What Unilever Can Learn From The Kraft-Starbucks Dispute

| About: Unilever Plc (UL)
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Unilever (NYSE:UL) entered into an agreement with Green Mountain Coffee Roasters (NASDAQ:GMCR) in March this year to offer Lipton hot and iced teas in K-Cup and Vue packs for Keurig single cup brewing systems. Another similar deal between Kraft (KRFT) and Starbucks (NASDAQ:SBUX), which turned sour in 2011, can be a great case example for Unilever to ensure its bargain of the deal.

Unilever is one of the world’s leading suppliers of food, home and personal care products with more than $68 billion annual turnover in 2012. The company has a presence in over 190 countries with iconic brands like Lipton, Dove, Luxa, Becel, BlueBand, Knorr, Hellmann’s, Axe, Wall’s, Surf and Close-up, etc.

Green Mountain – Unilever Deal

Unilever entered into an agreement with Green Mountain Coffee Roasters in March this year to offer Lipton hot and iced teas in K-Cup and Vue packs for Keurig single cup brewing systems. [1] Unilever is the world leader in the tea market with its Lipton brand, as it owns over 11.5% share in the $34 billion tea beverage market. Lipton is one of the oldest tea brands in the world and is available in different variants, including leaf tea, infusions and ready-to-drink iced tea. Unilever generated revenues of over $4.5 billion in 2012 from Lipton beverages, up 4.6% year-on-year.

Green Mountain Coffee Roasters dominates the U.S. home brewing market with more than 70% share, [2] selling more than 200 varieties of K-Cup portion packs and about $4 billion in annual turnover. See our previous analysis for the deals’ impact on Green Mountain Coffee Roasters.

The deal is a big contract for Green Mountain Coffee Roasters as it could help the company lift the sales of Vue brewers, which have been lagging for a while now. For Unilever, this deal provides a great opportunity to capture the tea capsules market and the out-of-home tea market which have shown tremendous growth since 2008, as users of Keurig single cup brewing systems would be able to brew tea from the same machine. Unilever has been expanding its personal care and packaged food businesses inorganically over the years, but the main strategy for the growth of its Lipton brand remains to grow organically.

How Does It Link With The Kraft-Starbucks’ Dispute?

Kraft and Starbucks broke their 13-year old contract in 2011, making allegations on each other. Kraft claimed that Starbucks unilaterally decided to end its agreement while Starbucks said Kraft failed to aggressively promote its brands. Prior to the dispute, Kraft used to package and sell Starbucks’ coffees including whole beans and ground coffee to grocery stores and other retailers. [2]

The Unilever-Green Mountain deal involves the latter to pack and distribute the former’s Lipton brand of teas. The terms of this deal has an inherent conflict of interest, as K-Cups filled with Lipton beverages would compete directly with Green Mountain’s line of high margin coffees. The sales of Lipton K-cups may cannibalize Green Mountain’s coffee sales. [1]

The deal between Unilever and Green Mountain Coffee Roasters has great potential given the current market leadership of the latter. Having said that, Unilever should be prepared in case the synergies of the deal do not materialize. Also, Green Mountain Coffee Roasters still has a few years in hand before its patent for Vue brewers expire. The sales may take a hit after the expiry of the patent. So Unilever could make use of the time in hand to forge other agreements so that the possible drop in sales as a result of any issue with Green Mountain Coffee Roasters does not hurt the overall top line for Lipton. It may also consider entering into a deal with other appliance manufacturers to develop its own brand of brewers. Although, these are just some of the options, we hope the deal proves profitable to both the companies.

Disclosure: No positions.