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SBUX’s battle with Kraft to gain control of its distribution is an important milestone for the company as it can gain control of a very important sales channel for the company, which will provide new avenues for growth. 

In my view, the recent article on Bloomberg regarding Starbucks, Kraft and the single serve segment misses the most important point.  The article rightly points out that the terms of the current deal with Kraft prohibit Starbucks from putting its coffee in the Keurig Home Brewer.  However, I believe Starbucks’ strategy is not focused on that area.  Starbucks is not getting out of the Kraft agreement so it can sell Starbucks coffee in a in the Keurig machine. 

The best analogy I can use to describe what will happen in the single serve market is that Starbucks will do to the single serve coffee maker what Apple did to the portable market for mp3 players.  By the end of FY2011, I believe we will be hearing that Starbucks is testing a Starbucks branded single serve coffee with new technology that is far superior that what is currently available.  The machine will likely be manufactured by a third party and sold in Starbucks stores, supermarkets and club stores.  For example, the company is working closely with Nuova Simonelli on a number of different types of machines.

I see Starbucks as posing a threat to Keurig’s 71% market share, not a benefit.  There is no doubt that growth of the single serve segment has cut into Starbucks’ grocery sales, but buying Green Mountain or aligning themselves to the Keurig brewer is not going to happen.  Starbucks has already made the mistake once of leaving control of the brand in the hands of Kraft, there are not going to make that same mistake with Keurig or Green Mountain. 

The recent success of VIA is a great example of Starbucks controlling and putting its marketing muscle behind it’s the instant single-serve product.  The introduction of VIA was about entering the “instant” coffee market and not the “single serve” segment.

In the short-term, the diatribes between Kraft and Starbucks will continue to fly around and the rumors about Green Mountain will continue.  Once Starbucks does get control of its distribution system, the opportunities for Starbucks will be made clearer.  At that time it will also make more sense as to why Starbucks should buy Peet’s Coffee & Tea. 

Howard Penney

Managing Director