Starbucks (SBUX) has had it pretty easy when it comes to the business of selling single-serve coffee pods called K-Cups -- simply mint money by licensing its powerful name to pod manufacturer Keurig Green Mountain (GMCR) .
But that cost-friendly arrangement for the Seattle-based coffee king may be about to change.
"We are 100% committed to the K-Cup market, but the one thing that is uncertain is if we will go at it alone," said Starbucks chairman and CEO Howard Schultz on a call with analysts Thursday evening. What Schultz was referring to was whether the impending acquisition of Keurig Green Mountain by a coffee competitor would force it to build its own K-Cup manufacturing platform.
Starbucks works with Kfee to make pods for its own Verismo single-serve coffee machine, according to a Starbucks spokesperson, but the Keurig-produced K-cups make up the majority of Starbucks' single-serve coffee business.
Keurig Green Mountain, the maker of the eponymous single-serve coffee machine, announced in December that it will be acquired by an investor group led by JAB Holding Companies for an eye-popping $13.9 billion. With the deal, Keurig -- which also produces various flavored pods under its own brand name -- will join a diverse portfolio of consumer-oriented companies. JAB owns controlling stakes in Jacobs Douwe Egberts, a coffee and tea giant that owns Gevalia, as well as other coffee brands that compete with Starbucks.
Starbucks is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio. Recently, he and co-manager Jack Mohr wrote of the stock "our conviction on the strength of the company's Chinese operations, as well as its overall potential for sustained value creation and continued execution, have increased with the latest earnings release."
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K-Cups have turned into a highly profitable business for Starbucks, which has about 17% share of the market according to UBS, in large part because it relies on Keurig for manufacturing.
Sales for Starbucks' channel development segment, which is mostly comprised of its K-Cup and packaged coffee businesses, rose 12.7% to $1.7 billion for the fiscal year ended Sept. 27. Operating profits grew at a faster pace, up 17.4%. At an operating margin of about 38%, the channel development was Starbucks' most profitable line of business last year.
In total, the channel development segment represented roughly 9% of the company's sales in the fiscal year.
And the momentum has continued into the new fiscal year. Sales for the channel development segment in the first quarter ended Dec. 27 increased 16% to $512.1 million, while operating margins rose to 37.7% from 35.6% a year earlier. Execs boasted on a call with analysts about Starbucks being the "number one K-Cup brand" and notching success with a recent introduction of hot cocoa pods.
Schultz moved quickly on Thursday's call to alleviate concerns that bringing K-Cup production in-house would stunt a key profit center. "Regardless of what we do, there would be no dilution in the delivery of product to market or in the margin we retain," Schultz said.