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Starbucks to Launch Single Serve Coffee Line

SBUX severs ties with Kraft, pushes into $500M K-Cup market


In December,  coffee giant Starbucks killed its contract with Kraft scrapped a 12-year retail coffee distribution deal. And now that a judge has ruled that Starbucks (NASDAQ: SBUX) indeed is within its right to cancel its relationship with Kraft (NYSE: KFT) as of March 1, the Seattle coffee behemoth is forging ahead with its new retail plans. It’s first major change: A spash in to the single-serve coffee market for machines like the Keurig K-Cup brewing system.

That could mean tens of millions in new revenue for Starbucks – and perhaps spell the end of the line for smaller single-serve coffee companies that have seen big growth in the absence of a major competitor.

Starbucks confirmed to the Chicago Tribune it is working on a new product for single-serve coffee machines. It’s no surprise why – the single serve market currently stands at over $500 million annually as consumers go for gourmet, on-demand brews at home for a fraction of the cost of a café visit. What’s more, single-serve coffee is growing at an impressive clip. While only 7% of the fresh coffee market in 2010, it was up from 5% in 2008 and expected to hit 10% in 2012 according to Euromonitor International.

Consumers who have a single-brew machine from manufacturers like Keurig or Gevalia know first hand the ease of use and quality of the coffee they can get. It’s can be pricier than a typical Mr. Coffee, but brews one cup at a time quickly and allows for greater variety in your cupboard.

Investors also know the power of single-brew coffee. Take Green Mountain Coffee (NASDAQ: GMCR), a small stock that was trading for under $8 a share at the beginning of 2009 (accounting for splits and adjusted share prices). Now it’s over $40 – a whopping 400% gain compared with just 40% or so for the Dow Jones Industrial Average. Other companies like Peet’s Coffee & Tea (NASDAQ: PEET) have also seen big success – PEET stock has more than doubled since the beginning of 2009.

Of course, that was without the big dog Starbucks in this fight.

Starbucks has been cashing in big time on retail sales, from its wildly successful Via instant coffee brand to a wider variety of Starbucks bottled drinks and ice cream. Thanks in large part to this retail push, total sales rose 8% to $3 billion in Starbucks’ latest fiscal quarter and margins hit a record 21.9% — up 4.5 percentage points from a year ago even despite higher coffee prices. Execs clearly are looking to keep the needle moving in the right direction by branching out into the single serve market.

That’s good news for consumers who love the taste of Starbucks coffee, but very bad news for the smaller single-serve brew makers.

Jeff Reeves is editor of As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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