|Starbucks brews a bitter cup for its current partner Green Mountain Coffee Roasters.|
- 1. The Starbucks Verismo substantially undermines the pending Keurig
Vue system, Green Mountain's answer to the September 2012 expiration of two principal K-Cup patents. "This will result in K-Cups remaining GMCR's dominant platform, on which we anticipate considerable profit pressure due to competition from private label, partner brands, and other branded coffee companies," said Stifel analyst Mark Astrachan. "Further, given Starbucks' brand and distribution strengths, we anticipate Verismo will take share of the single-cup market. We anticipate this will negatively impact Keurig household brewer penetration, reducing GMCR's long-term earnings power."
- 2. Starbucks is pricing its Verismo pods in line with its K-Cups, and that places Starbucks into competition with itself, which implies several negatives for Green Mountain.
- 3. Starbucks could de-emphasize its relationship with Green Mountain in favor of its own higher profitability system.
- 4. Starbucks could also try to gain negotiating leverage with Green Mountain when its current agreement expires. Margin erosion at Green Mountain as it comes to rely more on sales of premium K-cups like Starbucks has always been a concern.
- 5. Starbucks Verismo may impact the brand allure of the Keurig system in its key distribution outlets. "Interestingly, higher price points on Verismo may result in consumers perceiving the K-Cup system as a mid-tier or value offering, which could force GMCR to increasingly compete on price, potentially reducing prices on brewers and/or K-Cups. Additionally, we believe retailers could reduce Keurig shelf space given Starbucks anticipates selling Verismo brewers and pods in many of the same channels (e.g., specialty stores like Bed Bath & Beyond and in FDM)," Astrachan wrote.
- 6. Starbucks has a big cash advantage.
Trading in Green Mountain Coffee Roasters has been volatile since Greenlight Capital hedge fund manager David Einhorn, famous for his short positions, revealed a