Early morning riders on the San Francisco underground hop off the train for one of two reasons: work or coffee. Stations may have street names like Market, Montgomery, and Embarcadero but to caffeine-seeking commuters they are either Peet’s or Starbucks stops.
Alfred Peet, founder of Peet’s Coffee & Tea, inspired the inexperienced investors that launched Starbucks and supplied the coffee that brought fame to the then-tiny Seattle retailer. Starbucks has since become the world’s largest chain of coffee shops – valued at $85 billion and thousands beyond Peets store count – yet Peets has prospered, viewed by loyal grocery and coffee shop consumers as an ultra-premium roaster.
Peets greatly enhanced its coffee credentials last fall with the acquisition of Portland-based Stumptown Coffee Roasters and Chicago-based Intelligentsia. Although these well-known third-wave roasters own fewer than 25 shops combined, each has a sterling reputation as super-premium retailers with strong sales in grocery and specialty food. Stumptown, for example, is a market leader in bottled cold-brewed coffee. Combine this with the Midwest-based family-friendly Caribou Coffee and you begin to see that JDE (Jacobs Douwe Egberts) intends to use a multi-brand retail strategy to challenge monolithic Starbucks.
The above faceoff would normally be considered a bar fight given the 23,571 existing Starbucks locations, but JDE’s purchase of Keurig Green Mountain for $13.9 billion could lead to retail combat on a global scale.
In January Starbucks c.e.o. Howard Schultz told investors “I want to assure retailers, the millions of consumers who demand Starbucks branded coffees to their Keurig brewers, many of whom have told us that they actually purchased a Keurig brewer only after Starbucks coffee became available in the platform and at the market that we are in the K-Cup business to stay.”
He then issued this warning, “However, at this moment, the only matter that remains unresolved is whether we will be doing so in conjunction with Keurig or on our own.”
Industry observers are watching closely as this threat plays out.
Sales of Starbucks-branded K-Cups grew 20% last year, increasing the company’s market share to 17.2%. Starbucks remains the best selling K-Cup brand, growing 13.4% year-on-year, according to Trefis.
Starbucks strategists initially were surprised at the remarkable growth of single-serve capsules. Instead of buying multi-million dollar filling and packing equipment at the onset to fill their own capsules, Starbucks opted to license the technology and work closely with Keurig.
The decision boosted brewer sales at a critical time, allowing Keurig to subidize the expansion of the segment by offering home brewers at prices households could afford.
Keurig would still be an office coffee supplier had it not negotiated a 6.2-cent royalty on the billions of capsules sold in the past five years.
This is because brewers are inherently more costly than the price households wish to pay. Financing market penetration of nearly one-third of American households cost billions. While brewer sales account for 16% of Keurig’s revenue, it was royalties and profits from manufacturing capsules that made it possible. Royalties still account for 4.6% of company revenue. Capsule sales account for 80%, according to Trefis market research.