Is Starbucks (SBUX) Placing Too Much Hope in Via Line?

Instant coffee is a big new sales source for company

   

Starbucks (NASDAQ: SBUX) made a huge splash with its line of Via Ready Brew java, which tallied $100 million in sales after only 10 months on the market. The Via packets have been a big hit due to portability, a relatively low price tag of $1 a drink — and of course, a Starbucks quality flavor.

With the instant coffee marketplace expanding to upwards of $300 million thanks to Via’s reinvention of the caffeinated drink, Starbucks is now looking to take its Ready Brew technology to the next level with a new line of flavored drinks.

But is the move diluting Starbucks business?

We’ll get to the details on the new SBUX line in a moment, but it’s worth noting that according to some estimates the instant coffee business now surpasses the $265 million premium flavored coffee market – what has long been Starbucks’ core business. And with each passing day, it appears that Starbucks moves farther and farther away from just selling premium coffee to retail customers.

Early this spring, Starbucks retail products saw a big push from the Seattle company, including bottled frappucinos and a new line of ice cream flavors to be stocked at your local grocery store.

Then, Starbucks rebranded Seattle Best products in part to build up institutional sales at food service providers and restaurants.

In June, there was news of Starbucks beer and wine bars popping up in test markets. And in recent weeks, Starbucks launched a drink that doesn’t taste ‘burnt.’

Now after the initial success of Via, Starbucks is continuing to focus on its instant coffee brand. But it begs the question whether SBUX is doing too much and putting itself at risk of losing out on the core premium coffee business that made it such an iconic company.

Then again, plenty of other businesses have managed to branch out and not lose track of their roots. Take McDonald’s (NYSE: MCD), which has seen runaway success with its McCafe line of coffees. It’s not like people think a Big Mac tastes any different despite all those adds for mochas and lattes, right? And it’s worth noting that long before McCafe, McDonald’s took a flyer on another risky business move – adding fast food breakfast in 1972. Now, it’s Egg McMuffin is as recognizable a product as the Big Mac and breakfast sales account for nearly 30% of all MCD revenue.

By that logic, Starbucks could in fact be simply growing more dominant with its product expansions. It’s hard to argue that the launches have been bad for the company with SBUX stock up +21% in the last year – more than three times better than the Dow Jones Industrial Average. So perhaps the coffee company is on to something with all these new drinks.

As for Via, the instant coffee will now include four natural flavors — Vanilla, Mocha, Caramel and Cinnamon Spice. Suggested retail price is $8.99.

Presuming customers are as happy with the new flavored coffee as with the previous incarnation of Via, this could be another very profitable product launch for Starbucks.

As of this writing, Jeff Reeves did not own a position in any of the stocks named here.

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Article printed from InvestorPlace Media, http://investorplace.com/2010/08/starbucks-sbux-placing-too-much-hope-via-line/.

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