On January 4th, I wrote a note titled “SBUX FUTURE - BRIGHT BUT NO GREEN MOUNTAIN” and in that note I said the following:
“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.”
According to the Chicago Tribune, Starbucks "is planning a big splash" into the single-serve market, with the company confirming to the newspaper that it is working on a new product for single-serve coffee machines. A Starbucks spokeswoman said the company will either make its own machines or partner with a coffee machine maker, and will sell the machines in its cafes.
SBUX’s battle with Kraft to gain control of the distribution of its packaged goods is an important milestone for the company as it can gain control of a very important sales channel, which will provide new avenues for growth. The single serve segment is a critical element of that strategy.
Importantly, Starbucks is not getting out of the Kraft agreement so it can sell Starbucks coffee in a in the Keurig machine. Gaining control over distribution is, as I described above, part of an overall strategy of gaining control of the brand at every stage of production and distribution.
With the pieces of the puzzle starting to come together, I believe that the last element will be SBUX acquiring PEET. SBUX’s move to own its supply chain validates the PEET business model. In addition, when SBUX gains control of its distribution business one way to show continued growth will be to introduce more brands and PEET’s is certainly a great brand. Importantly, there is a rich history between these two companies going back to the early 70's when Starbucks was founded.
My “coffee” strategy remains to be long SBUX and PEET and short GMCR.