Starbucks and Keurig: Who needs who more?
Starbucks spurned Kraft and wants a new partner in the single-serve scene, but Green Mountain and its consumers may be out of its league.
By Jason Notte, TheStreet
Starbucks (SBUX) just broke up with its longtime supermarket distributor Kraft (KFT) and seems to have its eye on Green Mountain Coffee Roasters (GMCR) for a steamy single-cup partnership. But who wants who more?
"Starbucks needs a single-serve solution, and there's no question they're going to have to have one," says Scott Van Winkle, consumer analyst for Canaccord Genuity. "Green Mountain doesn't need Starbucks."
Post continues after video:
Starbucks broke off its grocery distribution deal with Kraft on Tuesday after an ugly court battle in which Starbucks accused Kraft of not doing everything it could to "protect and promote" its Starbucks and Seattle's Best Coffee brands. Kraft still maintains that it brought Starbucks' grocery sales from $50 million in 2004 to $500 million last year, but the market has changed a bit since 1998, and the paltry 2.6% of the single-serve coffee business that Kraft's Tassimo holds is a tall compared with the trenta 70% to 80% share held by Green Mountain's Keurig machine.
Though Starbucks announced an agreement with Courtesy Products to provide single-serve coffee for use in Courtesy's CV-1 in-room coffeemakers, which are in 500,000 hotel rooms nationwide, the company says it's still playing the field in search of the perfect one-cup home brewing partner.
"Starbucks is evaluating all options related to single-serve coffee, whether through R&D, relationships with other companies or through our VIA Ready Brew brand," said company spokesman Alan Hilowitz in a statement to TheStreet. "We continue to look for ways to provide our customers the high-quality, premium coffee products they are looking for in different forms and channels."
They're going to have to, as a whole lot more Americans are getting their coffeehouse-quality brew from their coffeemaker instead of a chatty barista. The National Coffee Association trade group's 2010 National Coffee Drinking Trends Study found 86% of Americans preparing their coffee at home, up 4% from 2009. With 40% of all coffee consumed considered to be "gourmet," that meant a shift from the counter to the coffee aisle.
Increasingly, those same consumers are reaching for a cup of Tully's, Caribou Coffee, Lavazza or other Green Mountain K-cup products. The 56% sales growth for Green Mountain each year from 2006 through 2009 and last year's big 73% sales hike may have caught Starbucks' attention. An 89% increase in Keurig K-cup sales to $332 million last quarter and a 58% increase in actual Keurig brewing machines to $188 million should have kept it. Green Mountain estimates that there's a Keurig in 6% of America's 90 million coffee-drinking homes, compared with the 5% grocery market share Connacord Genuity's Van Winkle estimates for Starbucks products.
"The broader the variety that's available for the Keurig system implies a larger market penetration," Van Winkle says. "The larger the market penetration for the Keurig system, the more difficult it becomes for a new technology to take share."
That variety's getting broader by the day, as Starbucks nemesis Dunkin' Donuts announced last week that it would start selling K-cup versions of all its blue-collar brews in its stores. Starbucks credits in-store sales of its single-shot VIA with a 12% increase in its consumer products revenue last quarter, but that $192 million take is still 40% less than Green Mountain's K-cup sales.
Right now, Starbucks's new partner, Acosta Sales and Marketing, is responsible for brokering all of its grocery deals, with Starbucks itself shouldering the ordering, distribution, marketing, promotion, sourcing, roasting and packaging burden. In Van Winkle's view, Starbucks has three options if it wants to heat up the single-serve market and get someone else to shoulder the load: team up with Green Mountain and Keurig; try to make knockoff K-cups without Green Mountain and hope their intellectual property rights are as weak as their decaf blend; or find a new partner such as Nestle's (NSRGY) Nespresso, Sara Lee's (SLE) Senseo or Mars' Flavia and start a system, though they've already failed in that approach with Tassimo.
"The industry standard has been set with Keurig," Van Winkle says. "I don't think Starbucks wants to wait a year and a half plus and run the risk of not being able to get past intellectual property or whatever Keurig does with its next technology."
Keurig would seem the obvious choice, as the new B70 model could even recreate Starbucks' iced drinks, but why should Green Mountain bend over backward for Starbucks? In the past year, Starbucks has tested a beer-and-wine concept at its stores, told Baristas to slow down when making drinks, dropped tall coffees from drive-through menus, introduced a 31-ounce beverage cup that is larger than the capacity of the human stomach -- launched in six of the 10 most obese states in the country -- and introduced a logo that was roundly jeered. Even before that, Green Mountain didn't think Starbucks was the most attractive item in Seattle after it bought and began distributing hometown competitor Tully's in 2008.
While Starbucks' revenues were up 9.5% last year and same-store sales climbed 7% in the same period, it's clear Starbucks is still sniffing out an identity while Green Mountain, seems fairly confident about its place on the kitchen counter and in the coffee aisle. Starbucks may be the most popular kid in the coffeehouse, but that's of little consolation to a company that prefers quiet mornings at home.
"What's great about Starbucks for Green Mountain is that it would take away the competitive risk and expand the opportunity of Starbucks consumers who would buy Keurig Brewers," Van Winkle says. "It's also probably cannibalistic, as Starbucks would take some share of the existing K-cups that are sold, and the economics wouldn't be as attractive to Green Mountain as they are for a Green Mountain K-cup or a Tully's K-cup."
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
Hedge funds' capital raising is causing all kinds of cascading destruction in the go-go names.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.