Green Mountain Coffee Roasters' (GMCR) stock experienced an "Et tu, Brute?" moment following Starbucks' (SBUX) announcement regarding its latest foray into the single serve coffee market. But wait, is this really a fatal stabbing, or simply a wild swing and miss? Upon further examination, I think it is a "swing and miss."
This is actually only an announcement of an espresso maker that will not be marketed until Fall 2012 or later, and it looks like all SBUX really has right now is a photo of a Chinese made brewer which is actually available on the market right now for $79.99 under a different name. This cut rate espresso brewer is then coupled with a new alliance with a German company whose website currently only advertises and markets packaged "instant" goods, not coffee brewers.
Then we learn on the SBUX conference call that SBUX has absolutely no distribution capability or plan in place beyond its own stores. But, before further exploring the gaping holes in this new SBUX deal, it is first worthwhile to slightly rewind the clock and put things in context since history often repeats itself.
While SBUX would like to forget it, their first foray into single serve was not Via instant coffee as claimed by SBUX, but was in the form of T-discs used in the Kraft Tassimo brewer. Unfortunately for SBUX, Tassimo became the DVD-HD format, while Keurig became the successful surviving Blu-ray format. Then, Kraft and SBUX suddenly got a divorce, and speculation began as to whether SBUX coffee would become available in GMCR K-Cups.
During that time of speculation and during the behind the scenes negotiations, there was a "leaked" internal SBUX management memo indicating SBUX had made no decision on a single serve partner and indicating there were no clear leaders in the single serve field (even though Keurig had seventy-five percent or more of the single serve brewer market in the U.S.). The memo knocked GMCR stock down eight percent, and it was immediately noted this could be an intentional ploy by SBUX. In the days immediately prior to the leaked memo, SBUX also announced a single serve deal with Courtesy Products - which SBUX stated would put single serve SBUX coffee in up to 500,000 hotel rooms by the Fall of 2011:
SEATTLE and ST. LOUIS, Feb. 15, 2011 - Starbucks announced today that it is entering into an agreement with Courtesy Products, the nation's leading provider of in-room coffee service to hotels, to provide Starbucks ground coffees for use in Courtesy's patented CV1® in-room and on-demand brewed coffee system in up to 500,000 luxury and premium hotel rooms across the U.S. Starbucks plans to begin offering its premium quality coffees for the CV1 this fall.
The market took this as a sign SBUX would not enter into a deal with GMCR, which had its own hotel program and was in only a meager 125,000 hotel rooms as of the end of FY2010. SBUX spokespersons also began telling the media that SBUX was going to roll out a single serve at-home brewer to be produced by Courtesy. Now, as we sit here thirteen months after the SBUX press release, and six months after the deadline for the massive rollout of SBUX into 500,000 hotel rooms, one must ask: "How courteous is SBUX?" Well, the fact is, SBUX is not Courtesy and Courtesy is not SBUX.
The only reference to SBUX coffee on the Courtesy Products website today is the February 2011 SBUX press release - and it does not taste so good. No SBUX coffee or SBUX brewers in sight anywhere over at Courtesy Products. So, as of today, Courtesy has not sold or distributed SBUX coffee to one hotel room or one customer, much less 500,000 hotel rooms. SBUX has not rolled out or produced a Courtesy brewer for at home use. On the other hand, GMCR, without any fanfare or press releases, has soldiered on and increased the number of Keurig brewers in hotel rooms by fifty percent in one year, up to 188,000 in-room Keurig hotel brewers, as of the end of GMCR FY 2011.
Then, not too long after the leaked memo and the Courtesy Products red herring press release, SBUX announced on March 10, 2011 it had reached an agreement with GMCR for SBUX to be in K-Cups as the exclusive "super-premium" K-Cup coffee brand. As a result, we now hear SBUX suddenly blowing its horn about 100 million SBUX K-Cups shipped within the first eight weeks of SBUX k-cup rollout (while SBUX fails to mention that in comparison it took 10 months for SBUX to sell 100 million dollars worth of VIA instant coffee, making K-Cups at least 300 percent more successful than SBUX's coveted instant coffee VIA).
Also not mentioned by SBUX is the fact that there were stories even questioning the legitimacy of the VIA sales numbers since some stores admittedly rang up other products as VIA sales due to pressure from management to sell VIA (who really drinks instant coffee today, anyway?)
In light of this historical background, we move to the recent press release by SBUX which coincidentally comes just as GMCR reported great sales numbers, rolled out its new Vue brewer, and as GMCR anticipates the roll out of the Keurig-Lavazza espresso brewer later this year:
SEATTLE, March 08, 2012 - As part of its commitment to bring exceptional coffee and espresso beverages to its customers, Starbucks Coffee Company today announced the first at-home premium single cup machine that meets its commitment to taste and quality, the Verismo® system by Starbucks. The Verismo® system by Starbucks crafts both Starbucks-quality espresso beverages, from lattes to americanos, and brewed coffee consistently and conveniently one cup at a time.
