Starbucks: Multi-Pronged Single-Serve Strategy

Thursday, August 18th, 2011

Starbucks is pursuing the rapidly growing single-serve market — usually pegged at $4 billion currently on a global basis (about $100 million in the U.S.) — on at least two fronts.

In mid-March, Starbucks announced a deal with Green Mountain Coffee Roasters to manufacture, market and distribute Starbucks- and Tazo tea-branded K-Cup portion packs for the Keurig Single-Cup brewing system.

That deal will provide a significant platform for Starbucks to make single-serve portion packs available through food, drug, mass, club, specialty and department stores in the U.S. and Canada starting in the fall.

The companies also plan to expand Starbucks K-Cup packs and Keurig Single-Cup brewing system distribution to Starbucks stores, and to sell the K-Cups through the Green Mountain, Keurig and Starbucks Web sites starting in 2012.

However, in February, Starbucks had signed an agreement with Courtesy Products, the leading provider of in-room coffee service to U.S. hotels. Starbucks initially announced that that deal would make Starbucks ground coffees available in up to 500,000 luxury and premium hotel rooms across the U.S., for use in Courtesy’s CV1 in-room and on-demand brewed coffee system.

But in late March, at its annual shareholders meeting, Starbucks made it clear that its deal with Green Mountain in no way precludes offering its own brewing system — that in fact, its agreement with Courtesy includes offering an on-demand, single-cup system for Starbucks and Seattle’s Best ground coffee and Tazo teas for sale in multiple channels, exclusively through the Starbucks Global Consumer Products Group. The company’s release did not include launch timing.

After that announcement, a Morgan Stanley analyst told International Business Times that while aligning solely with Green Mountain could produce greater profitability for Starbucks in the short term, it might hamper fully leveraging the single-serve opportunity in the longer term.

Questions raised by the announcement of the machine to be offered with Courtesy, said IBT, include whether the system will be closed (offering only Starbucks brands); whether it will be a pod system or use filter bags similar to those used in Courtesy’s hotel-room machines; how much cheaper to the consumer and how much more profitable to Starbucks per serving this new system will be; and whether this makes it less likely that Starbucks will join Keurig on its next-gen system, scheduled to launch next year.

Whatever the answers, a UBS analyst stressed that single-serve brewing, along with breakfast/snack/beverage occasions at retail, premium coffee, and international expansion (especially in China), are the key reasons that UBS believes that Starbucks will deliver long-term, double-digit EPS growth.

by Karlene Lukovitz