By Lisa Baertlein
LOS ANGELES (Reuters) - Starbucks Corp
In an internal memo obtained by Reuters on Thursday, Starbucks Chief Executive Howard Schultz suggested Green Mountain -- which sources say is in partnership talks with the world's biggest coffee chain -- may not remain the sector leader over the long term as global market dynamics shift.
In the memo to Starbucks' top brass, Schultz said he is increasingly being asked about the company's plans regarding Green Mountain, which has patents protecting some of the technology around its K-Cup coffee pods.
"Green Mountain has done a very fine job introducing single-serve brewer technology to the U.S. market. And as a result it has emerged as an early leader," he said in the memo.
"But as I have said, these are very early days, and history has demonstrated time and again that patents alone do not determine market winners-deep customer engagement, best-in-class experiences and quality do," Schultz said.
Green Mountain spokeswoman Suzanne DuLong offered a different view, telling Reuters: "We feel like we are in a very good position to continue to lead the way."
Reuters reported on Monday that Starbucks is in partnership negotiations with Green Mountain, citing a source close to the talks.
Representatives from Starbucks and Green Mountain on Thursday declined to comment on the issue.
Starbucks, which is pursuing growth outside its namesake cafes, repeatedly has signaled that it is eyeing multiple single-serve deals around the world.
Green Mountain dominates the U.S. single-serve market with its Keurig brewer, but is not a player internationally.
Euromonitor, which tracks sales of single-serve coffee pods in 52 countries, said the United States accounted for $600 million of 2010 global sales of $4.3 billion. The figures exclude machine sales.
While small, the single-cup coffee segment "is growing faster than any other segment in the global coffee industry," Schultz said.
On Nasdaq, Green Mountain tumbled $3.39 to close at $40.71. Starbucks fell 0.2 percent to $33.50.
DEALS BREWING
Starbucks on Tuesday announced a deal to supply coffee for Courtesy Products' CV1 one-cup brewers in as many as 500,000 upscale U.S. hotel rooms beginning this autumn.
Schultz said in the memo that "because of the speculation swirling in the marketplace around Starbucks' larger plans for single-serve in the U.S. and internationally, I wanted to take a moment to let you know what our intentions for single-serve are ... because they are very bold."
The Seattle-based coffee company on March 1 is ending a deal through which it provides coffee discs for Kraft Foods Inc's
Starbucks has said that about 80 percent of its customers do not own single-serve home brewers.
"This fact alone suggests that we are, again, at the very early stage of adoption and that Starbucks has a fantastic opportunity to introduce and deliver new single-serve coffee innovations to our customers," Schultz said in the memo.
While many on Wall Street are focused on the emerging U.S. single-serve market, the business is more mature in Europe.
Schultz said almost 40 percent of households in Germany own single-cup brewers, versus about 6 percent in the United States. In Germany, the market leader has an "open system" -- meaning any coffee roaster can provide so-called "coffee pods" for the machine. Keurig, on the other hand, is a closed system with U.S. patents set to expire next year, he added.
"The single-serve segment of the coffee industry is poised for a sea change of innovation," the CEO said.
(Reporting by Lisa Baertlein; Editing by Dave Zimmerman, Richard Chang, Gary Hill)