Starbucks latest premium single cup innovation combines Starbucks signature Espresso Roast and drink recipes with precise Swiss engineering and a patent-pending high pressure extraction capability, giving customers the ability to create Starbucks-quality beverages. Through a strategic relationship with privately-held, Germany-based Krueger GmbH & Co. KG, Starbucks will market and sell the premium Verismo® system by Starbucks and Starbucks-sourced 100 percent arabica coffee and milk pods starting this fall.
This news sent GMCR stock into a steep dive. It is well known from previously published information that GMCR is developing an espresso machine in conjunction with Italy's Luigi Lavazza, with the potential arrangement announced in Fall 2010 and a contract signing announced in January 2011. This agreement is for co-development and marketing of an espresso machine targeted at the North American market. The GMCR espresso machine is targeted for a holiday 2012 launch, with SBUX now targeting that same timeframe.
Furthermore, the reference by SBUX to "and brewed coffee" capabilities in the SBUX release seemingly puts SBUX in direct competition with GMCR with regard to the existing Keurig brewers. In the accompanying conference call, Howard Schultz claimed SBUX had been fully "transparent" about its development of this brewer with GMCR. Apparently bombarded with inquiries, GMCR appropriately and immediately responded via a regulation FD filing with the SEC, stating that despite SBUX claims, GMCR was advised only "recently" about the new SBUX brewing system, and GMCR had absolutely no advance knowledge from SBUX about the system making regular brewed coffee:
Item 7.01 Regulation FD Disclosure
We recently learned of Starbucks' planned initiative in the espresso-based single-cup category. As previously announced, we are working with Luigi Lavazza S.p.A. ("Lavazza") to co-develop a new single-serve espresso-based machine that we believe would complement our Keurig ® Single Cup Brewers. According to NPD Group for consumer market research data, espresso machines represented 2.7% of the total coffee and espresso maker units sold in the United States during calendar year 2011.
Prior to the press release issued by Starbucks yesterday and their subsequent public comments, however, we were not made aware of any additional capabilities of their planned espresso system. We look forward to learning more about Starbucks' new espresso system as it moves toward launch and to continuing to grow the single-serve filtered-coffee opportunity in North America with our Keurig ® system partners, including Starbucks.
In addition to noting SBUX was actually less than transparent with GMCR as shown by the SEC filing, one needs to explore whether the revolutionary new SBUX brewer is actually real or transparent. It has been discovered that the single photo released by SBUX of the new Verismo espresso brewer is the exact same as the low end Aldi Expressi brewer selling $79.95, less only the Verismo name on the handle in the SBUX photo. There is an extensive, but not so hot review, of this brewer, including photos of the box showing it is actually a K-fee system "Made in China" but "Engineered in Switzerland."
Of course, I do expect anything from SBUX to be more than just the one current photo with "Verismo" photo-shopped on to the handle, but how is this going to play out in the real world? The Krueger company does not even advertise or sell brewers on its website. In fact, Krueger has only one United States location listed which is not identified as a Krueger manufacturing/packaging plant, and operates as "Instant Products of America" in Columbus, Indiana.
So Krueger, along with some unnamed Chinese manufacturer, is going to develop, test, manufacture, package, and have on SBUX shelves a new espresso brewer in the next seven or eight months? How will this stack up against the Lavazza-Keurig effort, which has been in development for 15 months already?
More importantly, will there even be a SBUX-Krueger espresso brewer, or is this all just further posturing by SBUX in the same manner as the 500,000 hotel room deal with Courtesy Products? Stated another way, this may be a case of "seller beware". So, Achtung! Krueger, because instead of a sweet dream, this could simply be the beginning of your SBUX nightmare.
In concluding, I do note I certainly lack the stellar credentials of the GMCR bashers and short sellers. I am not a convicted felon like Sam Antar, I have not been subject to a record $11 million fine for insider trading like David Einhorn, and I am not a CNBC windbag who feigns ignorance on the air regarding the well known upcoming Keurig-Lavazza espresso brewer. I am just observing the facts overlooked by the mainstream media.
Disclosure: I am long GMCR.
Additional disclosure: I have no connection with GMCR other than a long stock position and a Keurig brewer on my kitchen counter. I have no position in SBUX. I have no intention to trade any stock mentioned herein within three days of the publishing of this article. However, if you and 24,999 of your friends will review this article, I will receive a $250 check from Seeking Alpha for writing this article and I might use it to buy a new Keurig Vue brewer, or I might have to give it to my 16 year old daughter who thinks the iPad2 is affordable with the recent price reduction.