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STiR tea & coffee industry international 31 Starbucks vs Peet's Coffee & Tea 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 inexperi- enced investors that launched Starbucks and supplied the coffee that brought fame to the then-tiny Seattle retailer. Starbucks has since be- come 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 acquisi- tion 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-premi- um 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 brand- ed 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 busi- ness to stay." He then issued this warning, "However, at this moment, the only mat- ter 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. — Dan Bolton Single-serve has single-handedly driven growth in coffee consumption, according to the National Cof- fee Association, citing data from StudyLogic. In the closing months of 2015 American coffee drinkers were consuming 2 billion single-serve cups a month, an in- crease in December 2015 of 13.2% compared 2014. While traditional methods of preparation are in decline (traditional, instant and French press) single-serve is more popular than ever in the home, at work, in food- service and even fine restaurants. Acquiring Douwe Egberts, partnering with Mon- delez International (Jacobs), and the purchase of Keurig – combined with the acquisition of retail coffee chains Peet's, Caribou Coffee, Intelligentsia, and Stumptown Coffee Roasters – makes JAB Holdings the world's largest pure-play coffee business and the dominate sin- gle-serve machine and capsule manufacturer (Keurig- Senseo-Tassimo). Euromonitor estimates JDE's global market share at 19.7%. Nestle/Nespresso holds 22.3% . What happens next? Ross Colbert, global strategist-beverages for Rabobank, visited Keurig executives soon after the acquisition. "I expect the expansion of K-Cups will likely focus on the high per capita coffee markets in Northern Europe (Nordics-UK to start) where a 'long coffee' is consumed more often," said Colbert. "Eventually Keurig will mi- grate K-cups to Brazil and other select markets," he said. "I am not sure that everyone has totally digested what has happened and how it will affect them," writes Pod Pack International president Tom Martin. Pod Pack, located in Baton Rouge, Louisiana, manufac- tures non-licensed Keurig-compatible capsules and filter paper pods. "It is an interesting situation as JAB somewhat controls the single cup future for the big US brands. As the existing Keurig distribution agreements expire I expect there will be many opportunities for the non-Keurig co-packers," he said. It is unlikely major brands will abandon Keurig as the margin pool for licensed partners is very appealing. Keurig's e-retail reach adds essential incremental volume for the smaller national brands and is significant enough to entice Folgers, Maxwell House and especially Star- bucks, the segment's market leader. "Overnight these brands are doing business with a worldwide competitor that definitely has its eye on building a significant US market. JAB, which has spent nearly $30 billion acquiring coffee companies in the past two years certainly has the financial wherewithal to do it. I wonder how comfortable these brands are about sup- porting this new major competitor?" asks Martin. "JAB took over Keurig at a pretty hefty price by all measurements," adds Michael Ishayik, president of Intelligent Blends, LP in San Diego. "I agree with the consensus that Starbucks will sure be leery of pumping up JAB's bank accounts so that Peets can further com- pete with Starbucks on every front," he said. "We ultimately hope that with JAB at the wheel Keurig will focus on expanding and growing the