A Surprising Winner in the Keurig-Subway Deal

Keurig Green Mountain announced a new partnership with Subway this week, but is it all it's cracked up to be?

Jun 16, 2014 at 6:07PM

Last year, Subway introduced Keurig Green Mountain (NASDAQ:GMCR) to about half of its U.S. and Canadian locations. Last week, the companies announced that the other 15,000 or so stores would also soon serve Keurig java using its single-serve brewing system. Keurig's stock has jumped almost 7% since the announcement, but the move was premature. The partnership is good news for Keurig, but it's not going to add that much to the company's bottom line.

The value of Subway
As an initial test of how meaningful this announcement is, remember that Keurig already had half of Subway's North American locations locked down, but never bothered to mention it. Second, the K-Cup coffee already being served in Subway is Seattle's Best, which is owned by Starbucks (NASDAQ:SBUX). Customer's buying Subway K-Cups are really, therefore, buying Starbucks K-Cups. Keurig is providing the product, but Starbucks is providing the brand. The added value for Keurig is going to be smaller than if Subway were serving a Keurig Green Mountain brand coffee.

Source: Starbucks.

That's not to say it's not important. The bigger deal for Keurig is that it will get millions of eyeballs' worth of advertising out of the deal. Subway has been pushing its breakfast menu hard for the last few years, which means coffee should start to play a bigger role in sales. Keurig Green Mountain is in a great place to turn that breakfast success into sales of its in-home products.

That will be where Keurig receives the biggest benefit from this deal, though it's a benefit investors will have to have to wait to see.

Starbucks on the breakfast train
I've been a Starbucks fan for a long time, and this deal seems great for the coffee juggernaut. As the company expands its food offerings and increases their quality, it's going to put more pressure on other restaurants and cafes to perform. Starbucks' long-standing relationship with Keurig Green Mountain has brought extra revenue to both brands. But if Subway sticks with the Keurig packaging of Seattle's Best, then Starbucks wins whether you buy your coffee at Starbucks or Subway.

Burger King is another Seattle's Best devotee, giving Starbucks a nice range of partner brands for customers to choose from. The slow-building dominance of Starbucks on breakfast menus means much more to me than the additional advertising that Keurig Green Mountain is getting out of this deal. In short, this is great news for Keurig and its investors, but I think it's even more indicative of the dominance that Starbucks has over the coffee market.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Keurig Green Mountain, and Starbucks. The Motley 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. The Motley Fool has a disclosure policy.

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