For Peet's Sake: Could Starbucks Be Eyeing Coffee Rival?

Analysts Mixed on Possibility, but a Combined Company Would Yield More Supermarket Clout

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At Starbucks' annual meeting today, investors will be listening closely to see if there is any discussion of the java giant's interest in Peet's Coffee & Tea. Rumors have swirled for months about such a possibility, and as chatter picked up last week, Peet's stock price jumped based on the speculation.

Starbucks declined to comment and Peet's did not respond to inquiries by press time. But the possibility raises the question: If Starbucks were to buy the $334 million Peet's, what could it mean for both companies?

The biggest benefit would be in the grocery aisle. Starbucks in December said the company plans on focusing on acquisitions with supermarket presence, and CEO Howard Schultz recently said the company hopes its grocery-store business could one day rival retail. In addition to its roughly 200 brick-and-mortar establishments in six states, Peet's is available at an estimated 60% to 70% of grocery stores across the U.S. Some $75.3 million of its total sales were to U.S. grocery stores.

"The deal would make strategic sense," said Steve West, restaurant analyst at Stifel Nicolaus. "Starbucks' focus right now is to build out their CPG [consumer packaged goods] business." Mr. West estimates that Peet's is also in about 600 Walmart stores and 144 Targets stores.

But not all analysts think the acquisition would be the best move, given that consumers may see both Starbucks and Peet's as both super-premium brands and, therefore, as competitors. "We believe Starbucks admires Peet's, but I'm not sure there's a ton of strategic fit," said Mark Kalinowski, research analyst for Janney. "Starbucks views itself as a super-premium brand. But the question is: Would it be smart to buy another super-premium brand? Would Starbucks be better off promoting its own brand? It's a high-end coffee, but that doesn't mean Starbucks is the right ownership for Peet's."

Mr. Kalinowski added that two super-premium brands under one parent company could confuse consumers, but that confusion wouldn't include Seattle's Best, the other coffee brand Starbucks owns. "Seattle's Best is different, more entry-level premium. Starbucks definitely views itself as the high-end of coffee. Would they claim Peet's is super-duper-premium to avoid confusion?"

Mr. West doesn't see that the brands fit into the same category. "Starbucks is about the same price as specialty coffee, but Peet's runs about a dollar more at the grocery store." The average price per unit for Starbucks' ground coffee was $8.31, compared to Peet's $9.24, for the 52-week period ended Feb. 20, according to SymphonyIRI.

So by Mr. West's logic, Starbucks would have the super-premium brand in Peet's, the core brand in Starbucks, and the value brand in Seattle's Best -- all catering to different consumers.

Just earlier this month, Starbucks inked a deal with Green Mountain Coffee Roasters, for the sale, manufacture and distribution of Starbucks and Tazo -- its tea brand -- K-Cups, the dominant format in the single-serve market. Green Mountain has the patent on K-Cups, and it owns the Keurig machines for which K-Cups are used. Starbucks was previously unable to jump into the Keurig market because of its 12-year distribution deal with Kraft, which is the exclusive distributor of Tassimo brewers, the main single-serve rival of Keurig. Starbucks in November moved to dump Kraft as the distributor of its coffee in grocery stores.

The news of the Starbucks-Green Mountain partnership could prove to be an obstacle for Peet's if Peet's isn't acquired by Starbucks. For now, Starbucks is the exclusive super-premium coffee brand for Keurig. But a Peet's acquisitions could open doors. "Peet's is worth more to Starbucks because of the contract it signed with Green Mountain," said Mr. West. "Starbucks could squeeze even more out of Peet's with K-Cups." Mr. West added that Peet's doesn't need K-Cups to grow, because of the other growth opportunities for Peet's by expanding into more grocery stores, should Starbucks acquire it.

Peet's and Starbucks also have historical ties: Peet's was founded in Berkeley, Calif., in 1966 by Alfred Peet, who taught Starbucks' founders how to roast coffee. In 1984, Starbucks bought Peet's, and in 1987, Starbucks' sold everything but Peet's to Howard Schultz and a group of investors, which now forms the current-day Starbucks.

Starbucks, whose agency is Omnicom's BBDO, in 2010 doubled its measured media spending to $94.4 million, according to Kantar. Starbucks spent about $4.9 million on Seattle's Best in 2010 -- a massive change from the measured $62,000 from 2009. Seattle's Best in January unveiled its first major ad campaign for a rebranding as well as its new Levels coffee system.

Peet's, according to Kantar, is also not much of an ad spender. The company spent about $17,000 on measured media in 2010.

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