New Deal With Starbucks Makes Keurig Green Mountain a Premium Play

The new partnership should brew up growth for both coffee slingers.

Mar 16, 2014 at 11:00PM

It may no longer be the exclusive super-premium coffee outfitted for Keurig single-cup coffee systems, but Starbucks (NASDAQ:SBUX) apparently realizes that as Keurig Green Mountain (NASDAQ:GMCR) prepares for the rollout of its next-generation coffee machine, getting more products out to customers is more important.

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When the two inked their original agreement in 2011, Starbucks' exclusivity was a key element in raising the profile of the Keurig system at a time when questions were surfacing about the long-term viability of the coffee machine maker as its patents approached their expiration date. Although some critics thought Starbucks CEO Howard Schultz was going downmarket by allowing his coffee products to be hawked in individual pods, the Fool's Tim Beyers saw it as a brilliant development that would benefit both companies.

Although Keurig's stock did get thrown when its patents expired, it's gamely landed on its feet again and is preparing for the rollout of Keurig 2.0 later this year that will see all new patents attached to its pods leaving rivals like Treehouse Foods (NYSE:THS) up in arms. But it's a smart move that should see Green Mountain's already sizable market share expand further.

Starbucks also benefited from the exclusive deal, seeing some 2 billion K-cups sold in the intervening years. That kind of success had the java slinger looking for additional opportunities and last May worked out an agreement with Keurig to triple the number of products being offered that go beyond the original lineup of Starbucks and Vue packs to also include Starbucks brands like Seattle's Best, Torrefazione Italia coffee, Teavana Teas, and Starbucks Cocoa.

The latest deal ends Starbucks exclusivity, which will help Keurig land additional premium coffee makers for its new machine lineup, but also extends to Starbucks better business terms under their contract and offers "significantly expanded Starbucks K-Cup pack and variety types."

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The single-serve coffee market is an $8 billion global opportunity, and despite the prevalence of coffee machines from NestleMondelez International, and even Starbucks itself, Keurig has still locked up 89% of the market, the advantage accruing from its being one of the first movers in the industry (Nestle's Nespresso machine was actually invented back in 1986). 

The new arrangement for Keurig also comes as it recently signed a deal with Coca-Cola (NYSE:KO) to bring to market a DIY cold beverage system along the lines of the soda systems offered by SodaStream International (NASDAQ:SODA). That machine will be introduced during its fiscal 2015 year, and it seems to position all of Keurig's agreements to take on all comers. While Coke will be central to the new system, Keurig says other brands will also be featured, so whatever the consumer's favorite beverage is, he or she will be able to pop in a pod and drink it.

It's the Keurig brand that's central to its marketing (hence the company name change), and it no longer needs to rely upon exclusivity deals to give it that extra promotional push. It can stand on its own now and extend better terms to partners in exchange for allowing anyone to be part of the universe.

As someone who hasn't always had a favorable view of Keurig Green Mountain, I find it a far more attractive investment these days, one that could and perhaps should earn a premium from the market.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, SodaStream, and Starbucks; owns shares of Coca-Cola, SodaStream, and Starbucks; and has options on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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