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Where Are Your K-Cups, Starbucks?

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Green Mountain Coffee Roasters (Nasdaq: GMCR  ) nabbed another believer last night. Conair will begin selling single-cup brewers under its Cuisinart brand, in a licensing and distribution deal with Green Mountain's Keurig.

The move is a winner for Green Mountain. The company has been selling a ton of its Keurig single-cup brewers -- nearly 1.2 million units over the past two quarters alone -- but the company essentially sells them at cost. The real gravy comes in the form of high-margin K-Cups, which provide single-cup portions of premium coffee from more than a dozen brands. Green Mountains has the perfect throwback "razor and blades" model here -- it's willing to sell the brewers without a premium and makes up the difference with the hundreds of millions of K-Cups it's now selling quarterly. More brewers mean more K-Cups, and business is booming at Green Mountain.

The playing field of third-party K-Cup participants has been limited to small java specialists such as Diedrich Coffee (Nasdaq: DDRX  ) and Caribou Coffee (Nasdaq: CBOU  ) . But business has been so potent that K-Cup sales account for the bulk of the growth at Diedrich.

Now that Cuisinart will be flooding the market with even more of Green Mountain's equivalent of the razor, isn't it only a matter of time before Starbucks (Nasdaq: SBUX  ) jumps into the K-Cup fold to get in on the blades?

That would be a humbling move, but Starbucks has already made inroads into instant coffee with this year's rollout of Via. If bean sippers aren't coming to its baristas, Starbucks figures that its baristas may as well come to the bean sippers.

Chains such as Starbucks and Peet's (Nasdaq: PEET  ) have resisted the charm of the K-Cup -- with which Green Mountain collects 6.4 cents for every single K-Cup sold -- despite the platform's booming popularity. Why? Well, what if a Starbucks K-Cup that will cost a consumer about $0.40 is as good as a $2 cup of in-store coffee? For that matter, what if it's simply nearly as good? Green Mountain's brewers make java more accessible and convenient. For the likes of Starbucks, that situation introduces an unpleasantly slippery slope.

Unfortunately for Starbucks, the K-Cup is a game it can't ignore anymore. Even Wal-Mart Stores (NYSE: WMT  ) began selling Keurig machines and K-Cup refills this quarter. As the installed base of Keurig -- and other single-serving rivals -- grows, the feasible market for real-world coffee chains shrinks.

Starbucks is doing its part, by expanding into different beverage categories and offering value-sensitive pricing, but the K-Cup coattails are going to keep moving, with or without the barista's blessing.

It may as well hop on for the ride.     

For further Foolishness:

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers recommendation. Starbucks and Wal-Mart Stores are Inside Value selections. Starbucks is also a Stock Advisor selection, and the Fool owns shares of it. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz doesn't fancy himself much of a coffee drinker, even though he lives within walking distance of three Starbucks locations and has owned a Keurig machine for two years. He owns no shares in any of the stocks in this story and 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.

Read/Post Comments (6) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 04, 2009, at 1:59 PM, dbauer69 wrote:

    FYI - Tassimo (Kraft) has had Starbucks T-discs since late 2007 I believe. They are sold through Target, Bed Bath and Beyond and online.

  • Report this Comment On June 04, 2009, at 2:03 PM, dbauer69 wrote:

    FYI - Tassimo (Kraft) has had Starbucks T-discs since late 2007 I believe. They are sold through Target, Bed Bath and Beyond and online. I've been using them for a while and feel they are just as good as the in-store coffee for approximately $0.87 per serving.

  • Report this Comment On June 04, 2009, at 2:48 PM, swagv wrote:

    K-Cups? Stale, pre-ground coffee under "vacuum seal" technology that's older than a can of Sanka, with the added bonus of maximum environmental waste?

    Are we living in the 1950s?

  • Report this Comment On June 04, 2009, at 3:38 PM, Ruhaan wrote:

    I believe Barrons is right about GMCR.. But in the short term, this fad is going to continue.. I certainly dont think its going to hurt SBUX in the long run.. SBUX is going to come out just fine.

  • Report this Comment On June 04, 2009, at 4:04 PM, TMFBreakerRick wrote:

    Swagv, as much effort as Starbucks puts into their cups, biodegradeable holders, and receipts, do you really think that's less environmental waste than brewing a small K-Cup into your own portable coffee mug/cup? They BOTH produce more waste than they should.

  • Report this Comment On May 14, 2010, at 10:51 AM, rawdog268 wrote:

    If the few here would do thier homework like i did(was concerned about the waste problem too) they would find that those k cups are made from a bio plastic made from suger.Completely bio degradable.

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