Why should Starbucks bid for Biz Coffee? Analyze the things of coffee second and Big three.

The purchase of Peets Coffee & Tea has recently attracted a lot of attention in the stock market, and Germany's JAB will buy the company for $73.50 a share in cash. JAB has several well-known brands, including Jimmy Choo, Coty and Bally.

However, after the offer was announced, Bitz Coffee shares traded above the offer of $73.50 a share, closing at $75.40 on July 31, making it the second-largest acquisition with a price of more than $500 million. Investors are expected to compete. The most logical choice is Starbucks (Starbucks). Comments on Wall Street and previous Bloomberg articles suggest that Starbucks may bid for Bitz Coffee at $80 a share. We believe that Starbucks should participate in the bidding and make a bid for Bitz Coffee. Our point of view is as follows.

Competition and Brand: reduce competitors and increase High-end Brands

In essence, Starbucks competes with any coffee shop or coffee product that does not belong to the company's brand portfolio. Although local community coffee shops attract customers away from Starbucks, such small coffee shops do not pose a threat to Starbucks commercial coffee chains at the regional or national level.

However, Bizi Coffee is different. Of all the coffee companies that have a competitive advantage over Starbucks, Bizi Coffee is the strongest. In addition, the company has detailed plans to compete with Starbucks, and we believe that this advantage will be strengthened after JAB completes the acquisition of Bitz Coffee. After the privatization of Bitz Coffee, there is no reason not to continue to implement the company's development strategy (JAB may increase revenue through privatization).

Bitz Coffee currently has branches in six states, most of which are in California. In recent years, the company has slowed its store expansion and focused on groceries. Bitz Coffee has increased the number of stores at a compound annual growth rate of only 3.38% over the past five years.

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However, the company is likely to re-accelerate store expansion after privatisation, as the profitability of Bitz coffee retailers is growing rapidly. According to the latest investor conference, Bitz Coffee's retail profits have grown 2.5-fold in the past four years, reaching $25 million in 2011.

In the long run, Bitz Coffee is likely to pose the biggest threat to Starbucks in the retail segment, surpassing the competitive threat posed by McDonald's and Dunkin. Why did this happen? Bitz Coffee has fewer than 200 corporate outlets (116 franchised stores as of the end of 2011), while McDonald's and Dawn both have thousands. The answer lies in the brand of Bitz Coffee, which fits perfectly into the Starbucks brand portfolio.

Of course, Starbucks's most famous brand is Starbucks, which has become synonymous with coffee. But Starbucks is not the company's only brand. The company understands that in order to succeed in the coffee industry, it needs to cater to the preferences of ordinary consumers in addition to the upper class, which is the core customer base of Starbucks.

That's why Starbucks bought Seattle Best Coffee (Seattles Best) in July 2003. Seattle Best Coffee caters to working-class tastes, and these customers don't usually visit Starbucks stores. This provides Starbucks with an opportunity to develop in this market segment. But Starbucks still lacks products aimed at the high-end premium coffee market. In the coffee market, Bitz Coffee is regarded as a high-end brand, and the price is correspondingly higher.

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The price of Bitz coffee has always been higher than that of Starbucks, especially in the grocery store market that both companies focus on. The price of a 12-ounce bag of Bizi coffee is $1 higher than that of Starbucks, mainly due to the strength of its brand. According to the chart from the latest investor conference of Bitz Coffee, Starbucks is positioned outside the high-end market. In fact, this chart shows that Starbucks lacks a share of the high-end market, and we think the company needs to improve this positioning as soon as possible. The brand strength of Bizi Coffee will help Starbucks consolidate its position, not only in the retail sector, but also in the grocery sector.

Grocery sales (Grocery Sales) and the International Market: the Future of Starbucks

In its latest quarterly results, Starbucks reported revenue growth for its retail stores, up 8.2% for its direct stores and 23.9% for franchises. However, Starbucks's consumer packaged goods (CPG) business grew by 42.7 per cent in the third quarter of fiscal 2012 as the company expanded its distribution and sales network to provide more products to consumers. Looking to the future, packaged consumer goods will become a more and more important department of Starbucks. We believe that Starbucks' addition of Bitz Coffee brands and products to its packaged consumer goods business will greatly enhance its market advantage. As Wedbush analysts point out, Bitz Coffee's high-end products and higher pricing power are "coveted" qualities of Starbucks.

For now, however, the distribution network of Bitz Coffee is far inferior to that of Starbucks. That's why revenue from Biz Coffee grew by only 11.75% in the latest quarter, reaching $40.659 million ($158 million in 2011). However, investing in the distribution network is a top priority for Bitz Coffee, which is the company's main advantage. Bitz Coffee's store direct distribution system allows the company to establish a good relationship with the grocery store to ensure that more fresh products are provided. These factors have led to high product prices.

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The average selling price of Biz coffee is 10.53% higher than that of Starbucks. Bitz Coffee has been successful in increasing its market share. In the United States, Bitz Coffee ranks second in the professional bagged coffee market, with an 18% market share in stores. Overall, Bitz Coffee has a 9% market share, mainly because of the small distribution network (these problems can be resolved with the Starbucks acquisition). However, Bitz Coffee has a leading market position in California and the western United States.

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High-end markets in California and the western United States show that the Bitz brand resonates with consumers who are willing to pay high prices for high-quality products. Still, Starbucks ranks second in the California market. If Bitz Coffee enters the Starbucks brand portfolio, the increase in distribution network will accelerate the growth of the brand.

