Starbucks Warms Up to Green Mountain

Starbucks (Nasdaq: SBUX  ) is hopping on the Green Mountain Coffee Roasters (Nasdaq: GMCR  ) bandwagon, with Starbucks coffees and Tazo teas hitting the market as K-Cup portion packs for Green Mountain's Keurig single-cup brewers this fall.

It was easy to see this coming. An internal Starbucks memo was leaked -- nudge, nudge, wink, wink -- three weeks ago, with Starbucks CEO Howard Schultz subtly threatening to own this market.

"The single-serve segment of the coffee industry is poised for a sea change of innovation," Schultz wrote at that time. "History has demonstrated time and again that patents alone do not determine market winners."

Schultz also pointed out that 80% of Starbucks customers don't own a single-cup brewing system. He also pointed to the barista baron's opportunity in this space since just 6% of American households have a single-cup brewer, compared to 40% market penetration in Germany.

The "leaked" memo was brutally transparent, though. Schultz was merely negotiating in public.

"If rattling Green Mountain Coffee executives and shareholders was the purpose of this memo, Starbucks succeeded," I wrote at the time. "Now it better strike a sweet deal before the market calls its bluff."

Duh ... winning
We don't know the financial terms of the deal, but it's going to be boost for both parties.

Starbucks saddled up the wrong horse when it struck a multiyear exclusivity arrangement with Kraft's (NYSE: KFT  ) Tassimo. It's been a dud in a Keurig-dominated niche. The Tassimo shackles came off last week.

A suddenly swinging single Starbucks began single swinging. It struck a deal with Courtesy Products last month to offer up its single-serving brews through 500,000 hotel rooms outfitted with Courtesy's CV1 brewer last month.

Starbucks could have struck out on its own. It could have tapped Conair's Cuisinart or Mr. Coffee parent Jarden (NYSE: JAH  ) to make a Starbucks-branded one-cup system, but failure would be embarrassing. If years of Starbucks exclusivity wasn't enough to get Tassimo going, why would it be any different now?

Going this route takes failure out of the equation. Keurig is the undisputed champ. Net sales soared by 67% in its latest quarter, as its installed base grows at a ridiculous pace. Starbucks is going to sell a ton of K-Cups to the millions of Keurig owners.

Green Mountain obviously wins because it won't have to fend off the Starbucks threat. They're partners now. The premium coffeehouse chain will also begin selling Keurig systems -- and Starbucks and Tazo K-Cups -- in its stores. Keurig now has a shot at some of the 80% Starbucks loyalists who have avoided the single-serving revolution.

As long as this move doesn't result in cascading comps at Starbucks -- and instead increases java consumption at home -- everybody wins.   

Bring on the bean counters
It obviously remains to be seen what kind of a financial impact this will have on Green Mountain now and when some of its Keurig patents run out by the end of next year.

The other big mystery will be pricing.

Caribou (Nasdaq: CBOU  ) , Hain Celestrial's (Nasdaq: HAIN  ) Celestial Seasonings and Folgers parent J.M. Smucker (NYSE: SJM  ) are some of the major brands that have made the K-Cup plunge. Green Mountain has also made several regional acquisitions to secure the hotter K-Cup brands, regardless of the patent situation.

Starbucks can obviously get away with a slight premium over rival K-Cup companies, but if it sells its arguably inferior Via packets at higher price points than Keurig K-Cups, can it price itself out of realistic contention?

We'll see. The free markets will play out. The important thing now is that Starbucks is playing along with Green Mountain, and this will translate into greater opportunities for both companies.

Is Starbucks a threat to Green Mountain or the other way around? Share your thoughts in the comment box below.

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers recommendation. Starbucks is a Motley Fool Stock Advisor pick. Motley Fool Alpha has opened a short position on Green Mountain Coffee Roasters. Motley Fool Options has recommended a buy puts position on Green Mountain Coffee Roasters. The Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz can actually walk to three Starbucks from his home, but he's still not much of a coffee sipper. He's had a Keurig brewer in his home since Christmas 2007. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On March 10, 2011, at 10:53 AM, SeekTheFire wrote:

    A Win - Win for both companies.

    Sbux sells more home coffee via K-cups and Via keeps selling too. GMCR gets access to an expanded market and a strong strategic partner instead of a strong competitor.

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