Is a Starbucks-Green Mountain Partnership in the Works?

(Starbucks-Green Mountain partnership report updated with news of Starbucks agreement with Courtesy Products.)
SEATTLE (TheStreet) -- Starbucks (SBUX) may soon be partnering with Green Mountain Coffee Roasters (GMCR) as it looks to enter the single-cup coffee market now that its 12-year arrangement with Kraft Foods (KFT) is coming to an end.

Starbucks told news outlets over the weekend it plans to announce a new product for the single-serve coffee market "in the near future." On Monday, unnamed sources close to the talks spoke with Reuters, telling the newswire that Starbucks and Green Mountain were indeed in partnership negotiations, but would not specify the nature of an agreement.

Amid all the speculation, Green Mountain shares surged 6.6% on Monday, but were 4% lower in at midday Tuesday, trading around $44.51. Starbucks shares, meanwhile, closed higher by 0.7% on Monday and were half a point lower on Tuesday at $33.39.

Starbucks on Tuesday announced it reached a distribution agreement with Courtesy Products, a privately held provider of in-room coffee service to hotels across the U.S.

The Seattle-based coffee shop behemoth already sells individual instant coffee packets under its Via brand, but speculation among analysts has mounted that Starbucks is poised to push more aggressively into the single-cup brewing market now dominated by Green Mountain's Keurig machines and K-Cup portion packs.

Under the agreement with Courtesy Products, Starbucks will provide ground coffees for use in Courtesy's patented CV1 in-room and on-demand brewed coffee system in up to 500,000 luxury and premium hotel rooms across the U.S.

Starbucks will begin offering its coffee for the CV1 this fall, but indicated it continues to look for other ways to further push its popular coffee into the single-serve market.

"The single-serve coffee category in the U.S., and much of the world for that matter, is in its beginning stages of development," said Starbucks consumer products group president Jeff Hansberry. "At this very early stage, there are numerous contenders and no demonstrated, long-term winners related to either format or machines. Following our very successful introduction of Starbucks VIA Ready Brew in the U.S. and into a growing number of international markets, Starbucks will continue to explore the many single-serve and on-the-go solutions and options available to us, and to participate in those where we can better and more conveniently serve our customers wherever they may be."

"Look for further announcements from Starbucks as we continue to expand our presence in the premium single-serve category," Hansberry added.

Reports in the Chicago Tribune and Reuters over the weekend "indicate Starbucks will sell brewers in its stores," noted Canaccord Genuity consumer analyst Scott Van Winkle.

"Our belief has been, and continues to be, that Starbucks coffee will be available for Keurig brewers later this year. A deal is inevitable, in our opinion, and the timing may be soon, given these articles."

Van Winkle said the reports fueled further speculation about Starbucks' plans after its agreement with Kraft -- a partnership where Kraft dispenses Starbucks' products to grocery stores and other retail outlets in the United States, Canada, Britain and other countries -- ends on March 1.

Part of the Starbucks-Kraft agreement involved Starbucks providing coffee discs for Kraft's Tassimo single-cup home brewers. Despite Tassimo's success with some consumers, Green Mountain's Keurig brewing system enjoys market share of around 80%, according to Reuters, dominating other competitors as well, including Sara Lee's ( SLE) Senseo brewer and Nestle SA's ( NSRGY) Nespresso system.

The Keurig-installed base grows at over 5 million brewers annually, Van Winkle said -- an attractive growth prospect for Starbucks, which has said it intends to make its coffee available in every form consumers want.

Van Winkle expects single-cup coffee sales, including brewing machines and coffee pods, to rise to $4 billion in the U.S. this year.

Richard Haffner, head of global beverage research at Euromonitor, told Reuters that U.S. sales of single-serve coffee pods (excluding brewing machines) grew to $600 million in 2010. Global sales were $4.3 billion last year.

Van Winkle added that, "What is new to our conclusions, based on these most recent articles, is that we suspect a Starbucks-Green Mountain partnership might revolve around the launch of a new Keurig brewer technology that is about to be tested. Both articles indicate that a partner has yet to be announced. However, we know that Keurig's patent portfolio around single-serve gives it a significant advantage by limiting competitive risk, and that the company has a brand that resonates with consumers."

Commenting on the "more than coincidental" timing of a new Keurig brewer launch from Green Mountain, Van Winkle went on to say that "attaching to the new Keurig technology could put Starbucks in a position to expand the range of beverages available, to lead a better solution than is in the market today, and to be the driver of adoption utilizing its stores for distribution."

"Keurig is the dominant brand in single-serve coffee with rapidly rising consumer adoption of its brewers seeding a market opportunity that Starbucks can't resist," Van Winkle said.

Despite widespread speculation about a Starbucks-Green Mountain partnership, Starbucks spokeswoman Lara Wyss would not confirm any such agreement.

"Starbucks is currently exploring all options to expand its presence in the premium single-cup coffee category, beyond our initial entry with Starbucks Via Ready Brew," she told Reuters.

"Single-serve is still in the earliest stages and no clear delivery system has been established as the gold standard so it is important for us to look at all options," Wyss said.

Van Winkle reiterated a buy rating and $50 price target on Green Mountain, and estimated that "earnings-per-share can exceed $1 for each 5% market penetration, with a 25% household penetration looking achievable."

JPMorgan analyst John Ivankoe noted in December that "such a product will be incremental to Starbucks' store sales and could easily be a $1 billion revenue opportunity for Starbucks in the U.S. alone."

Indeed, Starbucks' Wyss likened the coffee company's plans to penetrate the single-cup coffee brewing market to the impact Apple's ( AAPL) iPhones had on the smartphone market.

She told the newswire that Starbucks' options include new partnerships, expansions of its Via instant coffee line or sales of single-cup brewers in its retail outlets.

"We don't have any specific announcements at this time ... but should have information in the near future," she said.

With all this in mind, what do you think? Is a Starbucks-Green Mountain partnership a good idea or is the coffee chain better off launching its own single-cup brewing machine? Vote in our poll and see what readers of TheStreet think.

Should Starbucks partner with Green Mountain Coffee Roasters?

Yes -- partnering with Green Mountain would help Starbucks capture the 80% single-cup brewing market share Green Mountain already dominates.
No -- Starbucks can dominate the at-home brewing market without a partnership and should launch its own single-cup brewing machine.

-- Written by Miriam Marcus Reimer in New York.

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