Same tired thesis, simple insert a different product and company. Here is it is, Company A is going to sell a product similar to Jamba, Inc. NASDAQ:JMBA">(NASDAQ:JMBA). Since Company A is larger at what they do (unreleated to JMBA), they will crush JMBA.
First it was burger behemoth and smoothies. Remember? Following the 2009 entry into the space by Starbucks Corporation NASDAQ:SBUX">(SBUX), McDonald’s Corporation went heavy into smoothies in 2010 and folks were predicting the demise of JMBA. I mean, how could JMBA compete with (NYSE:MCD) MCD and its $1.2B ad budget? We should note that (MCD) spends roughly 10X more than Jamba’s entire market cap annually on advertising.
So, what has happened? Since the introduction of MCD smoothies, $JMBA has seen 5 consecutive quarters of SSS growth (7.7% in most recent quarter). It has been the first time since 2007 (pre-recession) this has happened. Far from damaging JMBA, MCD’s into the space was a boost to $JMBA
McDonald’s both validated the smoothie market with 10?s of millions of dollars in ad spend and boosted JMBA sales (JMBA accepted MCD smoothie coupons) with free advertising.
It also allowed JMBA to mock the quality of $MCD’s offering:
<iframe width=”560″ height=”315″ src=”http://www.youtube.com/embed/W_oLzOBgIRU” frameborder=”0″ allowfullscreen></iframe>
So, now we have SBUX and its “Juice Bar”
Starbucks Declares War on Jamba Juice
The move into juice will grievously harm Jamba, but it will also be a disaster for Starbucks
Mar 23, 2012, 12:48 pm EDT | By Lawrence Meyers, InvestorPlace Contributor
Imagine General Custer’s dismay if, as the Indians closed in, an Indian Air Force began dropping nukes on his position as well. That image will give you an understanding of what Jamba Inc. (NASDAQ:JMBA) must be feeling these days. Starbucks (NASDAQ:SBUX) is opening its own juice stores. I hope Jamba likes toast, because that’s what it’s going to be.
The fresh-juice market mirrors the trajectory of the bagel craze of the 1990s. It was a great idea, people loved the concept, and there was no barrier to entry. Every time you turn around today, there’s a juice store, a juice bar, or a beverage shop offering juice staring you in the face.
Whole Foods Market (NYSE:WFM) has a juice counter. Starbucks already offered juices. Then it purchased Evolution Fresh juices for a song — $30 million — last November. Starbucks clearly had a plan to take that concept and roll it out into a new type of store, and that’s just what it plans to do.
Evolution Fresh will offer juice, wraps, soups, sandwiches, salads and other light fare. This signals a huge move for Starbucks — it has decided not to sit around while McDonald’s (NYSE:MCD) and Dunkin’ Donuts (NASDAQ:DNKN) expand their food offerings.
I see two results developing from this initiative. The first is increased competition for Jamba, which is already suffering from a crowded market. The company has lost money every year, though those losses are finally expected to vanish this fiscal year. The company remains cash-flow negative, with only $20 million of cash on the books. So this could be the death blow for Jamba, which trades at $2 per share. I’d consider shorting.
I’ll stop it right there and take this point by point:
“Jamba, which is already suffering from a crowded market”. Really? Didn’t we already address that above? FAR from suffering, JMBA has been the primary beneficiary of the larger competitors entering the market. Why? Neither can do what JMBA does as well as JMBA does it. Both “offer” smoothies. The problem is they have limited offerings (3-4 vs several dozen) and simply do not taste as good. Then there are the aesthetics. Neither SBUX or MCD used real fresh frozen fruit blended on site in their smoothies. A MCD smoothie is squirted out of a silver bag just like their ketchup is and SBUX squirts theirs out of a plastic bottle. Neither says “fresh” or “yum”.
“The company has lost money every year, though those losses are finally expected to vanish this fiscal year.” Explain this to me. The company has lost money every year save for the current one. But, I though the “crowded market” was hurting them? If larger competitors entering their space was hurting them, results would be getting worse, not better, right? According to the authors owns stats, it would appear the more crowded the field gets, the better it is for JMBA. So, how again are more competitors bad?
