LOS ANGELES/NEW YORK (Reuters) - Starbucks Corp (SBUX.O) and Green Mountain Coffee Roasters Inc GMCR.O are joining forces to dominate the fast-growing $4 billion U.S. single-serve coffee market, sending shares in both names skyrocketing.
The partnership between the world’s biggest coffee chain and the company that controls about 80 percent of the North American single-serve brewing segment poses a formidable challenge for rivals from Peet’s Coffee & Tea Inc PEET.O to Kraft Foods Inc. KFT.N
During the session, shares of Green Mountain jumped as much as 43 percent while Starbucks gained 10 percent, the stock’s biggest one-day move since July 2009. The biggest move in Peet’s was a decline of 14.6 percent.
The companies will sell Starbucks coffee and Tazo tea for Keurig machines at wholesale clubs, drugstores and supermarkets in North America starting this autumn.
Early next year, Starbucks cafes will sell Keurig machines and the Starbucks coffee and tea pods.
The announcement follows a Reuters report last month that the two rivals would join forces in the U.S. single-cup coffee segment.
It also quieted speculation that Starbucks would debut its own single-serving brewer.
Financial details were not disclosed.
The deal “is an absolute validation that Keurig is the industry standard and that it is going to be the dominant system,” Canaccord Genuity analyst Scott Van Winkle said.
Van Winkle estimated that Green Mountain already has about 80 percent of the U.S. sales in the market for the single-serve coffee, which is fast-brewed from pods or containers that are specially designed for use in the brewing machines.
U.S. retail sales in the single-serve coffee category will likely top $4 billion in 2011, including brewers and coffee pods, he said, with coffee sales accounting for roughly three-quarters of those sales.
Green Mountain’s Keurig-related revenue, including sales of machines and its K-cup coffee pods, was $1.19 billion in 2010, representing 88 percent of overall sales.
The systems are gaining popularity because they cater to U.S. consumers’ demand for convenience and customization. Unlike traditional drip coffee brewers, the machines make one cup at a time and different users can have different brews.
Many U.S. office workers are familiar with Keurig because the machines are a common fixture in company break rooms.
Starbucks will be the exclusive licensed super-premium brand for the Keurig brewer for the length of the deal, which leaves Starbucks open to strike similar deals with other companies overseas. The length of the deal was not disclosed.
Shares of Peet’s fell 12 percent after Janney Capital Markets analyst Mitchell Pinheiro downgraded the stock to “sell” from “buy” because the deal appeared to block the high-end coffee company from the Keurig system. Peet’s executives were not immediately available.
Starbucks, looking to expand beyond its namesake cafes, wants to be a big player in single-serve and in September 2009 entered the market with the launch of Via instant coffee.
William Blair & Co analyst Sharon Zackfia said the Green Mountain relationship could add modestly to Starbucks earnings in its 2012 fiscal year starting October 1, but she also has concerns about coffee prices, which are at historic highs.
Oppenheimer analyst Matthew DiFrisco called the deal “incrementally positive” for Starbucks and joined some other analysts in raising earnings estimates for next year: “It is an immediate low risk and low investment solution to address the fast growing at-home single-serve market, in turn furthering the growth of (Starbucks) higher margin consumer products division.”
The deal comes nine days after Starbucks terminated an agreement under which it provided coffee discs for Kraft’s Tassimo one-cup home brewer, which is not a big contributor to Kraft revenue. At the same time, it ended its grocery distribution agreement with Kraft.
The Keurig system’s rivals in the U.S. single-cup coffee sector include Kraft’s Tassimo machine, Sara Lee’s SLE.N Senseo brewer and Nestle SA’s NESN.VX Nespresso system, which leads in Europe, where single-serve is more established.
“This probably makes the hurdle higher” for Green Mountain’s single-cup rivals, Bernstein Research analyst Sara Senatore said.
Premium coffee customers have been fastest to switch over to single-cup brewers like Keurig, but she noted that J.M. Smucker Co’s (SJM.N) mainstream Folgers coffee also saw brisk sales after it began providing coffee for the system.
Green Mountain shares were up 40 percent at $60.85 in afternoon trading after touching a session high of $62.37. Starbucks was up 10.1 percent at $38.03.
Reporting by Lisa Baertlein and Phil Wahba; Editing by Derek Caney, John Wallace and Matthew Lewis