day - the highest percentage since 2012.
But the rise of coffee in North America stretches back at least to the early 1980s when a young man from Brooklyn took a trip to Italy. Once there, the man began to notice that cafes and coffeehouses were more than just a place to stop for a quick pick-me-up. These cafes were important to the community, a “third place” away from home and work, where people could gather and commiserate.
That man was named Howard Schultz. Upon his return to the United States, Schultz made it his mission to transform a small Seattle coffee company into the Starbucks we all know today. Since the 1990s, demand for coffee has exploded by at least 50 percent worldwide.
The State of the Global Coffee Market
The types of coffee companies take as many forms as there are types of coffee beans on the planet. That is to say, a lot.
The market includes instant coffee, prepared-in-store, K-Cups, artisanal roasters, and more. Moreover, the global market has seen incredible growth over the last 20 years.
Coffee production begins at small family farms because it has proven difficult for large corporations to industrialize the process for picking coffee in the mountainous regions where coffee beans are typically found. In 1978, those farmers produced 79 million bags of coffee, or roughly 10.4 billion pounds of coffee.
Now, farmers are producing approximately 176.1 million bags per year, according to a recent report from the United States Department of Agriculture.
Meanwhile, the Coffee Shops market is projected to grow by US$58.7 billion worldwide, with a compound growth of 4.1 percent, according to another study. That same research suggested coffee could be worth more than US$143.4 billion by 2025.
So, it’s hard to overstate how much potential growth lies in the coffee sector. With that much momentum pushing stocks higher, it’s worth a look at some of the most promising publicly traded coffee companies to invest in.
1. Dunkin Brands Group ($DNKN)
Headquartered in Boston, Massachusetts, Dunkin Brands is the parent company of Dunkin’ Donuts and Baskin-Robbins. Two of the most recognizable brands in the United States.
At the beginning of 2020, Dunkin Brands was valued at a little over $6 billion, which was small compared to Starbucks’ market capitalization of nearly $80 billion. But Dunkin has been adding new stores and increasing its profit margins over the last few years. Its recent third-quarter earnings report may have drawn the attention of Inspire Brands, which recently announced it would acquire Dunkin Brands in a transaction worth $11.3 billion
That alone was enough to send the stock soaring higher, which makes DNKN a great buy if you can get in before they close the deal.
2. J.M. Smucker Co ($SJM)
Smucker might not be a name one would think of as a coffee stock. But the maker of Smucker’s Jam also happens to own Folgers Coffee, which it bought in 2008.
The company has recently benefited from solid growth efforts which have included buyouts and partnerships, as well as a focus on e-commerce business. This last factor was especially important given the recent pandemic, with more people opting to have their coffee delivered to their homes rather than risk going out for a hot cup.
That was spurred on further by Folgers’ strong brand recognition. When people thought about at-home coffee options, Folgers was often the first name that came to mind.
Accordingly, Smucker has accelerated marketing support for Folgers. And it may have worked, with the brand’s position in the US Retail Coffee segment increased 13 percent in the fiscal first quarter.
3. Nestle S.A. ($NSRGY)
This Swiss food and beverage giant has weathered the Coronavirus pandemic with aplomb. Indeed, the company recorded its highest quarterly sales growth in six years.
Of course, Nestle has a long history and an established footprint as a result. The company has 447 factories operating in 194 countries and has about 339,000 employees worldwide.
In addition to its famous coffee, Nestle offers a wide array of products that include baby food, bottled water, frozen food, dairy products, and many other staples. Many of which remain necessities even amidst a global pandemic.
Nestle recently released strong third-quarter results, even as some of its staple brands saw a decline. Its “on the go” products like water bottles and Milkybars were down more than 25 percent, and the company believes these will be a drag for some time. However, Nestle still managed to see an increase for the period, which suggests strong fundamentals and a diversified offering.
4. Starbucks ($SBUX)
It would be difficult, nay unseemly, to write an article about “the best coffee stocks” and leave a company like Starbucks off the list.
SBUX is easily one of the most important public coffee companies in the world. With a value of more than $85 billion and more than $25 billion in sales over the last 12 months, Starbucks is one of the top coffee retailers in the world.
Recent trends haven’t been in the coffee giant’s favor. The Great Recession caused many smaller coffee shops to fold, which helped Starbucks’ overall standing. Though the company’s stock did fall in tandem with the rest of the sector.
However, the economic recovery saw an increase in competition and Starbucks’ new visitors metrics have remained virtually stagnant in the last two years, with profits largely being driven by an increase in prices and more business from China.
5. Keurig Dr Pepper ($KDP)
Keurig Dr Pepper, of course, makes those famous coffee pods. The coffee division was formerly known as Green Mountain Coffee Roasters, who were largely responsible for introducing the world to K-Cups, which were basically ubiquitous a decade ago. So much so that in 2015, Green Mountain provided more coffee to Americans than Starbucks.
When the patents on K-Cups and their associated machines ended, competition bombarded the market, causing Green Mountain to go private in late-2015.
The company came back to the public stage last year following a Keurig-Dr Pepper merger. The new entity includes K-Cups and coffee machines as well as popular soda beverages and products like Dr Pepper, A&W, Sprite, Canada Dry, and more.
Of the two sides, coffee seems to be bringing in the majority of sales and profit, though it’s hard to know for sure given the relative youth of the company. There simply isn’t enough information to collect solid data on yet.
Still, with Keurig’s reputation, it may be one of the better coffee company stocks for risk-prone investors.
Risks For The Sector
Looking at the industry, coffee may seem like one of those evergreen investments that will never go out of style. However, coffee producer stocks are like any other industry and have their own levels of risk.
The main aspects to consider are the cost of coffee beans and an increase in competition from smaller competitors.
The changing global climate will likely drive the US coffee price higher. Investment in coffee cultivation has resulted in many smaller farms concentrating all of their resources in coffee production. Where once they were diversified with fruits, vegetables, and other staples, now they only produce coffee. If something has a negative impact on their crops, there is nothing to fall back on. Ultimately, the adoption of this monoculture will drive up their costs in the long run.
By 2050, huge parts of Brazil, Central America, Africa, and Southeast Asia will no longer be able to produce Arabic coffee, according to the International Coffee Organization. A change like that will necessitate big-time investments to mitigate the damage.
Whether coffee-producing countries have the ability to make the investments necessary remains to be seen, but if not it could lead to lower yields and higher prices. Those prices will be passed along to the consumer or result in lower margins, which will cause stock prices to sink in turn.
Another risk comes from increasing competition, with younger consumers opting for local, organic producers over big names like Starbucks.
Whether you’re looking for coffee bean stocks, coffee companies’ stocks, or just a list of publicly traded food companies or drink stocks, this sector has a lot of potential upside. The top coffee retailers have managed to weather the global pandemic relatively well compared with other industries.
As always, when looking for coffee stocks to buy, make sure to do your own research.