Friendly Fire For Green Mountain Coffee

By Billy Fisher | March 14, 2012 AAA

All is fair in love and war in the coffee world apparently. Shares of Green Mountain Coffee Roasters (Nasdaq:GMCR) took a 15.8% haircut on Friday after Starbucks announced plans to launch a new single-serve coffee brewer. It remains to be seen whether this Starbucks brewer will make any headway in the single-serve coffee market which Green Mountain has dominated, but the announcement is curious on several fronts.

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Trojan Horse
It was only last March when Starbucks entered into a "strategic relationship" with Green Mountain whereby it would begin to develop K-Cup portion packs for Green Mountain Keurig single-serve brewers. At the time, the move seemed to be a win-win situation for both companies. And that may still be the case, but it may turn out to be more of a lopsided deal in Starbucks' favor.

This is not the first time that Starbucks has made a push into the home brewing arena. Aside from the partnership with Green Mountain last spring, Starbucks unveiled packets of Via instant coffee in 2009. It also markets espresso pods for home espresso machines. The new machine, called Verismo, is expected to go on sale this fall, and will be capable of making both espresso and brewed coffee. (For related reading, see Dunkin' Brands Definitely A Hot Cup Of Coffee.)

Verismo will make for interesting competition, but it will take a lot to slow Green Mountain's momentum. Aside from Starbucks, it also faces competition in the K-Cup market from the likes of companies such as Dunkin' Brands Group (Nasdaq:DNKN) and Caribou Coffee Company (Nasdaq:CBOU), yet it has still managed to grow at a torrid pace.

In Q1, Green Mountain posted a 115% increase in net sales of its K-Cup packs when compared to the prior year quarter. Sales of the company's Keurig brewers and accessories were not all that shabby either. They grew by 76% over the same period.

The Bottom Line
This move by Starbucks isn't the best news in the world for Green Mountain or its shareholders. That being said, Green Mountain is the gold standard in the single-serve home brewing market and it might be a while before Starbucks will be able to show if it can even make a dent in Green Mountain's market share. The investment opportunity that has come out of this announcement is determining whether the market has overacted, or if in fact there may soon be a new sheriff in town in the single-serve market.

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At the time of writing, Billy Fisher did not own shares in any of the companies mentioned in this article.

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