Don't let it get away!
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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.
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