Frothy Friends or Foes in Joe: Starbucks and Green Mountain

Starbucks and Green Mountain are the top players in the piping-hot coffee industry. Must these companies slash each others' throats to succeed, or can they stay afloat together?

Feb 24, 2014 at 9:37AM

Investors are perking up about coffee stocks: Starbucks (NASDAQ:SBUX), the java chain that made luxury coffee mainstream, has savored a 37.80% share price increase over one year. In the past month alone, Green Mountain Coffee Roasters' (NASDAQ:GMCR) stock has jumped 46.95%. With low coffee bean prices plus the growing coffee addictions of Asia and America, the industry is hot right now. Will both Starbucks and Green Mountain continue to feed investors' hankering for caffeine-fueled growth -- or will one stock's gain be the other's loss?

Coffee shops and Keurig cups: Competition or cooperation?
Is there room for two major players in the global coffee industry? Starbucks' revenues depend on affable baristas and customers flocking to its coffee shops, while Green Mountain sees green when caffeine addicts purchase its Keurig home-brew coffee machines and K-Cups.

Because they inhabit different industry niches, Starbucks and Green Mountain do not compete by cutting prices, stealing customers, or otherwise crowding out each other's profits. These java giants enjoy a Venti serving size of synergy: since 2011, Starbucks and Green Mountain have been profitable partners in K-Cup crime, with Starbucks offering coffee-shop distribution of Green Mountain's Starbucks-brand K-Cups, and both receiving K-Cup revenue.

K-Cups are insatiably profitable at prices of 69 cents per cup, or $59 per pound of coffee. Starbucks bought coffee beans for $2.56 per pound in 2012 -- you do the investor-pleasing math.Green Mountain's innovative Keurig also spurred Starbucks to launch its own single-serve machine.

Rather than competing, Starbucks and Green Mountain are profiting from the joys of cooperation. As these bean slingers have proven, industry innovation is rarely a zero-sum cage fight.

Caffeine addicts: Starbucks goes east, Keurig brews Coke
Will the story of Starbucks and Green Mountain's mutual success hold long-term weight? Both companies know they can't rely on American coffee drinkers and nifty K-Cup machines forever. As Starbucks expands into Asia, it brings a premium brand, high prices, and K-Cups. When China and its neighbors' incomes rise, hot tea will likely be traded up to tall lattes (and if not, Starbucks has one foot in the luxury tea market with its 2012 acquisition of Teavana).

Meanwhile, Green Mountain has been slurping up headlines (and jumping in stock price) after announcing a partnership with Coca-Cola (NYSE:KO) the other week. Repeating its Starbucks-proven partnership model, Green Mountain will develop DIY cold-soda machines, and Coke will supply branded ingredient packets. In doing so, both companies will leverage their strengths (Green Mountain's technology, Coca-Cola's brand) so customers enjoy a superior product. 

Green Mountain's near-50% rise in share price last week seems rash, but it's found a recipe for revenue that's less of a secret than Coke's: the razor-and-blades style K-Cup model that worked with Starbucks could succeed again with Coke, bringing bubbly profits for both players.

The Foolish bottom line
Green Mountain Coffee didn't reinvent the coffee bean; it leveraged household brands like Starbucks which had already reinvented coffee into a popular, premium-priced addiction fix. Now, Green Mountain and Coca-Cola may be poised to similarly invigorate the soda industry. 

But does that make these companies great growth stocks?
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Glenn Singewald has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, and Starbucks. The Motley Fool owns shares of Coca-Cola and 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. The Motley Fool has a disclosure policy.

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