Starbucks, Green Mountain: Single-Serve Doesn't Mean Single Player

Date : 03/09/2012 @ 2:29PM
Source : Dow Jones News
Stock : (MM) (GMCR)
Quote : 91.67  0.0 (0.00%) @ 2:05AM

Starbucks, Green Mountain: Single-Serve Doesn't Mean Single Player

Starbucks Corp. (MM) (NASDAQ:SBUX)
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Starbucks Corp. (SBUX) and Green Mountain Coffee Roasters Inc. (GMCR) say there's plenty of room in the $8 billion single-serve coffee business for both of their brewers. But investors aren't so optimistic.

Green Mountain's shares tumbled 15% Friday to $53.28 while Starbucks's rose 3.9% to $52.34, hitting an all-time high.

Starbucks announced late Thursday that it is pushing farther into the single-serve coffee space with its own brewer, called Verismo, coming out this fall. The high-end, likely high-priced, Verismo will compete more with other espresso machines, like Nestle SA's (NESN.VX, NSRGY) Nespresso, than Green Mountain's line of Keurigs, which just brew regular coffee--even its brand new fancier Vue.

The concern is: Starbucks says it's going after the market aggressively, which makes it unlikely the world-wide coffee giant will stop with one brewer. Also, Green Mountain is jointly developing with Luigi Lavazza SpA a high-pressure capsule-based espresso system to be launched late this year.

Green Mountain Chief Executive Larry Blanford said there's "opportunity for complementary high-pressure espresso-based systems," adding that the two companies will continue to collaborate in the low-pressure Keurig brewing system, for which Starbucks sells so-called K-cups of Starbucks- and Tazo-branded coffee and tea.

About a year ago, Starbucks ditched its exclusive deal with Kraft Food Inc. (KFT) in a high-profile dispute in which Starbucks took control of its packaged coffee sales, including single-serve pods, to partner with other vendors.

Green Mountain makes most of its ongoing revenue from K-cups. The company has continued to come out with new brewers, such as the Vue it launched last month, to remain relevant, especially since its patents on K-cups expire later this year. "What's more, the timing of the Starbucks launch will position Starbucks directly against Green Mountain's new Vue platform launch," a J.P. Morgan analyst said in a research note, amounting to yet another headwind for Green Mountain to overcome this year.

In Green Mountain's defense, Starbucks pointed to the overseas market as its biggest prize for Verismo, given that Europeans generally drink more espresso than Americans as a percentage of their coffee consumption. Meanwhile, Green Mountain says its pending espresso machine will target North American consumers.

For Starbucks, the move is part of its overall strategy of becoming a broader consumer products company rather than relying so heavily on its retail stores. "Verismo will firmly establish Starbucks in the high-growth single-cup category," which saw 135% growth last fiscal year in the U.S., said Barclays Capital analyst in a note. Starbucks first entered the growing category in 2009, when it introduced the now $250 million VIA Ready Brew business. Following that was its single-serve coffee pods for other companies' brewers, and now, its very own brewer.

Starbucks says its consumer products business will one day rival its coffee shops in sales--a prospect that is at least several years away. Company-owned cafes represented 82% of its $11.7 billion fiscal 2011 sales.

"We believe the [single-serve coffee] category is still in its nascent stage," Starbucks Chief Executive Howard Schultz said on a conference call Thursday. "It's in both our interests for Starbucks and Green Mountain to cooperate in a way where we continue to sell those K-cups in the same spirit as when we began."

--Julie Jargon contributed to this article.

-By Annie Gasparro, Dow Jones Newswires; 212-416-2244; annie.gasparro@dowjones.com




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