Bottled Water, Next Generation Commodity

The stock exchange defines a commodity as “any unprocessed or partially processed good.” Wikipedia defines a commodity as anything for which there is demand, but which is supplied without qualitative differentiation across a given market. When we think of commodities or check the current prices of various commodities, we think of oil, natural gas, soybeans, corn, gold, silver, and other precious metals. Water, wind, and solar power are not considered commodities and cannot be publicly traded, but they are things that there are major demands for in our quickly developing world. Companies like First Solar, SunPower Corporation, and Suntech Power help provide megawatts of power through solar energy. Enercon and REpower manufacture the world’s largest wind turbines and take advantage of wind power to create energy. Finally we all pay water bills, we see Aquafina commercials on TV, and drink water out of public drinking fountains, yet the average person does not comprehend the demand for bottled water in this country. I guess it’s not just general water that is in demand, but the method of how we drink water and that Americans have a preference for the types of water they want and will pay for.

Within the last four quarters, Apple has reported Ipod revenue of 9.21 billion dollars with much help from the Ipod Touch and new versions of the Ipod Nano. 2007 movie tickets sales in the US totaled 9.66 billion dollars with blockbuster movies such as Spider Man 3, Shrek the Third, and Transformers all released last year. Also in 2007, Major League Baseball almost caught up to the National Football League in revenue with a little over 6 billion dollars. While all this revenue for MLB, Ipods, and movie tickets were quite impressive for 2007, what beat all those industries was bottled water. The United States contributed over 15-billion dollars to the bottled water industry last year!

Interesting bottled water statistics:

• Americans drink more bottled water than coffee, milk, or beer. (Don’t go rushing to sell your Starbucks or Anheuser-Busch shares quite yet though)
• In 1976, the average American drank 1.6 gallons of bottled water per year. Just last year in 2007, the average American drank over 28 gallons of bottled water. In over thirty years, we have increased our bottled water consumption by over seventeen times.
• Fiji Water produces 1-million bottles/day while 50% of the residents in Fiji don’t even have reusable drinking water.
• The only drink that outsells bottled water is carbonated soft drinks which totals to an annual consumption of 52.9 billion gallons.
• Bottled water is a 50-billion dollar industry worldwide with bottling companies like Arrowhead, Poland Springs, Crystal Geyser, and Saratoga Springs.
• 24% of US bottled water is tap water purified and repackaged by Coke & Pepsi (aka purified municipal water).
• Pepsi’s Aquafina is the #1 selling bottled water with 13% market share while Coke’s Dasani bottled water is #2 with 11% market share.

This doesn’t mean that people are completely halting their consumption of carbonated beverages, but it means consumers are adding a lot more bottled water to their drinking options. Coke (KO) and Pepsi (PEP) realize that consumers are considering a cold bottle of water over a cola, and almost a quarter of the US bottled water industry is derived from those two companies. Just because the bottled water industry is flourishing , it doesn’t make Coke and Pepsi good investment options. At the same time they generate much revenue from their bottled water brands, they also rely on huge revenues from their carbonated drink options. I honestly don’t know of any good way to profit in the stock market from the large growth of the bottled water industry. There are much better deals in the market right now with better long-term growth than these two beverage companies.

For me, it’s just a major eye opener on how much Americans spend on purified municipal water when we can just boil and bottle our own tap water at home. If we’re paying a premium for bottled water, I’d think that we’d at least want some spring water to get our money’s worth. We tend to pay a very high price for convenience in this country. If gasoline starts to cost $4/gallon this coming summer and a gallon of milk rises to $6, then it may be prudent to bottle our own water sooner rather than later!!!!

Starbucks: Add a Caffeine Shot to Your Portfolio

After hitting a high of $40/share in early October, Starbucks (SBUX) has fallen to a current value of $25.87, down 35% and is at a 22-month low. Why is this stock down so much?

1) In late June, the CFO of Starbucks was quoted that the high end of 2007 earnings forecast ($.87-$.89/share) “will be very challenging” to attain due to:
a) rising price of milk (which is directly related to the increase in ethanol production)
b) slowing sales growth in US Starbucks locations

2) Increased competition from other competitors getting into the coffee business such as McDonalds (MCD) who has a premium coffee that has received positive reviews.

Reasons for optimism:

a) Starbucks says that China will be the biggest market outside of the US and will increase international stores by 20% over the next few years. Key growth will be outside of the US in markets that Starbucks has yet to establish. Locations in Russia and India are poised to open later this year. Americans already knows what to expect out of Starbucks when you go to the one of 6,281 Starbucks locations. The goal is to get a foothold in Chinese, Japanese, and Brazilian markets as soon as possible.

b) Adding more drive through locations is a no-brainer. As of October 2006, Starbucks operated 1,600 drive through locations. Life is so fast-paced here in America that sometimes people just want to pay for their $4 latte and get on with the rest of their work day. Some people don’t want to deal with the long lines inside the store and hassle of carrying coffee to their car. If America wants coffee on the go, then that’s what she’ll get.

c) Peet’s Coffee (PEET) isn’t considered direct competition for Starbucks, but Dunkin’ Donuts is probably the closes competitor. These two chains target entirely different demographics. Dunkin’ Donuts was originally founded in 1950 in the Northeast (Quincy, Massachusetts) and appeals more to the lower/middle-class America that is looking to get a cheap coffee and a more down-to-earth experience. Dunkin’ Donuts operates 6,000 shops worldwide compared to Starbucks 14,000.

d) Modification of their food menu because sometimes people don’t want just coffee. Customers sometimes need some sustenance to go with their coffee and Starbucks has delivered recently. Additions to their lunch menu with new items including a tomato mozzarella salad, fiesta salad with grilled chicken, roasted corn and black beans, bowtie pasta with goat cheese, and Asian sesame noodle salad. To cater toward the health conscious consumer, McDonalds did an overhaul of their menu over the last few years including salads, premium chicken sandwiches, negating the supersize option, and offering other healthier options. McDonalds stock price has doubled over the last three years and their upward momentum appears to be continuing. Starbucks understands that they are not just a coffeehouse anymore.

Benefit or downfall?
Starbucks has over 14,000 stores open around the world and aims to have over 40,000 stores in existence for the long term (with over half outside of the US). But some say that with so many stores open this will dilute the appeal of a Starbucks coffee and saturate its image.

The way I see it, if Starbucks can open stores across the street from each other, then they can handle losing the “novelty” label. They cater toward a crowd that is looking for a pleasant ambiance and a casual place to have a drink with a friend, conduct an interview, work on your laptop during lunch, or just have a place to cool off during summer.

Starbucks is at a discounted price and I believe will have more upside potential with minimal risk. Target price: $33