LOS ANGELES (Reuters) - Starbucks Corp SBUX.O wants a piece of the growing single-serve coffee market and more control over its billion-dollar grocery business. Getting them will prove no easy task for the world's biggest coffee chain.
The moves stem from a simple, but profound problem: there are few opportunities to build yet another Starbucks cafe in the United States. To keep profits and revenue strong, it needs more ways to sell its wares outside its coffee shops.
Starbucks said on Friday that it will sell single-cup coffee makers and coffee pods as an extension of its Starbucks’ Via instant coffee packets, which generated $135 million in sales in their first year. It did not say when it would begin.
“It makes sense and gives them share of a market they don’t have a brand presence in,” said Oppenheimer analyst Matt DiFrisco.
Some analysts expected Starbucks to start selling single-cup machines after it said last week that it would end its licensing deal with Kraft Foods Inc KFT.N, which has sold Starbucks' bagged coffee and other grocery items since 1998.
Starbucks also supplies coffee disks for Kraft’s Tassimo one-cup system. A Kraft spokeswoman declined to say if the Tassimo disks would be affected by the licensing deal ending.
Green Mountain Coffee Roasters' GMCR.O Keurig brewing system has a near-monopoly on single-cup servings with roughly 80 percent of the market. Shares in that company fell almost 4 percent on word of Starbucks' plans.
Not everyone thinks Starbucks will succeed.
SunTrust Robinson Humphrey's William Chappell said Green Mountain's brewer has ground down competition from food giants such as Sara Lee Corp SLE.N and Kraft.
“We doubt that a Starbucks-owned machine would change the competitive landscape and it could actually help (Green Mountain) if Tassimo’s exclusive relationship with Starbucks is scrapped,” said Chappell.
The Kraft break-up is expected to be costly for Starbucks, but it would give the cafe chain more control over its billion-dollar business selling branded items through supermarkets, club stores and supercenters.
Starbucks plans to introduce its single-cup brewer, more Via products and other new items in its cafes before selling them through outside retailers.
Ken Harris, chief executive of consultancy Kantar Retail Americas, helped Starbucks when it first started selling bagged coffee in supermarkets and predicted the Seattle company would go it alone rather than replace Kraft with another partner.
“It’s a way to get greater control in the retail environment,” Harris said. “I think they would like to be a direct selling organization.”
Yet analysts said placing products in supermarkets requires expertise that few restaurant operators possess. Available supermarket shelf space for name-brand products is shrinking and competition for that space is fierce.
Dennis Lombardi, executive vice president of food service strategies at consultancy WD Partners, said Starbucks has an advantage because it has kiosks in grocery stores and already has its coffee on the shelves of most major retailers.
The company’s Starbucks and Seattle’s Best Coffee packaged coffee and Tazo teas were available in 33,500 grocery and warehouse club stores in the United States and 5,500 internationally at the end of fiscal 2009, the latest data available. Kraft managed the U.S. business, and the international business was overseen by Starbucks and Kraft.
Those businesses accounted for 23 percent of Starbucks' specialty revenue of nearly $1.6 billion in fiscal 2009. Specialty revenue also included royalties and fees from licensees such as Pepsico Inc PEP.N, which sells bottled Starbucks drinks, and Unilever PLC ULVR.L, which sells Starbucks ice cream.
Still, specialty roasters are challenging Starbucks in the popular Fair Trade coffee category. Smaller rivals Peet's Coffee & Tea PEET.O and Dunkin Donuts have drained market share from Starbucks, Stifel Nicolaus analyst Steve West said.
“Starbucks bagged coffee has seen three consecutive years of sales declines in measured channels,” UBS analyst David Palmer said in a note about the demise of the Kraft deal.
“That said, we believe that this brings significant execution risk to Starbucks, and wonder if the benefit of direct ownership and focus would outweigh its relative experience on in-store marketing and brand building in general,” Palmer said.
Reporting by Lisa Baertlein. Additional reporting by Martinne Geller in New York and Mihir Dalal in Bangalore. Editing by Robert MacMillan
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