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Yesterday, Reuters wrote a late day story on the SBUX/GMCR saga. The Reuters story completely goes against my theory. I’m sticking with my theory!

Reuters, citing a source close to the talks, said that “Starbucks Corp and Green Mountain Coffee Roasters are in partnership negotiations, a source close to the talks told Reuters on Monday, sending Green Mountain shares surging."  The really odd line in the story was this one: “The person close to the partnership talks would not say if the pending announcement would involve Green Mountain."  Are you kidding me?    

Have SBUX and GMCR talked?  I’m sure they have.  As the company has told me “they are exploring all their options.”  From where I sit, SBUX holds all the cards.  The single serve segment is important to SBUX but it's not really that important.  The U.S. coffee market is $34billion and the U.S. Grocery Coffee segment makes up $3.3 billion in sales.  The single serve segment represents $1.2B of the the U.S. Grocery sales.  It’s a big deal, but it means more to GMCR that it does to SBUX.

What is fascinating is that GMCR's market capitalization is 2x the entire U.S. Grocery coffee category and represent 50% of the entire US “specialty” coffee market.  Whether or not GMCR and SBUX make a deal (I'd be very, very surprised), the valuation of the company almost approaches that of its entire addressable market.  

Some additional thoughts:

  1. SBUX has the leverage not GMCR.
  2. SBUX has lots of partnerships.
  3. The current Kerug technology is not good enough for SBUX (why will version 2.0 work?).
  4. SBUX is not unhappy with the Tassimo technology.
  5. SBUX was unhappy with how Kraft handled the “brand” this includes the rollout of the single serve business.
  6. 80% of Starbucks customers don’t have a single brewer (Big opportunity for SBUX).

Maybe as SBUX and Kraft exit their agreement, a plan can be formulated involving the Tassimo technology?  After all, the Tassimo brewer is the preferred brewer of Hedgeye Risk Management!  The Tassimo technology was first introduced in France in 2004 and is now available in several countries in Western Europe as well as the U.S. and Canada.  The machines were developed by Kraft Foods, Inc.  New versions are now being manufactured by Bosch.

The battle for single serve coffee is brewing.  As I said before, the best analogy I can use to describe my prediction of 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. 

Howard Penney

Managing Director