Photo illustration depicts the potential appearance of a Starbucks single-serve cup for Keurig brewers from Green Mountain - MarketWatch
Starbucks arch-rival Peet’s Coffee & Tea’s shares drop on the news
By Matt Andrejczak and Andria Cheng
MarketWatch
March 10, 2011
SAN FRANCISCO (MarketWatch) — In a deal set to stir up the single-cup coffee brewer market, Starbucks Corp. and Keurig brewer parent Green Mountain Coffee Roasters Inc. said Thursday that Starbucks coffee and its Tazo tea will be sold in Keurig’s K-Cup portion packs.
The long-speculated-on deal sent Green Mountain shares (NASDAQ:GMCR) surging 38% as some investors had wondered if Starbucks would sell its own single-cup brewing machine to compete with Green Mountain.
Thursday’s deal doesn’t prevent Starbucks from doing so in the future.
Seattle-based Starbucks’ shares (NASDAQ:SBUX) advanced 9%.
Both stocks traded at 52-week highs.
Emeryville, Calif.–based Peet’s Coffee & Tea Inc. (NASDAQ:PEET) was seen as the loser in the deal. Peet’s stock tumbled 12% after Janney Capital cut its rating to sell, explaining that the Starbucks deal meant there’s now little room for Peet’s to strike its own K-Cup deal.
The deal is part of Starbucks’s goal of expanding its reach in the fast-growing single-cup coffee market and broadening distribution. For Green Mountain, Starbucks will give its booming K-Cup business even more cachet. Just last month, Dunkin’ Donuts said it was joining the K-Cup line up.
Starbucks’s earlier play for the single-serve category centered on its microground instant-coffee line Via, which hit the market in October 2009 and racked up more than $180 million in first-year sales.
Beginning this fall, the Starbucks K-Cup portion packs will be sold at supermarkets, wholesale clubs, drug stores, and department stores throughout the U.S. and Canada.
The agreement could accelerate already-brisk sales of Green Mountain’s Keurig brewer. In 2012, Keurig brewers, along with the Starbucks K-Cup packs, will be sold at Starbucks stores in the U.S. and Canada.
The number of participating stores has yet to be determined. Starbucks has 11,158 company-operated and licensed outlets in the U.S.
“Our research shows that more than 80% of current Starbucks customers in the U.S. do not yet own a single-cup brewer,” said Starbucks Chief Executive Howard Schultz.
Annual U.S. sales of coffee made for single-cup brewing machines as well as instant coffee total nearly $2 billion, the companies said. It is the fastest-growing part of the U.S. coffee market. Analysts at Morgan Stanley estimate single-serve coffee represents one out of every five cups of coffee consumed in America.
In its fiscal year that ended in September 2010, Green Mountain’s K-Cup portion pack sales shot up 103% to $834 million. Keurig brewer and accessory sales jumped 67% to $331 million.
Starbucks and Waterbury, Vt.–based Green Mountain didn’t disclose any revenue-sharing terms or other financial details of the multiyear deal, which does include an end date.
Starbucks is not precluded from making its own single-cup brewing machine under the terms of the pact. Patents on the current Keurig brewer system and K-Cup technology will start to expire next year.
Yet it’s far from clear whether Starbucks has any plan to develop and sell its own single-serve brewing machine. “We’re looking at all opportunities” in the single-serve market, said Starbucks spokesman Alan Hilowitz.
Starbucks on Feb. 15 struck a deal with Courtesy Products to provide its ground coffee for Courtesy’s single-cup machine, installed in more than 500,000 U.S. hotel rooms.
Morgan Stanley analyst John Glass estimates the Green Mountain deal will add 20 cents to 30 cents to Starbucks’ fiscal 2012 profit.
Janney Capital analyst Mitch Pinheiro forecasts Starbucks will help drive one million Keurig brewer sales in the first 12 months, resulting in at least 30 cents a share of earnings for Green Mountain on a full year basis.
Green Mountain’s Keurig in-home and workplace appliances dominate the single-cup-brewer market.
Keurig models ranked as the five-best selling coffee makers in the U.S. from October through December of 2010, making up an estimated 49% of total coffee maker dollar sales for that period, according to researcher NPD Group.
Competitors include Nestle (PINK:NSRGY) and Kraft Foods (NYSE:KFT) , with which Starbucks has been sparring over a distribution arrangement recently scuttled by Starbucks.
Deutsche Bank analyst Eric Katzman said the Green Mountain-Starbucks partnership is another long term negative for Kraft’s U.S. coffee business.
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