Single Serve Coffee Is a Good Bet for Starbucks

Single serve coffee represents a meaningful opportunity for Starbucks Corp. (NASDAQ: SBUX) as it is a $4 billion a year market globally with U.S. growing rapidly from its current base of about $100 million, according to RBC Capital Markets.

Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) holds a dominant share of the U.S. market at about 80 percent owing to several patents surrounding its K-cup.

Starbucks said on February 15 that it is planning to expand its presence in the market for premium single-serve coffee drinks. It agreed with Courtesy Products, a provider of in-room coffee service to hotels, to provide Starbucks coffee to a number of premium hotels across the U.S., mostly by this fall season. Courtesy will provide Starbuck's ground coffee for use via its patented brewed coffee system, across 500,000 luxury and premium hotel rooms.

The single-serve coffee category in the U.S. is in its infant stage of growth, and the company is seeking to explore opportunities in this segment, said Jeff Hansberry, president, Starbucks Consumer Products Group.

Following our very successful introduction of Starbucks VIA Ready Brew in the U.S. and into a growing number of international markets, Starbucks will continue to explore the many single-serve and on-the-go solutions and options available to us, and to participate in those where we can better and more conveniently serve our customers wherever they may be, said Hansberry.

Starbucks is in talks with smaller rival Green Mountain Coffee Roasters to carve a partnership in the U.S. single-serve coffee market that is led by Green Mountain's Keurig brewer, which has an 80 percent market share, as its 12-year arrangement with Kraft Foods (NYSE: KFT) is coming to an end, according to media reports.

There are several options available to Starbucks for entering the single serve market: create and sell its own machines and single serve coffee, license Green Mountain’s K-cup technology, or sell its own K-cup after Green Mountain’s patents expire around mid-2012, said Larry Miller, an analyst at RBC Capital Markets.

Starbucks' VIA Ready Brew was its first entry into the newly-emerging single-cup segment. As per a Nielsen Data, in the past year, premium single-cup accounted for over two thirds of the dollar growth in total U.S. coffee category, with Starbucks VIA driving 40 percent of the growth. Since its launch, Starbucks VIA has generated over $180 million in sales.

Miller believes Starbucks will enter the single serve market upon expiration of the Green Mountain patents. Starbucks believes a single serve coffee line would cannibalize packaged coffee line more than its VIA lines.

Morgan Stanley analyst said the 30 percent of current single serve coffee users may switch to Starbucks if offered. Morgan Stanley sees single serve as a big part of Starbucks' future, and if the company aligns with Green Mountain it could see more profitability in the short term, but may be hampered in the longer term.

Starbucks could be further pushed to entering the single-serve market alone, as Green Mountain's K-cup technology patent expires in 2012, the Morgan Stanley report stated.