Starbucks offers plans on packaged coffee

Company to bring distribution in house after Kraft deal ends

Amid growing speculation surrounding a new distribution partner for Starbucks Corp.'s $500 million packaged coffee business, the Seattle-based company said Tuesday it will work in house when its 12-year agreement with Kraft Foods Inc. ends next year.

Alan Hilowitz, a Starbucks spokesman, said late Tuesday in an e-mail to Nation’s Restaurant News that the company could not respond to speculation or rumor on potential partners after an analyst report cited Peet’s Coffee & Tea as a possible match.

“I can say that we are well on our way to building an exceptional infrastructure to support our global consumer products business for the future,” he said.

Starbucks has been distributing its new VIA Ready Brew instant coffee — which has reached $135 million in sales in its first year — to grocery stores with the help of Jacksonville, Fla.-based Acosta Sales & Marketing as a broker, Hilowitz said.

“We intend to build upon that relationship and work with Acosta in the same capacity for our packaged coffee business after March 1, 2011,” when Starbucks has said the contract with Kraft will end, said Hilowitz.

On Monday, Kraft said it had initiated an arbitration proceeding with Starbucks, the latest in the ongoing dispute that has resulted from Starbucks’ announcement earlier this month that its relationship with Kraft was coming to a close. Terms of the contract remain in dispute.

In addition, Starbucks’ agreement with Kraft to distribute its Tazo Tea, handled separately from the packaged coffee, comes to an end this year, Hilowitz said. The coffeehouse company plans to take on the distribution, sales and marketing of its Tazo filterbag teas and tea latte concentrates, again working with Acosta as a broker for that business.

Starbucks’ ready-to-drink beverages, such as its bottled Frappuccino drinks, are produced, distributed and marketed under a partnership with Pepsi North America. Starbucks brand ice creams are produced, marketed and distributed by Unilever.

“Our work with both of these companies continues to go exceptionally well and we have no plans to change those relationships,” said Hilowitz.

When Starbucks and Kraft began to dispute their relationship, analysts began to look for signs that Starbucks would find a new mate.

A report issued Tuesday by Steve West, an analyst with Stifel Nicolaus, speculated that Emeryville, Calif.-based Peet’s Coffee would make a possible new partner for Starbucks’ bagged coffee distribution. West noted no knowledge of merger-and-acquisition discussions between the two coffee companies or other parties.

“When Starbucks and Kraft part ways, we believe Peet’s could be a nice fit to deliver Starbucks into the distribution business,” West wrote.

Peet’s and Starbucks have ties that go back to the beginning of both companies. Peet’s was founded by Alfred Peet in 1966 in Berkeley, Calif., and was widely reported to be the inspiration for Starbucks. The original founders of Starbucks bought coffee beans from Peet for their first year of business in 1971.

One of Starbucks founders, Jerry Baldwin, with former Peet’s partners, bought four Peet’s stores in the San Francisco Bay area and later sold Starbucks to Howard Schultz, now Starbucks chairman, chief executive and president, so they could focus on Peet’s.

West suggests that Starbucks could acquire Peet’s at a 30-percent to 40-percent premium to its recent stock price of about $38, which could push the stock price to around $54.

West noted that Peet’s has relationships with major retailers, and joining the two brands would allow for what he calls a “triad of premium brands” on store shelves, with Peet’s offering super-premium, Starbucks as premium and Starbucks’ secondary brand Seattle’s Best Coffee positioned as “fighting” premium.

Peet’s also holds licensing rights to the Godiva chocolate brand and distributes Godiva-flavored coffees.

The pairing of Starbucks with Peet’s and Godiva-flavored coffees also would give Starbucks leverage if it enters the single-cup brewer market, which many see as a huge area of growth in the coffee industry.

Together, Starbucks and Peet’s could have enough “market weight nationally across all retail channels to challenge the supremacy of Green Mountain Coffee Roasters with its K-Cup product, which currently dominates the single-cup world,” West wrote.

Contact Lisa Jennings at [email protected] [3].

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