What about the problem of brand conflict? Will the brand expansion of Bitz Coffee snatch Starbucks customers? We don't think so. As mentioned earlier, Biz Coffee may have 32% of the market in California, compared with 18% of the professional bagged coffee market in the United States.

The advantage of Bitz Coffee lies in the high-end coffee market, which does not threaten the growth of Starbucks' own brand. Biz Coffee caters to a wide range of consumers, which is why the brand is more successful in California and western states than in the United States as a whole. If Bitz Coffee is privatized and becomes part of JAB, the company will have more resources, less scrutiny, accelerate investment in the coffee market, and are likely to compete more strongly with Starbucks, rather than neck and neck. In our view, Starbucks should control the situation by buying Bitz Coffee.

The acquisition of Bitz Coffee also provides Starbucks with another opportunity to expand its international market. It is difficult for Starbucks to gain a foothold in the European market, not least because of the economic situation in Europe. The Starbucks brand does not resonate with European consumers as it does in other regions. Investment bank Oscar Gruss analyst said, "the current situation is intriguing, it is very difficult for Starbucks to let the Starbucks brand enter the European market." Even if people know that the brand is from Starbucks, a completely independent brand will attract them. " In fact, Bitz Coffee is located at the high end of the coffee market, which also helps Starbucks compete in the European market.

Financing, valuation and antitrust: inspection traps

The Bitz Coffee deal has become the most expensive acquisition by a non-alcoholic beverage company in North America. Including the company's net cash, Biz Coffee's market capitalization is 21 times earnings before interest, tax, depreciation and amortisation. If Starbucks participates in the bid, it is likely to bid $80 a share, which would be as high as $1060053040 based on Bitz Coffee's 13250663 outstanding shares. Taking into account cash and investment (Biz Coffee has no debt), acquisition costs have fallen, totaling just over $1 billion, which would be the largest acquisition in Starbucks history.

From a financial point of view, Starbucks can bid for Biz Coffee. Starbucks had net cash of $1.8306 billion as of the second quarter of fiscal 2012 (using second-quarter data because Starbucks has not yet filed its third-quarter 10murQ file). With only $549.6 million in debt, Starbucks can easily provide bidding funds through debt if he so wishes.

With operating cash flow close to $600m a quarter (which is expected to continue to grow in the third quarter and in the coming quarters), Starbucks does not have to put a lot of pressure on its balance sheet after its $1 billion acquisition of Bitz Coffee.

Starbucks can also suspend the increase in dividends. Starbucks now pays a quarterly dividend of 17 cents a share and a quarterly dividend of $255 million, which has risen 70 per cent since it began paying dividends in March 2010. We would rather see Starbucks suspend its dividend and rebuild its cash reserves than lose the opportunity to buy Bitz Coffee.

So what is the market value of Bitz Coffee? We believe that even at 21 times earnings before interest, tax, depreciation and amortisation, which is 34.934 times earnings per share for fiscal year 2013 (currently $2.29 per share), it is in Starbucks' interest to buy Bizi Coffee. The current revenue forecast of Bitz Coffee is based on its prospects as an independent company. If Bizi Coffee becomes part of Starbucks, Starbucks' distribution network and potential international sales will bring higher revenue and sales to Bizi Coffee, as JAB has seen. In our view, the short-term cost of acquiring Bitz Coffee will be fully offset by the long-term potential of the brand belonging to Starbucks.

Will there be antitrust concerns about this acquisition? We believe that the problem of monopoly between the two companies is negligible. Bitz Coffee stores are located in only a few states, and in most of the United States, the two companies are not currently competing. The only possible antitrust problem will be concentrated in the grocery market. Even so, we believe that the monopoly problem between the two companies is negligible. After the merger, Starbucks and Bitz Coffee will control 33% of the professional bagged coffee market, which has not yet reached the monopoly standard.

Conclusion

Starbucks should make a bid for Bitz Coffee. The $1 billion acquisition cost will allow Starbucks to enter all aspects of the coffee market, and its product sales will accelerate if it is integrated with Starbucks' distribution network.

This also provides an opportunity for Starbucks to enter the international market. By acquiring Bitz Coffee, Starbucks can reduce potential competitive pressure on retail stores and significantly improve the chances of success in the packaged consumer goods business.

Bitz Coffee may not be as threatening as it is now, but after being acquired by JAB, the possibility of the company becoming a stronger competitor should not be ignored. However, as part of Starbucks, Biz Coffee will be a valuable and profitable asset. If Starbucks announces a bid for Bitz Coffee, we will become buyers of the stock, especially if the company sells its shares. We think there is too much potential for Starbucks to buy Bitz Coffee. Starbucks has become a leader in the coffee industry, not just by building and nurturing Starbucks brands. Brands such as Seattle Best Coffee and Tazo contribute to the company's overall growth and success. If Biz Coffee becomes part of the Starbucks brand portfolio, we believe that Starbucks will have a better future than ever before.

Disclosure: I am bullish on Starbucks and McDonald's. We own 1.02% of McDonald's through mutual funds. We may buy Bitz Coffee shares in the next few trading days.

Helix Investment Management was founded in July 2011 as an investment management and consulting firm. We invest through long-term theoretical analysis to find the basic trends in the global market and go beyond the abnormal changes in the business cycle.

Source: Disai net