U.S. consumer multinationals are struggling in China right now, bogged down and challenged by both Chinese rivals and geopolitical tensions.
In the first quarter, Apple iPhone sales were down 8% in China while Huawei sales were up 70%. Walmart (WMT) has closed more than 100 stores in China over the past five years.
Nike used to count on China providing 20% of total revenue but it’s closer to 10% now while Chinese sneaker maker Anta’s sales surge.
In the world of coffee, the story is the same, with a dominant leader and two fast-growing upstarts all contending for the title of the best coffee stock in the world.
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Coffee king Starbucks’ (SBUX) overall sales were down 8% in the first quarter.
Starbucks’ U.S. sales are crippled by slowing consumer spending and people working remotely as well as competition from local boutique coffee roasters.
All this led to Starbucks posting $8.6 billion in sales, a 2% decline over the prior year. Comparable sales declined 4% worldwide, which is one area where Starbucks may also be losing out as prices are high relative to competitors.
For example, the smaller disruptive chain called Dutch Bros (BROS) has demonstrated some impressive growth over the last few years.
An operator and franchisor of drive-thru coffee stores, the company has about 900 locations across 17 states in the U.S. Dutch Bros has seen its share price soar with potential room for further growth.
Revenue soared by 92% from 2021 to 2023, and after some heavy losses, Dutch Bros was able to manage a small net income of $1.7 million for 2023. Dutch Bros looks well-positioned to continue growing as the company plans to open between 150 to 165 new stores this year. From a price-to-sales perspective, Dutch Bros’ stock price is right in line with Starbucks’ stock, so it is basically a call on higher potential growth versus a global premium brand with much stronger financial resources.
With strong brand recognition from its member rewards program, along with two successful product launches during the most recent quarter, Dutch Bros looks like a stock you can keep for the long term. However, some investors are concerned about the company being able to maintain its growth momentum leading to its stock pulling back rather sharply in the last month.
Starbucks, which has made a major bet on China’s emerging coffee market, also faces formidable homegrown competitors, and this is impacting its market share.
One such upstart is Luckin Coffee (LKNCY).
Luckin has more of a kiosk, delivery, and technology-driven retail strategy blending quality, convenience and affordability. Sales were up 41% in the first quarter as it opened more than 7,000 outlets in 2023 - equal to the total number of Starbucks in China. The company also has prices of roughly half of its premium competitor.
Luckin Coffee was founded in 2017 and started out of the gate fast only to run into some serious accounting and management problems. After regrouping, it has resumed a torrid growth trajectory. The company opened 2,342 new stores, including two in Singapore in just the first quarter of this year.
This presents investors with a classic situation. A dominating company such as Starbucks and two disruptive competitors growing much faster and offering cutting-edge distinctive strategies as well as lower prices.
Which stock should you buy?
It comes down to judgement based on weighing risk, valuation, and growth prospects for each company and stock.
Take this opportunity to join the Cabot Explorer to learn which stock we chose this week and why.
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