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Starbucks’ single-cup deal could mean $200M in year one

In a long-expected move, and one that could net Starbucks Corp. as much as $200 million in incremental sales during year one, according to an analyst, the largest coffeehouse chain finalized its licensing deal for single-cup distribution.

Green Mountain Coffee Roasters Inc. will partner with Seattle-based Starbucks Corp. to help the coffeehouse giant stake its claim in the $2 billion, single-cup premium coffee category.

Terms of the deal announced Thursday were not disclosed. The licensing relationship will allow for the manufacturing, marketing, distribution and sale of Starbucks and Tazo Tea brand K-Cup portion packs for use in Green Mountain’s Keurig Single-Cup brewing system.

The news boosted Starbucks’ stock price more than 9.9 percent on Thursday, to close at $37.97. During the day Thursday, the stock hit a new annual high of $38.21.

Analysts hailed the move, saying the sale of single-cup Starbucks coffee and Tazo tea for the home Keurig user will generate incremental sales similar to the company’s instant Via Ready Brew, which in its first year surpassed $135 million in sales.

Securities analyst Sharon Zackfia of William Blair & Co. wrote in a report Thursday that sales of K-Cups will largely be incremental, as sales of Via have been, “with some potential modest cannibalization of whole bean sales, but at a very favorable margin.”

She projected that Starbucks’ K-Cup sales could reach between $100 million and $200 million in the first year.

Zackfia also noted that Starbucks might look for other partners to pursue the single-cup category overseas. While Keurig is the dominant partner in the United States, she wrote, Sara Lee’s Senseo system is the leader in international markets.

Under the deal, Starbucks will be the exclusive super-premium coffee brand produced by Green Mountain for K-Cup brewers. The K-Cup portion packs will be available in a variety of retail locations across the United States and Canada, beginning this fall.

Next year, Starbucks stores will begin selling the single-cup packs and the Keurig brewing system, and the products also will be available for sale online through Green Mountain and Starbucks websites.

Howard Schultz, Starbucks’ chair, president and chief executive, has long pointed to the growth opportunity in the single-cup business.

“Today’s announcement is a win for Starbucks, a win for [Green Mountain] and, most importantly, a win for consumers who want to enjoy Starbucks coffee with the Keurig Single-Cup Brewing system,” he said. “Our research shows that more than 80 percent of current Starbucks customers in the U.S. do not yet own a single-cup brewer and our relationship will enable Starbucks customers to enjoy perfectly brewed Starbucks coffee at home, one quality cup at a time.”

Prior to its breakup March 1, Starbucks previously had an exclusive deal with Kraft Foods to develop products for its Tassimo single-cup system.

Analyst Mark Kalinowski of Janney Capital Markets on Thursday called the Green Mountain partnership “a clear positive” for Starbucks.

“With Starbucks joining the Keurig platform, it removes Starbucks as a potential ‘going-it-alone’ competitor to Green Mountain Coffee, and, in turn, cements Keurig as the market-leading single-cup platform in the U.S. for what we believe will be many, many years to come,” he wrote.

Kalinowski noted that the Dunkin’ Donuts brand also is offering K-Cup products in partnership with Green Mountain, which will likely spur more consumers to buy a Keurig brewing system. That, in turn, will allow Starbucks to sell more of its K-Cups, he said.

Analyst David Tarantino of Baird Equity Research said Starbucks’ new partnership with Green Mountain appears to lock Peet’s Coffee out of a deal, a marriage that also had been speculated.

Peet’s likely will have to wait to enter the Keurig system until the patents expire — which Tarantino said could happen in late 2012 — or find another partner to pursue a single-cup strategy.

Contact Lisa Jennings at [email protected].

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