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Starbucks, Green Mountain, Still Getting Together for Coffee


A few weeks after launching its own home brewing system, Starbucks (SBUX) is telling the world it's still in a coffee klatch with Green Mountain Coffee Roasters (GMCR).

Green Mountain shares had tanked by 16% two weeks ago on the announcement that Starbucks was launching its Verismo single-cup coffee system.

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On Wednesday morning, when Starbucks and Green Mountain announced that Starbucks' lineup of single-serve coffee cups would be available on the new Vue system from Green Mountain, Green Mountain shares made up some of that drop, rising 6% on a full day's trading volume in the first hour of the market session.

Green Mountain, Starbucks: Still BFFs

Green Mountain is a heavily shorted stock (18% of float, and a trading statistic often magnified by the long-only institutional ownership that does not trade) and the reaction to any positive headline about the Starbucks relationship could cause the stock to rally.

The joint release from Starbucks and Green Mountain was short on details. It said that the Keurig machine is the exclusive low-pressure (30 psi or under), single cup brewing system of its kind offering fresh-brewed Starbucks coffee and Tazo tea.

The key term in this agreement is "low pressure" when it comes to assessing the superficial appearance that Starbucks is now standing behind its Green Mountain deal as opposed to trying to unseat the home brewing empire.

Here is what Starbucks had to say in the Verismo launch release: "The premium single-cup segment is the fastest-growing business within the global coffee industry," according to Howard Schultz, Starbucks chairman, president and CEO. "We have long believed that the biggest prize within the segment is a high-pressure system."

At the time of the Verismo announcement, Stifel analyst Mark Astrachan, one of the few analysts on Wall Street to be early and correct in advising investors to sell Green Mountain shares last year, laid out six reasons why Starbucks' Verismo will produce much more pain for Green Mountain earnings and margins, and why investors should continue to sell shares.

None of the bearish take on Green Mountain assumed the two companies would no longer work together, but that the leverage might shift to Starbucks in the relationship and the Verismo system might create branding issues for Keurig in a market with limited shelf space.

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