Ground Zero for the Coffee Wars — Canada

Tim Hortons (NYSE: THI ) is an up-and-coming coffee stock focused mainly on the
Midwest and Canada. For 15 straight quarters, sales have beaten totals from the
previous year. Shares are up almost 20% in 2011 despite the summer volatility in
the stock market. Things are looking up. With an eye at continuing this kind of
growth, Tim Hortons announced this week it will branch out from traditional
coffee and pastries into lattes and mochas to appeal to more American tastes.
Look out, Starbucks (NASDAQ: SBUX ) and Dunkin Brands (NASDAQ: DNKN ). You might
not recognize the Tim Hortons name if you're on the U.S. coasts. The company
boasts about 4,000 stores in full, but only about 500 in the United States,
focused mainly in urban markets of Midwestern border states like Michigan. But
it continues to push into the U.S. in force, unveiling a 900-store expansion
plan in 2010 even as other companies were hunkering down in the wake of the
recession. Clearly there is untapped potential in the U.S. market and Tim
Hortons is jumping in with a splash. Its new line of premium coffees starts at
just $2, so the beverages appeal to American wallets as well as American tastes.
About 50% of the U.S. population or 150 million Americans drink espresso,
cappuccino, latte or iced coffees. The specialty beverage market is booming at
the rate of 20% a year. This growth is what propelled Starbucks to dominance in
the past decade and allowed for sweets shop Dunkin Donuts to grow rapidly and
host a successful 2011 IPO to raise $424 million and fund future growth.
However, those fancy drinks represent a mere 10% of the nearly $20 billion
coffee market in America. Plain coffee with sugar, cream or just plain black
still is the biggest money maker. That's where Tim Hortons has a leg up. The
coffee shop, like Dunkin Donuts, is well known for its coffee and donuts and not
frilly and flavored drinks. Founded in 1964 by a former NHL player of the same
name, Tim Hortons focuses its marketing efforts on its blue-collar roots. A host
of consumers prefer its mild coffee to the bold flavor of Starbucks. While
specialty coffees like cappuccinos might have a higher price tag, the sheer
volume of "plain" coffee sales can't be understated. If THI can succeed in
tapping into the specialty beverage market, it might provide an impressive
platform to roll out its core business across the U.S. Of course, that's
easier said than done. In addition to Starbucks and Dunkin Donuts, the
popularity of McDonald's (NYSE: MCD ) McCafe coffees and countless independent
coffee shops means a very saturated market in America. But the chain is
committed to revenue growth beyond its typical breakfast business. Last month,
for instance, Tim Hortons unveiled a new dinner menu, including lasagna.
That's fine, as long as THI doesn't take its eye off the ball. According to
company reports, Tim Hortons currently sells eight out of every 10 cups of
coffee at so-called "quick service" restaurants in Canada, and 2 billion
cups of coffee a year in North America. If it sacrifices its "everyman"
branding and popular breakfast biz for a quick pop in sales, the stock could see
rough days ahead. Only time will tell whether lattes and cappuccinos perk up Tim
Hortons sales, or whether it distracts this Canadian cult stock from its
traditional business of serving up a sweet breakfast. Jeff Reeves is the editor
of InvestorPlace.com. Write him at editor@investorplace.com , follow him on
Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook . As of
this writing, he did not own a position in any of the aforementioned stocks.