Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Starbucks Joins the Onslaught of Competition Against Partner Green Mountain


Starbucks isn't going to settle for just two-thirds of the profit on the K-cups Green Mountain sells. The coffee giant is going to market its own competing machine to expand its share of the at-home coffee market.

Et tu, Starbucks?

Starbucks (SBUX) really stabbed its partner Green Mountain Coffee Roasters (GMCR) in the back last night when the ubiquitous coffee chain said that it will produce its own competitor to Green Mountain's Keurig single-serve coffee system.

The Starbucks machine will be called "Verismo" (Italian for "realism," also the name of a fin de siècle Italian literary movement) and will be able to make quick single-serve coffees, espressos, and lattes.

Shares of Green Mountain plunged as much as 24% in the pre-market today, and stabilized later. So far today, the stock price is down over 14%. Starbucks shares are up 2.28%.

Other competitors are ganging up on the Vermont-based company. Wal-Mart (WMT) will start selling its own single-serve system. Nestle's Nespresso, currently the world leader in sing-serve coffee, is also trying to ramp up it's market share in the US.

Starbucks will still sell their branded K-cups even after it releases a competing system.

Green Mountain, which once called the Keurig system the "iPod of coffee" followed the razor/razor blade model: Sell the machine near cost, and sell the K-cups at a high margin. This is similar to Amazon's (AMZN) Kindle, HP's (HPQ) printers, and Kodak's (EK) film. These business models are essentially a license to print money, but once the patent expires this fall, that party will be over.

The loudest critic of Green Mountain, hedge fund manager David Einhorn, pointed out in a slideshow last year that the company faced competition even before the patent expires. Einhorn thinks that the market for Keurig machines, which are more expensive than drip coffee machines and more expensive by the cup, is smaller than Green Mountain estimates. He also makes the point that Starbucks already makes two-thirds of the profits on the Starbucks-branded K-cups that currently sell in Starbucks stores.

When drug companies lose the patents for profitable drugs, they usually hope that the next cash cow is close behind in the pipeline. Green Mountain is trying to do this with its new Vue system, and a future joint project with Lavazza. The myriad systems that will hit the market this year, including the Starbucks machine, will ultimately end up competing on price.

Lawrence J. Blanford, Green Mountain's CEO and President, commented on the Starbucks announcement this morning. He hopes that the company's dominant position will stick even after the patent expires.

"The two companies continue to collaborate with each other in the low-pressure Keurig Single Cup Brewing system in North America. As a leader and one of the few long-time participants in single-cup premium coffee brewing, we agree that there also is opportunity for complementary high-pressure espresso-based systems, as evident by our joint development work with Luigi Lavazza S.p.A. on a high-pressure capsule-based espresso system targeting North American consumers," he said.

Twitter: @vincent_trivett
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Featured Videos