Starbucks and Kraft Court Singles

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Starbucks (Nasdaq: SBUX) is getting crafty indeed -- it hopes to break into your kitchen and burrow deeper into your heart by teaming with long-term partner Kraft (NYSE: KFT) in the at-home, single-serving coffee market.

Kraft offers the Tassimo, a single-serving coffee brewer. Now, four Starbucks flavors (House Blend, Breakfast Blend, Caffe Verona, and Africa Kitamu) will be available for consumers who use the Tassimo to brew up just one cup.

This isn't any surprise. Starbucks and Kraft already have a distribution partnership, through which Starbucks beans are offered on the shelves of all the biggest grocery stores, despite the fact that Kraft has its own Maxwell House brand on the shelves. This is certainly an avenue through which Starbucks probably hopes to rope more consumers into the Starbucks lifestyle, and of course gain their loyalty for trips to its coffeehouses.

Not that the grocer route isn't fraught with competition. Last month, rival Dunkin' Donuts began distributing its own beans through a partnership with consumer products giant Procter & Gamble (NYSE: PG).

And speaking of competition, the first thing I thought of upon hearing the news was that Green Mountain Coffee Roasters (Nasdaq: GMCR) has a big stake in the market for single-cup coffee brewers. Its Keurig acquisition included the Keurig single-brewing coffee system and related K-Cups products. The parallels are so close that last February, Green Mountain sued Kraft, claiming the Tassimo T-DISC single-serving beverage cartridges infringe on one of Keurig's patents.

One cup may sound like child's play when it comes to some of us who tend to have more of a hankering for Starbucks' Venti caffeinated goodness, but it makes sense that Starbucks try to find ways to drive up its market share. Starbucks has surprisingly low market share when it comes to coffee consumption (just 7% here in the U.S., and 2% worldwide, the company revealed at a conference in June), so bringing even a few new diehard customers into the fold could make a significant difference, when you consider how far Starbucks has come, and how profitable it has been, with such a small piece of the market.

It makes sense that Starbucks would want a piece of the at-home, single-serving brew market, but whether its long-term partner is the strongest contender in that space is another matter. Given the companies' existing partnership, Kraft might have been a no-brainer, but whether it will prove the most lucrative and effective could be another matter entirely; according to Kraft's latest Form 10-K, in 2006 Kraft re-evaluated Tassimo's business model since revenues lagged its own internal expectations. This is another case where Starbucks shareholders may wonder if its partnerships might do more for its partners than for its own growth. Of course we hope that that's not the case.

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