Adding another big name to its already-impressive lineup, Green Mountain Coffee Roasters (NASDAQ: GMCR) just announced a multiyear agreement with Italy's Lavazza brand. While the name brand is a nice addition to the family, the fact that Lavazza focuses on espresso is an even bigger win. Green Mountain's Keurig machines have become the de facto brand for single-serve brewed coffee, but the company has had less luck making inroads to the land of pressure-brewed espresso. Lavazza offers Green Mountain a new avenue to success.
Lavazza brings a roaster's background to the partnership, and it doesn't operate retail locations. While the initial product development will focus on brewed coffee for the Keurig line, there's no doubt that espresso is the long-term play for Green Mountain. Lavazza and Green Mountain have so far announced four lines available starting in the fall of this year, all focused on brewed coffee. That, though, is a market that Green Mountain is already dominating. A much more important market is the world of single-serve espresso -- a world that's, so far, largely unexplored.
The expansion of espresso
This isn't the first time that Lavazza and Green Mountain have joined forces. In 2012, the companies co-branded a brewer called the Keurig Rivo. That system has a stronger pump, which allows it to brew espresso and steam milk. The Rivo doesn't get much coverage from Green Mountain in its investor materials, in all likelihood because it's not growing at anything like an impressive rate.
A new range of Lavazza pods could help boost sales of that machine and reach into new homes and offices, or help the company double down on existing Keurig owners who also want to brew espresso. Right now, the biggest competition for the market isn't very big.
Although Starbucks (NASDAQ:SBUX) produces a Verismo brewer, which brews coffee and espresso, the machine has failed to take off, although it did well this holiday season. The relatively open competitive space means that any big move -- like this Lavazza agreement -- could swing large portions of the potential customer base.
Doubling down on Lavazza
Instead of tying in with a new company, Green Mountain decided to go after the espresso market with Lavazza. It's the right call, as Lavazza already has a 5% stake in Green Mountain -- taken back in 2010 when the companies first discussed a jointly designed machine -- and Lavazza is a major worldwide brand. In 2011, the business generated $1.7 billion in worldwide sales.
Even in the U.S., the company has a wide distribution, appearing in grocery stores, department stores, and specialty shops. Globally, Lavazza operates in 90 countries and sells billions of cups of coffee annually. Due to its different focus, the company is nowhere near the scale of Starbucks, which generated $14.9 billion in sales last year, but it has the chance to help Green Mountain round out its offerings without building even stronger ties with Howard Schultz & Co.
As Green Mountain has grown, it's built up a tentative truce with Starbucks, which sees the value in having its product more widely distributed. Since that agreement still has more than four years left on it, there's no telling what Starbucks' brewer offering will look like by the end. Better for Green Mountain to tie up with Lavazza, which will definitely not be offering a competing brewer, than to get even further in with Starbucks. This deal looks like an excellent move for Green Mountain.