June 12, 2012 / 10:57 PM / in 5 years

Safeway launches 5 store brand coffees for Keurig

(Reuters) - Safeway Inc SWY.N launched under its own store brand five types of filtered coffee pods compatible with Keurig brewers but cheaper than those sold by ailing Green Mountain Coffee Roasters Inc GMCR.O, whose dominance in that market is being threatened.

Green Mountain, once a Wall Street high-flyer whose shares have taken a nose dive, sells the Keurig brewers but makes most of its profits from the “K-Cups” that go with them. New entrants to the market, especially ones priced below Green Mountain’s K-Cups, could pressure prices and grab market share, say some analysts and investors.

A Safeway store in Petaluma, California on Tuesday had on its shelves five varieties of Safeway Select coffee for use with Keurig machines. They were Breakfast Blend, French Roast, Costa Rica, Hazelnut and Sumatra varieties, selling in packs of 12 for $6.99. The regular price for most of the other K-Cups is around $8.99, though they sometimes go on sale.

The new Safeway products differ from existing private label pods for Keurig in that they are filtered coffee. The products launched in January, two cappuccino-flavored drinks and one hot cocoa drink, were instant, Safeway spokesman Brian Dowling told Reuters in an email.

Safeway told Reuters about the coffee on Tuesday, days after rival chain Kroger Co (KR.N) said it was launching store-branded coffee pods for the Keurig machine. That sent Green Mountain shares down as much as 10 percent to a 2-1/2-year low on Monday.

Green Mountain shares closed down 0.2 percent at $21.27 on Tuesday after falling as low as $20.72, a new 52-week low. Before the news from Safeway they had been up slightly.

Green Mountain shares have tumbled more than 80 percent since September, due to questions about its business strategy and growth trajectory, management and accounting practices. It has been targeted by short-sellers, who have bet on the shares falling.

In addition to its own Green Mountain coffee brand, it sells Starbucks (SBUX.O), Folgers (SJM.N), and Dunkin Donuts (DNKN.O) K-Cups, among others, through licensing agreements.

Green Mountain owns dozens of patents that govern design of the brewers, K-Cups and the interface of the machine and the cups. Two patents governing cup design are set to expire in September, which could allow manufacturers to make Keurig-compatible cups independently of Green Mountain.

Some investors and analysts fear that private-label brands will be able to undercut Green Mountain on price and erode its dominant market share in the U.S. market for single-serve coffee.

Among other retailers with private label brands, Target Corp (TGT.N) told Reuters it had no immediate plans to enter the single-serve coffee market. Supervalu (SVU.N) said it was aware of the expiring patents and always looking to offer consumers private label products.

Wal-Mart Stores Inc (WMT.N) declined to comment, and Costco Wholesale Corp (COST.O) did not immediately respond to requests for comment.

Green Mountain spokeswoman Suzanne DuLong declined to comment on the Safeway news and referred Reuters to a previous statement regarding private-label competition in which she said Green Mountain has the benefits of being the first to make K-Cups, along with manufacturing scale and institutional knowledge about the complexities of manufacturing K-Cup packs.

Another company to watch, analysts say, is Starbucks. The coffee shop chain, which has been trying to boost its packaged goods business, has a multi-year partnership with Green Mountain by which it supplies coffee to Green Mountain, which then makes the K-Cups.

Starbucks spokeswoman Alisa Martinez declined to provide details about the companies’ contract. When asked whether Starbucks planned to renew the partnership even after the patent expiry could allow it to manufacture the cups independently, she said Starbucks valued its relationship with Green Mountain and that it was not in a position, at this time, to change it.

Safeway shares closed up 14 cents, or 0.8 percent, at $18.16 on the New York Stock Exchange.

Reporting by Martinne Geller in New York; editing by Matthew Lewis, Bob Burgdorfer and David Gregorio

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