Starbucks to sell single-serve coffee brewers

DETROIT Thu Mar 8, 2012 6:48pm EST

The Starbucks logo is seen outside the new Starbucks cafe in Warsaw March 6, 2011. REUTERS/Kacper Pempel

The Starbucks logo is seen outside the new Starbucks cafe in Warsaw March 6, 2011.

Credit: Reuters/Kacper Pempel

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DETROIT (Reuters) - Starbucks Corp (SBUX.O) said it will launch its own single-cup coffee and espresso drink machine later this year, putting it in direct competition with partner Green Mountain Coffee Roasters Inc (GMCR.O), seller of the popular Keurig home brewers.

Shares of Green Mountain plunged as much as 24 percent in after-hours trade, but regained some ground after Starbucks said on a conference call that it would continue to supply Green Mountain with Starbucks-branded single-serve coffee pods called K-cups.

Starbucks shares rose 3 percent to $51.87.

"With Green Mountain's patents expiring this fall, Starbucks' entry is part of the competitive onslaught hitting Green Mountain," said hedge fund manager David Einhorn, who has been one of the most outspoken critics of Green Mountain.

Green Mountain did not immediately respond to requests for comment on the Starbucks announcement.

Single-portion coffee, known as cups, discs or pods, make up only 8 percent of total worldwide coffee sales, according to data supplied by Euromonitor International in January. Still, category bulls say that percentage should grow as more people take advantage of its convenience.

Joshua Brown, vice president of investments at investment advisory firm Fusion Analytics, said Starbucks' move was inevitable.

"There was no way that Starbucks and Dunkin' Donuts (DNKN.O) were going to see this niche coffee market take off and not want a bigger share of it," Brown said.

"A lot of people thought Starbucks was going to play nice and just sell K-Cups through the Keurig. But Starbucks doesn't do anything where they are going to be the No. 2 or the No. 3 player," added Brown, whose firm has no position in either stock.

Single-serve brewers, which can range from about $50 to about $800, make fresh cups of coffee, or even barista-worthy espresso drinks, in seconds.

Starbucks said that the "Verismo system by Starbucks" will make both brewed coffee and espresso beverages such as lattes.

The system will be sold online at select Starbucks shops and at specialty retailers in the United States, Canada and some other international markets, it said.

Pricing on the machine will not be announced until closer to launch, Starbucks said.

"This is a positive for Starbucks, it gives them better penetration into the at-home market," said Lazard Capital Markets analyst Matthew DiFrisco, adding that the move leverages Starbucks' strength in the espresso and latte category.

SUPPORTING BOTH SYSTEMS

Green Mountain controls more than three-quarters of the U.S. market for single-cup coffee. That dominance has been fueled by the large network of coffee brands that provide coffee cups compatible with Keurig machines, including Starbucks, Dunkin' Donuts (DNKN.O), Newman's Own, Caribou Coffee Co CBOU.O and Folgers, made by J.M. Smucker (SJM.N).

Despite the introduction of Verismo, Starbucks plans to continue its partnership with Green Mountain.

"We will support both systems and we will continue to support and honor the relationship we have with Green Mountain," Howard Schultz, Starbucks' co-founder and chief executive, said on a conference call with analysts.

Single-serve coffee is most popular in Western Europe and the United States.

The global leader is Nestle SA (NESN.VX), whose Nespresso system holds a 35 percent share, according to Euromonitor.

Other popular single-cup brewing systems include Tassimo by Kraft Foods Inc KFT.N, Senseo by Sara Lee SLE.N, and Flavia by Mars. At the end of this month, Senseo will be discontinued in the United States, except on select websites.

A spokesmen for Sara Lee and Kraft declined to comment on Starbucks' move. A spokeswoman for Nespresso was not immediately available.

Consumer Edge Research analyst Robert Dickerson has estimated that a cup of coffee made at home by a one-cup brewer costs on average about 5 times more than traditionally brewed coffee.

(Additional reporting by Martinne Geller and Jennider Ablan in New York, Mihir Dalal in Bangalore and Jessica Wohl in Chicago; Writing by Martinne Geller; Editing by Tim Dobbyn, Bernard Orr)

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