Ken Shreve, Profolio Manager at the Street.com reports at Yahoo Finance that when you think of coffee and Wall Street, it’s easy to point to Starbucks as the stand-alone coffee brand. After rapid expansion and perhaps a loss of focus, Starbucks has engineered an impressive turnaround by shuttering stores and regaining focus.
But the real story in coffee recently has been in the single-cup coffee market — a market where Starbucks hasn’t been able to make meaningful inroads. The dominant company here is Green Mountain Coffee Roasters. “K-cups,” which contain a filter and a single serving of coffee, are used in Green Mountain’s fast-selling Keurig coffee brewers, a brand it acquired in 2006.
Green Mountain sells more than 100 coffee selections under its own name, as well as under the Newman’s Own Organics brand and others, but its underlying goal is to sell as many Keurig machines as possible to businesses, homes and hotels. The real profit driver is the K-cups. Earlier this year, Green Mountain announced a deal to distribute Keurig brewers and K-cups in over 3,000 Wal-Mart locations.
Peet’s Coffee and Tea wanted in on the K-cup market and offered to buy Diedrich Coffee for $26 a share. Diedrich is a licensee of Green Mountain, but Green Mountain used its sheer size and financial muscle to swoop in and ultimately win the bidding war for Diedrich. It paid $290 million, or about $35 a share. Green Mountain had to pay a termination fee of $8.5 million to Peet’s.
Acquiring licensees is a familiar strategy for Green Mountain. In September 2008, Green Mountain acquired the wholesale and supply-chain business of Tully’s Coffee for $40.3 million. Last month, Green Mountain paid $157 million for the wholesale operations of Timothy’s Coffees of the World. Prior to the Tully’s buy, Green Mountain sold its coffee and K-cups via 4,800 supermarkets mainly on the East Coast. With the Tully’s brand, Green Mountain now has a major West Coast presence.
It’s estimated that Green Mountain controls about 80% of the single-cup coffee market. Patents for its K-cup technology expire in 2012, but some analysts say that downside is limited because of Green Mountain’s first-to-market position and sheer domain.
Read More at: Yahoo Finance