STARBUCKS’ VIA IS NO INSTANT COMPETITOR FOR K-CUP

October 30, 2009

STARBUCKS' VIA IS NO INSTANT COMPETITOR FOR K-CUP

By Reverdy Johnson, reverdy.johnson@ 415.364.3782

OUR STARTING THESIS AND APPROACH FOR THE GREEN MOUNTAIN COFFEE ROASTERS PROJECT This week, Blueshift Research initiated research on Green Mountain Coffee Roasters Inc. (GMCR). The original thesis is that Starbucks Corp.'s (SBUX) Via instant coffee may pose a threat to sales of Green Mountain's Keurig K-Cup.

This study employed Blueshift's pattern mining approach to establish contacts within eight independent silos to test this thesis. The silos: 1) Starbucks store checks, 2) department store checks, 3) grocery store checks, 4) retail executives, 5) independent coffee shop baristas, 6) office coffee distributors, 7) industry experts and 8) secondary sources. We interviewed a total of 54 primary sources and included eight of the most relevant secondary sources reviewed.

SUMMARY OF FINDINGS Via does not pose a threat to K-Cups because K-Cups offer higher-quality taste, more flavor options and versatility, and matches the convenience and ease of use of any instant coffee. Via received high marks for its taste and should perform well against other instant coffee options likes The J.M. Smuckers Co.'s (SJM) The Folgers Coffee Co., Nestl? S.A.'s Taster's Choice, and Kraft Foods Inc.'s (KFT) Maxwell House. Starbucks stores said Via is receiving positive consumer feedback and demands for a decaf version and other roasts, but store associates said it would not compete with K-Cups, which are not instant coffee. Sources from grocery stores and at least one department store said the K-Cups were not in stock at their locations despite being listed as K-Cup retailers on Keurig's Web site. The investment in Keurig's brewing machine is a hurdle for consumers considering switching from K-Cups to alternate coffee options, including instant coffee. Kraft Foods' Tassimo Beverage Machine was noted as Keurig's closest competitor in department stores while Mars Inc.'s Flavia provides a less expensive alternative to K-Cups in the office environment.

Starbucks Store Checks: Fourteen sources agree that Via has made a favorable first impression with customers, but none said it would challenge K-Cups, which is not viewed or treated as an instant coffee. Customers enjoy Via's convenience, portability and taste, and the majority of store managers said it would outclass other instant coffees. Sources expect Via to be popular in offices, hotels, and airports, as well as with the weekend traveler. Customers are eagerly awaiting the November release of decaffeinated Via.

? New York 1 o "We met our sales goal the third week Via was out." o "In the Via taste test 80% of the people got it wrong." o "You can use it in hot or cold water and even milk. You can't do that with other instant coffees."

? New York 2 o "I don't know if Via will replace other instant coffees as it's a much stronger blend, but it will definitely catch the Starbuck drinker's attention." o "We are getting very positive feedback from Via taste tests we have done."

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o "People hesitated at first, but once they tried it they were impressed with the full flavor and body."

? Boston 1 o "Customer reaction has been very positive. Via is above any other instant coffee. In a blind taste test people had a hard time deciphering which was which." o "K-Cups have a big market of their own. Via is more convenient and consistent with what you purchase in the store." o "We are seeing a lot of repeat business, especially on the weekends."

? Boston 2 o "Via is great. It cuts down on the packaging of the K-Cups." o "We might start doing other coffee roasts." o "The one thing that trumps Via is that K-Cups come with a variety pack."

? Columbus 1 o "Putting Via up against other instants, there is no comparison. But K-Cups is not an instant coffee." o "We are not gaining any new customers because of Via." o "Via will really take off when they launch it in grocery stores."

? Columbus 2 o "You can't compare Via to K-Cups; it's a different market." o "Customers are really enjoying it. It is a lot smoother than other instant coffees. It's not crystallized like Folgers or Tasters' Choice." o "People buying Via are looking for convenience."

? Columbus 3 o "The reaction has been really positive. Customers come in for their morning coffee and leave with a few Via packets as well." o "Via is going to start taking off in hotels and airports." o "Customers are requesting a decaf blend and more everyday blends."

? Chicago 1 o "I'm not sure if there will be an effect on other instant coffee brands." o "So far the reaction has been good overall."

? Chicago 2 o "Overall, our customers really like Via." o "Travelers and folks taking off for the weekend really like the idea." o "Our No. 1 request is for a decaf blend."

? Seattle 1 o "Via doesn't compare to other instant coffees. The taste and feel are far superior." o "It's less mess with no filter to throw away. On-the-go types are really responding to it." o "Via has turned heads of the single cup drinkers."

? Seattle 2 o "People love Via. It's a more convenient way to make a single cup of coffee."

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o "Other instants coffees are made with an inferior bean." o "We have already seen business offices buying Via to take to work."

? Seattle 3 o "Customers are reacting well to Via." o "Via is going over very well for business meetings. Customers can purchase Via and just take hot water and cups. It's less mess and more convenient, and there is no wasted coffee to throw out later."

? San Francisco 1 o "Via won't hurt other instant coffee sales, but it might give them a run for their money." o "Via has been a big hit. In the Via taste challenge 50% of the people got it wrong."

? San Francisco 2 o "Via won't hurt K-Cup sales, but customers like the convenience of the Via in comparison." o "Customer response has been great; people are buying it." o "Customers are using Via at work rather than the office vending machine."

Department Stores: Twelve sources said Via has not hurt Keurig or K-Cup sales. K-Cups continue to be very popular among consumers at the three different chains in four separate cities because of the variety of flavors, good promotions, and quality that is superior to instant coffee. The Tassimo Beverage Machine provides the most direct competition though no source ranked it higher than Keurig.

