The baron of baristas is playing nice with the Keurig king again. The two companies are announcing an expanded strategic partnership whereby Starbucks will offer its single-serve coffees through Green Mountain's new Vue brewer.
Green Mountain's stock took a hit earlier this month when Starbucks declared its entry into the single-serve coffeemaker market with an espresso-centric system. This morning's deal doesn't change that. Starbucks is still going to market a branded one-cup platform that uses high pressure to make the fancy European beverages that the chain specializes in as well as the traditional coffee that it's been offering since last November in Keurig K-Cup form.
However, this expanded deal is a win-win for a few different reasons.
For Green Mountain, it signals that Starbucks is willing to play with the company's new platform. Unlike the K-Cup patents that expire in September, Vue packs are just beginning their patent life cycle. As the marquee brand when it comes to premium java, Starbucks availability for Vue will also validate the new appliance.
What does Starbucks get in all of this? Security. Its Verismo machine will hit the market in time for the holidays, but it's no sure thing. Janney Montgomery analyst Mitchell Pinheiro estimates that espresso-based systems made up just 3% of last year's brewer sales. Despite the niche audience, it's already a competitive space. Starbucks has the brand, but if it sticks to only offering Starbucks refills it may be pricing itself out of the market. The reason that Keurig has come to thoroughly dominate the larger low-pressure market is that it offers more than 200 varieties of K-Cups from dozens of the leading companies. Verismo won't fail initially because Starbucks is going to market it hard through its stores during the optimal holiday shopping season. However, if it flops after that, Starbucks can always point to its thriving single-serve business through Green Mountain.
Or -- better yet -- it can avoid that potential brand-smacking embarrassment and acquire Green Mountain now.
Bean there, done that
When Krispy Kreme (NYS: KKD) announced last night plans to beef up its coffee initiatives this year, the logical conclusion is that Krispy Kreme will do what Starbucks and larger rival Dunkin' Brands (NAS: DNKN) did last year: Krispy Kreme is going K-Cup.
Sooner or later it will have to. Despite the misfortunate acronym that Krispy Kreme K-Cups would convey, it's a move that makes sense if Krispy Kreme ever goes from being a misspelled doughnut shop into a place known for its caffeinated brews.
K-Cup patents or not, all roads lead to Keurig in the coffee space. There will always be speculation about the terms of the deals crafted between Starbucks and Green Mountain, but Starbucks knows what it was like to back a loser when it was only available for Kraft's (NYS: KFT) fledgling Tassimo espresso system.
Green Mountain is the only sure thing in single-serve right now. If Starbucks thinks about it, snapping up Green Mountain and making K-Cup, Vue, and Verismo a family of low-, mid-, and high-end brewers would assure Verismo's success while making it coffee top dog at home and on the road.
The deal would also be accretive if the premium isn't too rich. Even though Green Mountain is growing a lot faster than Starbucks, it's fetching just 15 times next fiscal year's projected profitability. Starbucks has a multiple of 24.
A couple of weeks ago, a marriage wouldn't have made sense. Why would Starbucks want to dabble in a single-serve platform that could cannibalize its in-store business? Well, clearly Starbucks has changed.
There's a whole latte love going on.
Brew ha ha
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At the time thisarticle was published The Motley Fool owns shares of Starbucks.Motley Fool newsletter serviceshave recommended buying shares of Green Mountain Coffee Roasters and Starbucks.Motley Fool newsletter serviceshave recommended writing covered calls on Starbucks and creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Green Mountain. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.