“Villainous fungus. Have at thee! I stabeth thee right in the spore.” – Fictional Version of Starbucks that is a knight.
A storm is brewing in the Mediterranean. Luck might finally be on our side as the insane market run cools off and great companies can be invested in at less than a premium. Not to say that all companies are inflated, but cheaper is always better when it is a great company you do not yet own.
Opportunities Meet Mother Nature
I was hoping that Starbucks (NYSE: SBUX) would be a bit cheaper, but that was hoping for too much as it is the economic engine of America by keeping America awake. Perhaps that is overstated as there are other places to get your coffee, but Starbucks has managed to nudge itself into people’s daily routine. Coffee used to be something that you made in the morning at home while getting ready. Now it is something you go to. Even with all the machines out there, including Starbucks’ own Verismo machine, the quality that people like can only be had at the stores.
Starbucks needs overseas expansion in order to continue growing. India has a small number of shops, but they are doing reasonably doing well. It seems to be a slow expansion for India. Chinese stores are doing well too, but it is too early to tell if this success will grow at the expected rates or be as consistent.
There is not much Starbucks can do domestically. It can diversify its product offerings. Getting Teavana is part of diversifying, because some people just do not drink coffee. Offering tea bars is a great way to do for the tea drinkers what it did for the coffee drinks, which is giving them a place to work on their screenplays. Selling food is another way to expand revenues, but is not as effective as hitting new population centers.
Starbucks bought a coffee farm to experiment with fighting off a fungal infection called coffee rust, though other research is planned. This is the first I head of it. I do know the dramatic impact Phylloxera had on European vineyards, and it was only abated via the introduction of grafting. That involves attaching the stem of the grape you want to a base that is resistant to the annoying insects. It is one of the most significant events in the history of winemaking. Estimates of coffee production declines indicate there is an expectation that the fungus is spreading. It could place an upward price pressure on coffee beans.
This fungal infection is not to be taken lightly. Phylloxera was especially bad due to Old World vines having no resistance to the New World pest. Coffee rust appears to have spread from the Old World to the New World, but has been in Brazil since at least the 1970s.
Starbucks will see success overseas, and I think its domestic strategies are brilliant. My feeling is that Teavana will be a huge victory for Starbucks once it really gets going. You should consider giving Starbucks at least two years to show you what it can do. On the negative side the fungus does have me concerned. Starbucks is a roaster, not a grower. It is taking the fungus seriously. It does not appear to be an acute problem, but a chronic one that could get worse.
Fingers in Many Pies
I really like Coinstar (NYSE: CSTR) as a company, and the Rubi machine that will dispense Seattle’s Best Coffee seems like a great idea. I still have not seen the machine in my area, but am eager to sample the coffee. Despite the Rubi being test marketed in various places around the country, the revenue potential from this is apparently not built into guidance. That means there is a good chance that Coinstar could over deliver come earnings, if the Rubi really catches fire.
Coinstar is not sitting by with its vending business with one new product. It is testing a new machine called Crisp Market, which dispenses fresh food. The initial build-out is in Chicago. I hope they have top analysts looking at the data and identifying hotspots of demand for the nationwide rollout. The other vending machine is a kiosk that sells beauty samples for $1 called “Sample It!” Only two locations exist so far, but demand seems healthy enough that more will be rolled out.
I initially thought Redbox Instant was a bad idea. Redbox Instant is the big news du jour. When I heard the price plan come out, my opinion regarding it was immediately changed. With a $9 plan you get unlimited streaming and 4 blu-ray movies from a kiosk per month. Everything I have wanted to watch on Netflix streaming in the last month has not been available. Not just new movies, but ones from a few years ago. The option of heading over to a kiosk to get newer, popular movies is an enticing one. I know it is not Netflix’s fault that it cannot get certain content, but that does not solve my specific problem of not getting what I want.
Coinstar is getting into coffee, fresh food, and online streaming? Those are some excellent areas to expand into. Coffee and streaming are known to be expanding markets. Coffee is actually a mature market now, but the Rubi mixes in some convenience and is $1.50 a cup of Seattle’s Best. It might be a good option for your 3rd cup. Offering a vending machine with fresh food choices would be great for people with short lunches or want to avoid the lunch traffic.
Conclusion
Both Starbucks and Coinstar are working on ways to continue growing. Starbucks is opening stores overseas, and is offering more products domestically to increase sales. Coinstar is testing new kiosks, and is expanding into streaming. Streaming is Coinstar’s biggest risk. If RedBox Instant fails to do well it could mean trouble for Coinstar’s share price due to negative sentiment, though I am not certain what the fundamental fallout would be. In the near-term, I expect limited upside and macroeconomic concerns could bring the share prices down. Both companies would require a year or two for all the new efforts I have discussed to really start paying off.
Additional Riffing:
The effects of the fungus should not be underestimated. The number of pounds of coffee expected to be destroyed is growing year to year. That is not even the main issue. As more plants are infected the broader the reach. It is just like a human epidemic. In zombie terms, 1 zombie can make 1 zombie, but now there are 2 zombies who can make 2 more zombies. Not saying this will work the same way, as the fungus seems to destroy the coffee plan not turn them into living weapons.
Coffee rust does spread by direct contact with an infected plant. The more plants that are infected mean that more can potentially be infected. That is just how these things work. They get progressively worse as the exposure broadens. I am not trying to sound a panic, but trying to frame the risk. So far it is a few million pounds of coffee affected. Perhaps the fungus is not as devastating as Phylloxera was, but the problem is worsening. Hence the need for a good solution. It could be as simple as some of the solutions for grapes. A common fungus for grapes can be hindered by using elemental sulfur. This is not a chemical just a natural element that is rarely harmful to humans in trace quantities. Once the grapes are picked they are cleaned, all-in-all elemental sulfur is a good solution.
RedBox Instant is really brand new. It took a while for Netflix to become what it is. The market and the media are going stupid and crazy. Calling RedBox Instant a failure already, or calling it as meaningless because it has less content is like saying Starbucks is a failure when it first started, because Folgers sold more coffee and had a broader footprint. Give it a moment, damn. As for it being a Netflix killer, you don’t know that. Redbox Instant might always have a smaller portfolio, but unlike Netflix might actually have some recent movies. The use of the Kiosk is encouraged with Redbox Instant, and it caters to a different class of consumer IMO.
I almost regret going only with streaming on Netflix. Frankly, most of the stuff I want to watch is not available. So a lot of people out there need to stop kissing Netflix’s butt. The service is solid, but it is not the end-all, be-all of the streaming world. There is massive room for improvement by all market players. No one is free from criticism. Not Apple, not Netflix, and not Amazon. Redbox Instant gets a temporary immunity shield like right at the beginning of a new life in a video game so you do not get killed right away by what killed you last time. It is too new to use scathing criticism. That is like telling a baby that they won’t amount to anything, because they are small and weak. The child could grow up and beat the crap out of you.
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