“The Next Starbucks … in China”

By Travis Johnson, Stock Gumshoe, November 8, 2007

This one comes in from Jeff Siegel for Green Chip Stocks — kind of an odd selection for a green newsletter, but it is a “fair trade” coffee company, so I suppose that must be the connection.

The special report that you’ll get for subscribing to Green Chip Stocks is called “Coffee Coup: How to Profit from China’s Secret Addiction” — Green Chip will cost you $79 a year if you want to read the whole report.

But if you just want to come on along on the Gumshoe Express and learn the name of this microcap coffee company … well, read on!

Siegel says that this company has had a huge catalyst that the market doesn’t recognize yet:

“In short, this tiny company had just finalized the same sort of deal that launched Starbucks from a single-shop Seattle coffee house into the 6,000-location conglomerate we know today. The sort of deal that handed investors $396,119 on every $10,000 they started with.”

“This company has actually gained exclusive rights to open its 100%-owned coffee shops – selling their gourmet beans – throughout a newly coffee-crazed China.”

So essentially, they’ve made a deal with China that allows them to import without the 60% tariff Siegel says Starbucks has to pay.

The market cap is $18 million, Siegel thinks it should be $167 million. Later on, he says that the shares should go up 214% — not sure why he’s not promising tenfold returns if it should have that much larger a market cap, but perhaps he’s just lowballing us a bit. Or maybe he realizes that the “should” is perhaps a little overstated?

Apparently, coffee used to be illegal in China as part of the crackdown after the Cultural Revolution — who knew? Not probably all that relevant here, except insofar as it means China’s a bit further behind in adopting coffee shop culture than it is fast food culture — there are way more Kentucky Fried Chickens than Starbucks in the Middle Kingdom so far.

This little company apparently has access to 30% of the Jamaica Blue Mountain crop, among the most sought-after coffee varieties in the world. Personally, I don’t get it — I can’t tell the difference between great coffee that costs $12 a pound and Blue Mountain at $20 or $30 a pound … but that’s probably just me.

Other clues? The shares are at fifty cents now, and he thinks they’ll go up at least 214%. No, I have no idea how he came up with such a specific number.

So, is that enough for the Gumshoe Thinkolator? Methinks this is …

Coffee Pacifica, which is in the process of renaming itself Growers Direct Coffee (CFPC new ticker is GWDC)

They do have a deal with a joint venture partner to open up coffee shops in China — they hope to have one this fall, five next quarter, and 300 within five years. Fairly optimistic for a company with an $18 million market cap (actually down to $16 million now, the shares have tumbled slightly) … and only $1 million in net cash on the balance sheet. I guess they must be relying on that joint venture partner to cough up some dough.

Strangely enough, I’ve actually tried their coffee — the business is admirable, they are primarily grower owned, mostly be coffee farmers in Papua New Guinea, which is where their stuff is sourced for the most part (though they did buy a Jamaican Blue Mountain brand a while back, too). I like that the coffee is great, and that they’re fair trade, and I like that the farmers get a fairer shake.

I’m not so crazy about the fact that the reason I’ve heard of them and tried their product is that they had a booth at an investing conference and were giving out free samples. And the guy that gave out the sample bragged about how great his coffee machine was, mentioning the thousands and thousands of samples it had effectively brewed, which means they must be pushing this company like crazy on the conference circuit. Good coffee, but to me the tiny OTC companies that present at investor conferences always seem just a wee bit too desperate.

Not that there’s anything wrong with that … but I hope they’re working harder to interest Chinese consumers than they are to interest small US investors.

The shares spiked up very briefly to a dollar when they announced the China deal, but have slowly fallen down to about 50 cents, where they stand now. The shares WERE up well over $2 earlier this year — it actually looks like the Jamaican Blue Mountain deal moved the shares a lot more than the China deal did. And they’ve actually been public for about three years now, during which time they’ve spent a fair amount of energy talking up the idea of building a “tree to cup” strategy of vertically integrating the coffee supply chain without quite getting to the level of opening their own successful cafes worldwide … yet.

So what else do we know? Their sales actually fell significantly in the last quarter, but at least they do have sales … though no earnings or positive cash flow yet. I have seen their announcement that they want to have hundreds of stores in China in relatively short order, but not any details about how they’re going to pay for it, what kind of stores they’ll be, or anything else that you could hang your hat on.

As for the “next Starbucks” bit … I think it’s worthwhile to note that Starbucks certainly didn’t get where they are by having the best coffee, or by opening up new markets to coffee, or even by introducing espresso or arabica to the hoi polloi — certainly those are all part of the Starbucks story, but they got where they are primarily by creating a place that people wanted to go to, giving it cachet, making it into a strong brand, and building enough stores so that Starbucks is a part of nearly every American’s daily life … even if it’s a part of your life only to the extent that you can’t help but remark “another effing Starbucks, pshaw!” every time you see a new one built between you and where you want to go. Even if Starbucks has to pay a 60% tariff, I wouldn’t be too worried about them competing with Coffee Pacifica in China — it’s never been about having the cheapest high quality coffee for Starbucks.

So … this company does at least make really good coffee, which the Gumshoe can personally verify … and it is small enough that you could probably get the CEO on the phone if you wanted to learn more about their strategy in China, or their brand building (off to a bit of a rocky start, changing the name already … but that’s just one Gumshoe’s opinion).

I am somewhat intrigued, but that’s about as far as I go with this one today. Feel free to share if you’ve got more information, or even a really strong juju vibe about this stock. And really, even if you don’t like it, you’ve got to love the combination of “next Starbucks” AND a China play … props to Jeff Siegel, that’s the newsletter teaser double whammy. Now if only someone could come up with something that’s both the “next Google” AND the “next Berkshire Hathaway” …

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