The Boston Globe - March 11, 2011

Starbucks deal solidifies Green Mountain’s market lead
The Boston Globe

Green Mountain Coffee Roasters Inc.’s stock jumped 41 percent yesterday after it announced a partnership with coffee giant Starbucks Corp., increasing its dominance in the single-serve coffee market.

The deal will put single-serve Starbucks packs for Green Mountain’s Keurig brewer in grocery stores, drug stores, and retailers such as Wal-Mart, Macy’s, and Bed Bath & Beyond in the fall. Next year, Starbucks K-Cups and Keurig brewers will be sold in Starbucks stores across North America.

With the addition of Starbucks, including K-Cups for its Tazo tea brand, Green Mountain has secured partnerships with almost every major coffee brand in the country, including Canton-based Dunkin’ Donuts, a deal that was announced last month.

“That’s a really tremendous market opportunity for us,’’ said Michelle Stacy, president of the Keurig business unit for Green Mountain, which is based in Waterbury, Vt. “One of the things it offers the consumer is yet another fantastic brand among the array of brands that we have.’’

Teaming up with Starbucks removes a potential competitor for Green Mountain, which controls more than 70 percent of the burgeoning single-serve market. Until March 1, Starbucks had offered single-serve coffee for Kraft Food Inc.’s Tassimo brewer, which only has a 3 percent market share.

“The leading brand hooked up with the leading brewer, and logic prevailed,’’ said Mitch Pinheiro, a food analyst with the Philadelphia financial services firm Janney Montgomery Scott LLC.

The single-serve market is hot, with sales rising more than 112 percent year over year as more people are drawn to the convenience of brewing a cup at a time, according to the market research firm SymphonyIRI Group. Ground coffee sales, on the other hand, have risen less than 4 percent, and some see full-pot brewers going the way of the record player and the VCR.

“The next kid born at Mass. General may never see a drip coffee maker,’’ said Scott Van Winkle, the Boston-based managing director of the investment banking firm Canaccord Genuity.

The customer base for a teamed-up Green Mountain and Starbucks is huge: Starbucks serves more than 50 million customers a week in its 11,000 US stores and estimates that 80 percent of its US customers don’t own a single-cup brewer.

With the power of the Starbucks brand on Green Mountain’s side, Van Winkle estimates that the percentage of US homes that have a Keurig will rise from 6 percent now to at least 30 percent in the next few years. Janney Montgomery Scott estimates that Starbucks will generate 1 million brewer sales and 600 million Starbucks K-Cup sales over the first year of the partnership.

“I call this the Trojan brewer,’’ Janney Montgomery analyst Pinheiro said, referring to the mythical wooden horse that allowed Greek warriors to infiltrate the city of Troy. “Once the brewer gets in the Starbucks household, they’re going to be drinking other Green Mountain blends.’’

Green Mountain has been steadily expanding its presence in the single-serve market, which makes up 91 percent of its business. Along with the Starbucks and Dunkin’ Donuts partnerships, and previous arrangements with Newman’s Own Organics and Caribou Coffee, in the past two years Green Mountain has snapped up the Canadian coffee company Van Houtte Inc., the last remaining independent Keurig licensee, as well as Diedrich Coffee, Tully’s Coffee, and Timothy’s World Coffee.

Two brands that haven’t partnered with Green Mountain, Maxwell House and Peet’s Coffee & Tea, aren’t likely to, analysts say, because Maxwell House is owned by Kraft, which sells a competing brewer, and Starbucks is now Keurig’s exclusive “super-premium’’ coffee brand, which rules out Peet’s.

“Now that you have every major brand available locked up, consumer adoption is going to rise,’’ said Van Winkle. “One of the deterrents to adoption has been the availability of K-Cups. If I lived in Cedar Rapids, Iowa, it wasn’t available in the grocery store. Now in Cedar Rapids, Iowa, I can get it at Dunkin’ Donuts, Starbucks, and quickly in every single grocery store.’’

Starbucks has also been growing its cup-at-a-time business, introducing instant single-serve coffee packets in 2009 and last month partnering with Courtesy Products to get its single-serve product in up to 500,000 hotel rooms.

“Our customers are looking for Starbucks in many different formats and many different channels,’’ said Starbucks spokesman Alan Hilowitz. “We’re looking at many different opportunities within this space.’’

On news of the deal, Green Mountain stock rose $18 to close at $61.71, while Starbucks stock was up 10 percent, closing at $37.97.

Green Mountain’s growth comes as coffee prices are on the rise — up 15 percent from a year ago, according to SymphonyIRI Group. Rising temperatures and intense rains have caused coffee yields in Latin America to plummet while demand has increased across the globe, from new coffee drinkers in China to amped-up Americans downing coffee-flavored energy drinks to stay awake.

But Green Mountain is confident rising costs won’t dampen the single-cup coffee craze.

“We have not seen any change in coffee sales or slowdown in K-Cups due to increased price,’’ said Green Mountain’s Stacy. “It seems to be one of those things consumers have to have is their cup of coffee.’’