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Starbucks Growth Is a Red Flag for Keurig

Already reeling from poor customer acceptance of its newest coffee brew system and criticized for a botched rollout of a cold beverage appliance, Keurig Green Mountain (NASDAQ: GMCR) has lost more than half of its value since hitting a 52-week high last October. But some industry analysts think the worst is yet to come.

The one bright spot for Keurig, even after it lost patent protection on its coffee brewers and single-serve K-Cup pods, was that it still sold a ton of the latter. Even today, they remain the key component of Keurig's business, representing 85% of total second quarter revenue, and sales grew 7% to $957 million, representing a 14% increase in equivalent servings (a measure Keurig uses to convert its different pod sizes into a common serving). According to last year's annual report, Keurig was still responsible for 30% of all retail coffee sales.

However, its business could be threatened even more by Starbucks (NASDAQ: SBUX). According to the market analysts at Euromonitor International, speciality coffee shops are experiencing a resurgence. Beverage Daily reports they generated $19.1 billion in sales last year, 15% more than they did five years prior. While most of that comes from Starbucks, whose own sales have grown 53% over that time, its store expansion is slowing now while small, premium, artisanal shops are on the rise. Still, Starbucks accounts for 63% of all specialty coffee shops, even if it is down from 67% in 2008.

Analysts say the shift is a result of changes in consumer preferences. It was during the recession that the single-serve pod grabbed hold of customers' imaginations, and they took to it in droves because of its convenience. Although it is cheaper to brew bagged coffee at home, the single-serve pod was a less expensive alternative to store-bought coffee.

But with the economy improving and more disposable cash on hand, consumer tastes are shifting once more. In their quest for unique flavors, tastes, and aromas, consumers are turning to specialty coffee shops and abandoning their single-serve appliances.

That is obviously a big risk for Keurig if it proves lasting, and considering the company has already capitulated to consumer demand to let third-party pods be used in its new brew system as well as restoring the My K-Cup reusable pod to allow bagged coffee to be made in the appliance, Keurig Green Mountain could see its business crumble as Starbucks grows with the industry.

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Rich Duprey has no position in any stocks mentioned.

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