Italian Coffee Treading on Starbucks Turf?

Includes: MAR, MDLZ, SBUX
by: World Market Pulse

There has been widespread Wall Street optimism, especially in the food and beverage sector, after Starbucks Corp.'s (NASDAQ:SBUX) impressive quarter results announced last week. But the coffee major has publicly announced its willingness to part ways with Kraft Foods Inc. (KFT), and an upscale Italian coffee company, IllyCaffe SpA, is making inroads onto Starbucks' turf by serving coffee to well-heeled travelers in upscale hotels, two moves that could potentially shake up the single-cup coffee market in U.S. grocery stores.

Italy based coffee major IllyCaffe SpA's new business plan to include hotel business is increasingly serving up a big challenge to Starbucks. Illy coffee is now served in 2,000 hotels around the world, up from about 700 five years ago, and Mr. Andrea Illy, chief executive of the company, says he plans to double the brand's hotel business in the next five years.

For the past two years, Illy has been signing contracts with U.S. cafes that agree to serve its brand exclusively. Now, it's aggressively pursuing business at hotels around the world. Testimony of IllyCaffe's growth plans is its partnership with the JW Marriott Marquis Miami, an upscale Marriott International Inc. (NYSE:MAR) hotel that opened in October, which serves Illy coffee in a pool-side cabana, at an Illy-branded coffee bar in the lobby that Illy helped design, and in its restaurants and banquet rooms.

Starbucks, which dominates U.S. coffee culture with more than 11,000 retail stores in the U.S. and offerings at 15,000 U.S. food-service locations, including hotels and restaurants, has downplayed any substantial threat from the Italian company, saying it's been delivering a high-quality specialty coffee experience in hotels, restaurants and meeting spaces since 1994.

Starbucks-Kraft Deal

Even as grocery stores are becoming an increasingly important distribution channel for Starbuck's products, the company has publicly announced its willingness to part ways with Kraft Foods, a move that could shake up the single-cup coffee market in U.S. grocery stores. Starbucks' public statement about its intention to end the deal sparked a tit-for-tat exchange of press releases, with both companies accusing the other of having improperly characterized the terms of the pact. Kraft Foods, which also surprised Wall Street with its profit report, said it was too early to say what the impact of the lost agreement would be on its results. Kraft, which makes coffee under the Maxwell House brand, has been distributing packaged coffee for Starbucks since 1998. Analysts believe that if and when the deal is terminated, it could mark a major shift for Starbucks' consumer-packed business, a key building block in Chief Executive Howard Schultz's strategy to drive future growth for the nation's largest coffee-shop chain.

Last year Starbucks made a surprising entry into the single-cup coffee market when it unveiled Via, the instant coffee and customized frappuccinos that racked up $135 million in first-year sales. According to analysts at WSJ, Via, along with Starbucks' customer-loyalty program, have been the main catalysts driving traffic to the coffee chain's stores during the fiscal fourth quarter, helping it post higher-than-expected earnings.

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