? Kohl's, Boston o "There's been no noticeable change in K-Cup sales in the last month since Via has been available." o "When [K-Cups] are on sale, they go like there's no tomorrow."

? Kohl's, Chicago o "I don't think Via has had any impact on Keurig sales." o "The Keurig's sell well. We don't sell them quite as often as our basic ones--like [Jarden Corp.'s/JAH] Mr. Coffee--that do the 12 cups, but anyone that does the single cup usually goes for Keurig."

? Kohl's, Columbus o "I'm not aware of the introduction of Via having any effect on K-Cup sales."

o "Keurig is the only single-cup brewer we sell. They're very, very popular. They range in price from $89 up to $169."

o "K-Cups are our best sellers among coffee and are marked down to $9.99."

? Kohl's, Seattle o "K-Cups are much better than instant coffee. The versatility of Keurig brewers can't be matched by instant options."

? Bed Bath & Beyond, Boston o "K-Cups sell better than the Tassimo right now because they start at $9.99 for an 18-pack,

while the Tassimos are $14.99." o "It all depends on personal preference. They all basically do the same thing."

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? Bed Bath & Beyond, Chicago o "The variety of flavors you get with K-Cups gives it a big advantage over something like Via." o "Keurig and Tassimo are about the same. A lot of people tend to like the Tassimo flavor packs. I'm not sure if it's the taste or if it has more flavor options than the Keurig does."

? Bed Bath & Beyond, Columbus o "People tend to buy the K-Cups a little more because they know the brand name better." o "Keurig and Tassimo are basically the same, just different manufacturers. We probably sell more of the Keurigs."

? Bed Bath & Beyond, Seattle o "I don't think Via can compete with Keurig brewers." o "Keurigs are really good. It's definitely better than instant coffee. You have the flexibility to do coffee, tea, hot chocolate." o "Keurig sells better than Tassimo because they have several different models and a much wider selection of coffee choices."

? Macy's, Boston o "Via is not going to appeal to Keurig buyers because they like taste and variety." o "K-Cups are very popular with no signs of slowing down." o "We sell a lot more of the Keurigs than Tassimos."

? Macy's, Chicago o "Keurig is our best seller. It's just so simple. A lot of hotels have it, so people recognize it from there." o "Keurig offers a filter, so when you want to put any kind of coffee in, you can brew your own."

? Macy's, Columbus o "Keurig is the most popular, definitely."

? Macy's, Seattle o "Via might be popular with people on the road, but when they're at home, people want a better cup of coffee and K-Cups are better than instant." o "We sell the Keurig and [Conair Corp.'s] Cuisinart at a pretty steady equivalent pace."

Grocery Stores: Only six of our 16 grocery store sources carry K-Cups, conflicting with information from Keurig's Web site. Those who stock K-Cups reported good sales because of the variety in flavors. Most sources had not heard of Via and could not confidently comment on its effect of K-Cup sales. We included interviews with five of the 10 sources who do not carry K-Cups.

? Wegmans Food Markets, New York 1 o "We do really well with the K-Cups. We carry different varieties of them, so that's a big part of their sales. [Sara Lee Corp.'s/SLE] Senseo packs do better. They have different varieties as well. o "I have never heard of Via, but our Starbucks bulk coffee doesn't do that well."

? Wegmans, New York 2 o "K-Cup sales are just OK.

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o "I couldn't say if Via will affect K-Cup sales."

? Wegmans, New York 3 o "Green Mountain is better than other single-serving coffees. The flavor is better. Our own brand just doesn't compare to Green Mountain." o "Green Mountain is more expensive, so the customers tend to go for Folgers, [R.C.] Bigelow [Inc.] or our brand." o "I've never heard of Via. We carry Starbucks coffee in bulk, but [J.M. Smuckers'] Dunkin' Donuts coffee does a lot better."

? Meijer, Columbus 1 o "We don't carry K-Cups, but we do have Maxwell House, Taster's Choice, Senseo and [?lker Bisk?vi Sanayi A.S.'s] Godiva. We might carry it online; the online store tends to have more options than what is carried in each of the stores."

? Meijer, Columbus 2 o "We don't carry K-Cups, and I've never heard of them."

? Fred Meyer Stores, Seattle 1 o "We carry Green Mountain coffee in our nutrition center in bulk, but I have never seen the single servings. What we carry here for single-serving coffees are the Senseo, Maxwell House and Taster's Choice."

? Fred Meyer, Seattle 2 o "We don't carry K-Cups, but we do have Folgers and Nescaf?. I have seen Via in Starbucks stores. It looks like a great idea, but I don't know about the taste. Most people who drink coffee want something fresh brewed, not just added to hot water."

? Target, Seattle o "Sales of K-Cups are good. They have a variety of flavors, and it comes in a variety pack. The price is very competitive, and people seem to like them." o "Via is hopefully going to be in our stores for the holidays. Since we don't have it yet, it would be hard to tell if it will sell better than the K-Cups."

? Target, Boston 1 o "A lot of K-Cups go out on the shelves. We stock it all the time. I haven't heard of Via. I'm sure we will carry it soon if it is out on the market."

? Target, Boston 2 o "We don't have K-Cups."

Retail Executives: One source reported problems getting Keurig machines from the distributor, while another said Via will not threaten K-Cups because Keurig customers are more discerning and not likely to drink instant coffee.

? The buyer of small electrics products for a department store that operates in 23 states and has carried Keurig machines and K-Cups said the distributor no longer supplies his store. He did not know why he no longer receives shipments and said K-Cups were a top seller when he had them in stock.

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