Should Starbucks Corporation Worry About A New Rival In JAB Holdings?

  • JAB Holdings of Germany seems to be going after Starbucks.
  • In recent months the company has bought Keurig, Krispy Kreme, Einstein Bagels and Caribou Coffee.
  • Is Starbucks getting surrounded?

A German conglomerate called JAB Holdings is in the process of surrounding Starbucks (NSDQ:SBUX) by buying up its competition.

In the last year, JAB Holdings has bought Peet's Coffee, Caribou Coffee, Einstein Bagels, Keurig, and now Krispy Kreme (NYSE:KKD), giving it a very strong position against both Starbucks and McDonalds (NYSE:MCD) in the breakfast arena.

Outside food, JAB owns a number of brands. These include RB Holding, which controls brands like Woolite and Lysol, Calvin Klein owner Coty, and Belstaff, which includes Jimmy Choo and Bally’s Shoes.

Krispy Kreme's recent international expansion - 70% of its stores are outside the U.S. -- is no longer going to be a drag on earnings. That will make it accretive to JAB, which measures results in weaker Euros. But the bigger question is whether Starbucks should be worried about losing coffee share and, eventually, breakfast share to its new rival?

In the short run, no.

Also read: Starbucks still a worthy investment.

Peet’s and Caribou are not a unified brand, and Caribou has been closing stores, not opening them. Einstein and Krispy Kreme are fast-service restaurants, far more like McDonald’s than Starbucks. Keurig was overpriced, a speculative stock that fell hard after trying to make its cups proprietary and failing to deliver a cold drink platform on time.

In fact, all the elements here were overpriced. Caribou was closing stores when it was bought. Einstein was short of capital and Krispy Kreme’s best days were behind it. It’s really up to JAB to see if all this can be turned into more than the sum of some very expensive parts. The coffee at Einstein’s could be better, there are opportunities here to cross-promote with Keurig, but that’s about it. JAB could put these operations under one umbrella, as it now owns seven chains selling coffee around the world (and one tea outfit, Mighty Leaf).

So far JAB has just put six of the brands under JAB Beech while running its two European operations separately. It’s just not one thing, it’s a holding company for a lot of things. JAB is not one chain going after Starbucks, but a number of chains, each trying to grab a small piece of Starbucks' market.

The purchases do bring up a specific problem for Starbucks, namely food. The company bought La Boulange, a San Francisco baker, to address that problem, then closed all the stores.  Starbucks still maintains Evolution Fresh stores, in addition to stocking the products in its shops. But as it expands into more day parts, what’s a drink without a nosh?

Coffee and tea are easy to distribute. Fresh food is a different thing, and the Starbucks stores don’t have the facilities to produce it on-site. Starbucks needs to create a network of bakeries and food preparation facilities if it’s to capitalize more fully on the drinks its stores are selling. For investors it’s an opportunity – the company’s sales and margins aren’t threatened by the lack of food, they could just be improved if it can distribute good food profitably through the current network.

For now, it’s JAB that has the problems, and JAB that needs to perform, at least to its own satisfaction, demonstrating it can manage the assets it has bought, profitably. For now this is nothing Starbucks shareholders need to worry about.

For now.

Check out Amigobulls' Starbucks stock analysis video for a quick look at key financials.

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