You Don’t Have to Be a Coffee Lover to Profit from Coffee

Down again.

The ASX 200 fell more than 4.7% since last Friday. It’s more than the Dow Jones. And here I thought we were following them down.

As I explained in yesterday’s Money Morning, investors are worried about bond yields and future uncertainty…again.

It’s why I suggested you jump into small-cap stocks. The correlation between small-caps and large-caps isn’t perfect, for now. Meaning a drop in large-caps might not lead to a similar drop in small-caps.

If you can also find small-caps with the wind at their back, you could make a tidy profit as the ASX 200 continues to slide lower.

And who really cares that the market fell a few per cent anyway? You can’t really do anything with this information. Stocks are not cheap enough for you to blindly buy anything and everything.

The only ones excited over this decline is the mainstream. It’s something to talk about, something to fill the headlines.

Again, this doesn’t really help you. No point reading ‘news’ that just turns out to be noise in the long run. So in an effort to give you news and not noise, I thought I’d talk about an idea you can use.

Let’s have a chat about coffee…

The pick-me-up that rejuvenated coffee

Rather than alcohol, which seems to take off everywhere, you could say coffee is an acquired taste. I remember when I first tried a brew. Bitter. Watery. Stale.

Maybe it was just a really bad cup. Over time, I grew to love the bitter, creamy taste (habit makes all things easy).

It seems my experience is pretty typical too. I’m sure lots of coffee drinkers didn’t like it at first. Yet, we all grow to crave it sooner or later.

In the 1930s, 98% of American families were coffee drinkers, which even included six to 16 year olds. Today, the stats haven’t changed all that much.

In-between however, coffee had some rough times. From anthropologist William Roseberry:

The second post-war development involved the long-term decline in consumption beginning in the 1960s. Through the 1950s, consumption was essentially flat, with minor fluctuations. From 1962, one can chart a consistent decline. In that year, 74.7 percent of the adult population was calculated to be coffee drinkers; by 1988 only 50 percent drank coffee. Even those who drank coffee were drinking less.

According to Scientific America, the bitter brew had to undergo a marketing face lift. That face lift would come from the bright minds at Ogilvy and Mather (ad firm).

They suggested to emphasise the value and quality of coffee. ‘We are entering the “me” generation,’ the ad firm wrote.

The crucial questions “me” oriented customers will ask, of all types of products, are: “What’s in it for me? Is the product ‘me’? Is it consistent with my lifestyle? Does it fill a need? Do I like how it tastes? What will it cost me? Is it necessary? Can I afford it? Is it convenient to prepare? How will it affect my health?”

Fast forward to today and most coffee drinkers will tell you they enjoy the experience or drink coffee out of habit.

And it’s these two qualities which have made companies like Starbucks Corporation [NASDAQ:SBUX] a fortune over time.

In fact, one hedge fund manager is loading up on coffee. He’s bought millions worth of Starbucks stock, betting that the Middle Kingdom could double his interest in the next two to three years.

Why you should invest in coffee

Bill Ackman of Pershing Square Capital has bought roughly US$900 million of Starbucks stock. He believes their push into China might be the key to kick stagnating growth.

From the Australian Financial Review (AFR):

A month before, Coca-Cola paid $US5.1 billion for UK chain Costa, which has 400 cafes in China, a figure it wants to triple in the next five years.

Powered by venture capital money from the likes of Internet giant Tencent Holdings, local start-ups like Luckin Coffee and Seesaw Coffee are aggressively expanding store count in an attempt to challenge Starbucks, which is opening a store every 15 hours in China.

The coffee-shop market in China is projected to grow by 32 per cent to 79.4 billion yuan ($16.3 billion) by 2022, from 60.1 billion yuan last year, according to research firm Mintel. But the appeal of coffee in China is driven by factors beyond healthy short-term growth.

A report involving 4000 Chinese consumers in big cities aged 15 to 49 by research firm Kantar Worldpanel reveals two factors driving bullishness: only a minority of Chinese consumers currently buy coffee, but those who do spend more on average than drinkers in developed coffee markets such as the UK and Spain.

MoneyMorning 11-10-18

Source: Bloomberg
[Click to open new window]

So why is Ackman betting on a Chinese market that hardly drinks coffee?

How Aussie investors could potentially win big when China takes on Silicon Valley — Download your free report now.

Chinese culture is big on tea, not coffee. And those that do drink coffee see it as a treat. An experience to have after work or on the weekend.

But I’ll bet Ackman is banking on Starbucks’ ability to turn coffee into an everyday habit among Chinese workers. It will be their morning ritual to start the day, and their afternoon pick-me-up to power through four o’clock.

The AFR continues:

The potential for coffee to catch on is enormous, though Kantar’s Yu said the java industry still faces a challenge from tea franchises offering milk and bubble tea products.

“This under-penetration is a double-edged sword,” Yu said. “A lot of room for expansion but also a lot of competition.”

Despite coffee not being an entrenched habit among Chinese consumers, those who are buying coffee spend on average almost twice as much as drinkers in developed markets. This is because coffee culture in China has been essentially created by Starbucks in the past decade.

And it’s not just coffee. Asia presents one of the biggest opportunities for a myriad of businesses, from retail to tech. Thus, there are a myriad of opportunities for you to sink your teeth into.

So is coffee an idea worth pursuing? Potentially. It sure beats stressing about a 4–5% market decline.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: Silicon Valley is losing ground to this hot new competitor — and you could potentially profit with this concise guide. Read the free report now.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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