Starbucks partnership to strengthen Green Mountain
The partnership lends GMCR a stronger presence and more customers within the US.
Starbucks has received an impressive increase for its branded K-cups sales volume, shipping more than 230 million units in just five months since the product launch. Starbucks has been selling its branded K-Cups through other retailers since November. Now it intends to leverage its own retail presence to sell its K-Cups.
According to a company representative, Starbucks will sell K-Cups of one medium and one dark-roast blend in 12-count packs for $11.95. In March, Starbucks announced its plan to launch Verismo, a single-serve espresso brewer, by the end of this year. This announcement led to more than 15% drop in GMCR's stock price. (See our previous post: Starbucks, Wal-Mart Rain on Green Mountain's Parade with Single-Serve Coffee Plans)
It is yet to be seen what would be the likely impact of Starbucks' interest in the single-serve coffee segment. The recent development is a positive for GMCR as the partnership with Starbucks lends it a stronger presence and more customers within the U.S.
However, it is too early to comment on Starbucks' interest in this association. The possibility of Starbucks entering as an independent player in this market and leveraging its presence and customer-base cannot be completely ruled out. It seems the company is testing the waters before entering this market on a larger scale.
We have a price estimate of $45 for Green Mountain Coffee Roasters, implying a premium to the current market price.
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We'll see how "impressive" this news is in September when K-cups sell for much, much less than $11.95 for 12. I'm sure there are some diehard Starbucks coffee drinkers out there...but I'm also pretty sure they are vastly outnumbered by people who will buy Kroger's K-cups instead.
We'll soon find out how willing people are to substitute expensive name-brand products in the face of cost-cutting competition.
To say that GMCR will essentially double to $45 seems like wishful thinking. Their margins will be hammered if K-cup competition results in lower prices and their current model on selling brewing machines already results in lower margins. What will change between now & the $45 per share forecast to drive the price that much higher?
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