Investment Opportunities

Invest in the “Starbucks of China”

Imagine my surprise when I arrived in Tokyo decades ago as an eager student and found more coffee shops per block than bars in Milwaukee.

I had thought that Japan, like most of Asia, was a land of tea drinkers. It turns out that with rising incomes and western influence, Japanese people love coffee (with lots of sugar and milk) alongside their green tea.

Right now, Japan’s per capita coffee consumption is 75 percent of America’s and still trending upwards.

This is pretty much the pattern South Korea followed.

China will also follow this trend. How can we get a piece of the action?

To put China’s coffee upside potential in perspective, I drink more coffee per day than the average Chinese drinks in a year right now! That’s three cups of coffee complements of my neighborhood Starbucks (shout out to Katie and Matt).

Which brings me to two very different companies hoping to cash in on coffee growth in the Middle Kingdom.

Blue Chip Starbucks vs. Taiwan Rival

As much as I admire the Starbucks brand, it’s hard not to notice that it already penetrated just about every possible nook and cranny in America.

That’s why the company is going international in a big way and sees China as a major target of growth.

CEO Howard Schultz said Starbucks (Nasdaq: SBUX) is still in the “very early days” with its efforts in China. But its goal is to triple its number of stores there to more than 1,500 by 2015. It’s growing fast in China, with quarterly sales growth of around 20 percent.

International sales rose a nice 15 percent in the quarter, but account for about 30 percent of overall revenue. In contrast, U.S. sales were up six percent.

For the year ending September 30, Starbucks recorded $12 billion in revenue and posted revenue of $1.7 billion. Starbucks stock has done well over the past year, up over 30 percent and up 500 percent from its 2008 lows.

No question, Starbucks is a great global coffee play, but a purer play on China’s potential to grow exponentially as a coffee market is Taiwan’s 85C Café Bakery operated by Gourmet Master (TPE: 2723).

(If your broker doesn’t support foreign exchanges, you may want to look into other options.)

“Low-Price Luxury”

The company’s “low-price luxury” appeal is right on target. The Founder, Mr. Wu Cheng-hsueh, came up with the idea of after getting a stiff bill for coffee and pastries at a five-star hotel in Taipei. Mr. Wu is an experienced entrepreneur who went from one good idea to another before founding this gold mine.

85C Café Bakery has a base of 325 stores in Taiwan and expects to increase its stores in China six-fold to 1,000 by 2015. The company has three stores in the United States and its highest grossing store is in Irvine, California where it offers 80 varieties of pastries as well as its famous sea salt coffee.

The company’s edge is three-fold: its coffee pricing advantage of 30 percent to 50 percent over rival Starbucks, its absolute focus on growth in mainland China, and its Taiwan base gives it political savvy to run the thicket of regulations put up by China’s mandarins.

In addition, from reading scores of comments online, it seems that 85C’s major pull is its bakery with waiting lines like Disneyland. Of special note are its coffee mochi bread, taro bread, half moon cakes and squid ink buns.

85C’s stock, like many boom chip stocks, has been on a wild ride since its November 2010 IPO. The stock rocketed 138 percent out of the gate before settling down as Taipei’s market pulled back 22 percent in 2011. The stock was trading since August about 20 percent above the IPO price.

This is a great entry point, and by putting 85C and Starbucks in your saddlebag, you can hedge your bets and put a shot of caffeine your portfolio.

Good Investing,

Carl Delfeld

*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.

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