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Why Green Mountain’s Momentum Is Over

With Starbucks announcement late Thursday of a new “premium” single-serve coffee machine, the Green Mountain partner on K-cups will now become a Green Mountain competitor on machines.

K Cups
CNBC
K Cups

Starbucks' plan will allow it to get a jump start on a machine Green Mountain says it’s developing with Italy’s Luigi Lavazza.

Of course the new Starbucks Verismo, which uses high pressure to make brewed espresso and brewed coffee, will also be a direct competitor to Nespresso’s popular premium machines.

In a statement today, Green Mountain said that its it agrees with Starbucks that there is a market for high-pressure machines, “as evident by our joint development work with Lavazza.”

It’s unclear, however, when the new Green Mountain/Lavazza machine will hit the market.

But critical to story is this: The Starbucks announcement of its machine, partnered with Germany’s Krueger GmbH & Co., coincides with this weekend’s start of the International Housewares show in Chicago.

A few weeks ago, in anticipation of the housewares show, ago Green Mountain rolled out new premium single-serve Vue machine, which uses low-pressure technology. The Vue, with its patented V-Cup, is designed to generate a new line of revenue for Green Mountain after patents on its K-Cup expire later this year.

“Importantly, we believe [the new Starbucks machine] substantially undermines the pending Keurig Vue launch,” writes Stifel Nicolaus analyst Mark Astrachan, a longtime Green Mountain bear.

Green Mountain’s shares soared last year when Starbucks announced it was partnering with Green Mountain, licensing its K-Cups for Starbucks’ coffee.

Neither company has disclosed the economics of the K-Cup deal.

Green Mountain’s stock has been on a roller coaster in recent months, tumbling two quarters ago after the company’s guidance disappointed. Then, last quarter, it reported stronger results, in part citing stronger-than-expected sales of its Keurig brewers, which it sells at cost. The company also said: “While we already face the challenge of estimating sales in a very dynamic environment, first quarter's brewer shipments, though great news for the business longer term, add additional complexity to our forecasting.”

Adding to the intrigue: Two weeks ago Lavazza, Green Mountain's single-serve machine partner, disclosed it had taken its 6 percent to 7 percent stake in Green Mountain to below 5 percent. It cited “global economic” issues.

Astrachan also notes that Starbucks said it would not have any capital expenditures associated with its new machine; that compares with Green Mountain’s plans to spend upwards of $700 million this year, including $100 million so far on its Vue.

Starbucks CEO Howard Schultz went out of his way on a conference call Thursday to praise Green Mountain. “Our relationship with Green Mountain is as solid as it is when we began,” he said.

It very well may be on K-Cups. Starbucks’ goal is to sell coffee, and K-Cups have become a significant platform.

But Starbucks is also betting that as single-serve consumers replace machines and trade up there is life beyond K-Cups.

And for that it doesn’t need Green Mountain. And by the time the Green Mountain/Lavazza machine hits the market, Starbucks will have stolen its thunder.

My take: In the high-pressure single-serve category, with Starbucks' fast launch, it will be a two-horse race between Starbucks and Nespresso.

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