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Green Mountain embraces the coffee gorilla


Commentary: Working with Starbucks is hardly without risk
By MarketWatch

March 10, 2011

SAN FRANCISCO (MarketWatch) — A word of advice to Green Mountain Coffee Roasters Inc.: Be careful who you invite over for a cup of coffee.

After a tense standoff in the fast-growing world of single-cup brewing, Green Mountain (GMCR 60.58, +16.94, +38.82%) and Starbucks Corp. (SBUX 37.85, +3.31, +9.58%) have joined forces. According to their joint statement, Starbucks will add its powerful brand name to the lineup of coffees and teas available in K-Cups for use in Green Mountain’s Keurig brewing machines.

In exchange, Vermont-based Green Mountain gets to place its Keurig single-cup brewers in Starbucks stores, gaining instant access to millions of coffee lovers via thousands of outlets across the planet. This marketing bonanza sent Green Mountain shares soaring as much as 40% Thursday.

And to think, less than a month ago Starbucks was making ominous comments about how it intended to crush Green Mountain at its own game.

That was then. What threatened to become open warfare in the single-cup sector has ended amicably. But assuming this means everlasting peace between the two companies might be assuming too much.

Starbucks artfully has avoided signing any exclusivity agreements. It retains the right to someday launch its own single-cup machine, and Chief Executive Howard Schultz clearly said on Feb. 17 that he intends to mount a “very bold” foray into this market — a comment that sent Green Mountain shares tumbling 8% that day.

The folks over at Kraft Foods Inc. (KFT 31.53, -0.14, -0.44%) know a bit about how Schultz rolls. More than a decade ago, the company partnered with Starbucks, which was looking for a way to get its namesake coffee onto supermarket shelves.

It was a sweet deal for Kraft, but it went terribly sour once Starbucks decided to go solo, having learned a few things about distribution and in-store promotions. With $500 million in annual sales on the line, Kraft fought back, arguing breach of contract.

As these things always do, the dispute ended in court, where a judge ruled in favor of Starbucks — giving Kraft’s own struggling coffee business another black eye.

While analysts wasted no time Thursday bumping up their buy recommendations on Green Mountain, investors with a more cynical, long-term view of the market might want to keep Kraft’s experience in mind.

After all, sitting down with the coffee industry’s 800-pound gorilla isn’t without risk: Once it knows more about you, it might just roll over.

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