Can Caribou sell coffee?

I want to take another break from Seoraksan tonight to talk about an upcoming initial public offering that caught my attention yesterday.  Caribou Coffee (proposed symbol, CBOU) will go public in a traditional public offering in the next few weeks.  The IPO date has not yet been set.  The company filed its intention to go public with the Securities & Exchange Commission on Monday.  Caribou Coffee is one of many gourmet coffee and coffeehouse companies chasing market leader Starbucks.  The company operates 337 establishments in 14 states (primarily in the Midwest) and in the District of Columbia.  If you live in the Midwest, you’ve probably heard of Caribou Coffee or visited one of its stores.  The company’s business model closely parallels Starbucks’ model–it offers gourmet coffee and related products in its company-owned stores. 
Starbucks Coffee is an amazing success, no doubt about it.  The stock has richly rewarded investors through the years, and it will likely continue to shine.  Will Caribou Coffee succeed too, or will it fail as a Starbucks copycat?  I must admit that this IPO is intriguing to me, and I am considering putting in a bid for shares at a price above the expected $13-$15 per share.  Here are what I see as Caribou Coffee’s positives.  First of all, it is a small-cap stock with a small, 5 million share float.  This means CBOU will be a closely held stock.  Its majority shareholder, Arcapita Investment Management, Ltd., holds 85% of the company.  Although Arcapita will cash in some of its initial investment, it will likely hold on to a large stake in Caribou as it continues to grow.  Fewer available shares should translate into a higher share price.  Secondly, Caribou’s target market is large enough and growing fast enough that it has plenty of room to grow, so long as it manages growth properly.  It currently operates in just 14 states, so it has plenty of room to expand throughout North America.  Moreover, many people don’t like Starbucks’ coffee.  They think Starbucks serves overpriced, bad-tasting coffee.  Personally, I like Starbucks coffee, but my dad, an avid coffee drinker, thinks it tastes burned (of course, he is just fine with coffee straight from the can).  I’ve tried Caribou’s coffee, and I liked it.  Seattle’s Best Coffee, which happens to be owned by Starbucks, also thrives on being a palatable alternative to Starbucks coffee.  Starbucks knows this, so it keeps the SBC brand alive.  In addition, Caribou avoids franchising, and like Starbucks, it owns all of its stores.  This is one reason why Starbucks has been so successful.  Franchising makes it much more difficult for the corporate parent to manage stores and provide consistent products.  Finally, Caribou Coffee is one of the few investment opportunities in a hot market one can pursue without buying Starbucks stock.  Peets Coffee & Tea, the Bay Area original that inspired Starbucks, is another option.  Peets’ stock debuted in 2002 at about $9 per share.  It is now at $30.72 after peaking at $37.28 earlier this year.
The Caribou Coffee business model is also fraught with risk.  For one, it can’t escape the fact that it operates just 337 stores, while Starbucks boasts over 10,000 worldwide.  Starbucks has economies of scale and efficiencies that Caribou cannot match.  Caribou will also compete with a multitude of coffee-hocking vendors, ranging from supermarkets to espresso stands to direct competitors such as Tullys Coffee.  Still, Starbucks has proven that you can take a commodity such as coffee and turn it into a differentiated, high-margin product.  Secondly, Caribou’s hunting lodge theme may not sell well in some markets.  Starbucks’ Italian espresso theme plays well worldwide; a coffeehouse decorated like a Minnesota hunting lodge will not.  That will hinder its expansion, and Caribou may have to soften its rugged image.  Thirdly, although it is now growing at 30% per year, Caribou Coffee is currently unprofitable.  Expansion is fine as long as it is well managed.  Krispy Kreme Donut, once a Wall Street darling, turned into a stock to shun because it overexpanded and engaged in shady accounting practices to cover its growing pains.  I think Caribou Coffee’s expansion is in line with its loss, indicating that it is not expanding too fast.
In the coming weeks, I will likely bid on some CBOU shares in the hope that it will be a promising growth stock.  I’m optimistic that Caribou Coffee’s stock will perform well in the next few years.  I may wait to buy some after the post-IPO fire sale, because as Peets’ IPO showed, the price will likely drop after the stock rises on the first day.  Peets IPO’d in 2002 at about $9 per share, rose to about $17, and dropped to $7 per share in the same month.  I anticipate that CBOU’s price will fluctuate after its IPO.  I’ll keep an eye on it and will let you know what I do.
  1. Wade

    I was disappointed the other day… I went to KKD in Issaquah to get some of my favorite KKD doughnuts… Blueberry Cake doughnuts, and they have discontinued them and replaced them with a Blueberry Fritter…. 🙁 The Fritter was not as good as the blueberry cake doughnuts that I loved. Maybe that was a contributing factor to KKD stock price fall… 🙂

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