“The company remains cash-flow negative, with only 20 million of cash on the books.” True, it has been cash flow negative but like profits, cash flow is moving in the same direction, better and should also be positive this year. Now the “only $20M in cash” comment. This is relative as JMBA only has a $170M market cap (fully diluted). So, its cash balance makes up 11% of that market cap. To put that in perspective, SBUX has a cool $2.2B on its books but that only accounts for 5% of its market cap.
We should also note that current CEO James White took over in Dec 2008 when the company was on the verge of extinction. At that time he laid out a three year plan to return the company to profitability and growth. He has accomplished that. So to look back at results several years old is to look at a company that at its core, is materially different (they have gone from a company owned to a franchise model). Losses have decreased every year since he took over ($146M) in 2008 to ($8)M in 2011 and cash flow has improved. All of this in one of the worst recessions in most people’s lifetime.
“So this could be the death blow for Jamba, which trades at $2 per share. I’d consider shorting” Short a $2 stock? For what, $.50? Isn’t your risk far higher that $JMBA gets bought or continues its momentum and their profits grow and along with it the stock price?
The author makes a VERY common mistake here and confuses a smoothie with juice. A customer wanting any one of the dozens of varieties of smoothies at a JMBA, will not even consider going to a SBUX evolution because that is not going to be the focus of the concept. It is “juice”, not “smoothie”. Will they offer them at Evolution? Judging from the picture (below) and the two blenders off in the corner, yes, they might. Even if they do, this is clearly not going to be a focus of the operation. Not only the lack of blenders prove that but the set up of the service area is in no way designed for any type of substantial smoothie business.
As a matter of fact, the juice looks like it will not even be produced on site……back to the silver bags or plastic bucket of juice poured from the spout in the wall? “Fast Juice” rather than “Fast Food”? We also have to consider JMBA is rolling out “made to order” juices at it 700+ locations as we speak. They have a large head start on $SBUX here
However, I’m not crazy about this move by Starbucks. The company’s success has been based on two simple concepts: (1) providing a place for people to hang out and socialize besides work and home, and (2) selling an addictive product.
Evolution Fresh is nothing more than another health-food cafe that sells juice. There’s nothing special or unique about it, it does not solve a problem, and it is not what Starbucks specializes in.
Like bagels and juice stores before it, the concept may burn brightly at first, but then I suspect the effort will become an albatross. Starbucks’ net margins are in the 10% range. Restaurants are lucky if they make 3% margins. I think this is a classic case of Peter Lynch’s concept of “diworse-ification.”
In the end, I suspect this move will significantly harm Jamba but also inflict harm on Starbucks. The difference is the latter will still be an 800-pound gorilla, but the former will be a splattered watermelon.
The problem with the last sentence is that in the smoothie category, it is JMBA that is the 800-pound gorilla as they by far have the dominant market share. It is the fact that billion dollar companies like MCD and SBUX had ZERO negative effect on JMBA’s smoothies biz that $SBUX has for the most part dropped that effort and gone the juice route. Even MCD has substantially pared back their smoothie advertising. All the while JMBA has seen its business continue to grow.
I also don’t think this is a bad move for SBUX (no position in it so I don’t really care either way). The “Health and Wellness” food category is exploding growing ~30% annually. I think it is pretty clear they are going to have their main thrust for the juices as a pre-packaged good in grocery, convenience and in current $SBUX location (even Evolution locations have large displays of CPG). Because of that they will sell plenty of it. I also think they will make money in the physical stores but that their footprint will be a fraction of what JMBA’s is. As I have said before, If SBUX wanted 700+ locations it would be cheaper for them just to buy JMBA than spend the money to do it themselves and compete as they do it.
It will be a niche concept in affluent and highly traffic areas and complement the packaged juice effort. It also will do for JMBA what both MCD and SBUX did for them in smoothies……boost the entire category. When you have #1 share in that category like JMBA does, you get a nice boost.
By Todd Sullivan of valueplays