Selling coffee by a different sort of cup

If you think a K cup is something for a Playboy model, you’re out of sync with the hottest trend in coffee selling.

The “K” stands for the Keurig, a single-cup coffee brewer that’s now a standard feature of corporate canteen areas. A user fits a sealed single portion of coffee grounds—a little package that looks like a larger-than-normal coffee creamer—into a receptacle inside the machine. The machine is closed, a button is pushed, and the coffee is brewed and dispensed.

Because the user’s discretion is removed, the cup of coffee tends to be of barista quality. You get the best of what’s in the little pre-portioned container, a.k.a. the K cup.

Quality aside, the machines are proving popular because there’s little maintenance. Someone has to empty a bin that catches the used K cups. But there’s very little additional work to be done by the host site.

No wonder the Keurig unit has made such inroads into the coffee-service market. But it’s also winning home-brewers, too. Green Mountain Coffee Roasters sold 771,000 of the units during the 2008 year-end holidays. Walmart has struck a deal with the company to sell Keurigs in 3,000 of its outlets. Clearly it’s the gadget of the moment.

And that’s orgasmic news for coffee processors who put their grinds in K cups. Once you have a machine, you have to buy the cups. It won’t work otherwise. It’s selling razor blades, so to speak.

Yet the phenomenon has landed roasters with retail outlets in a Catch 22. Players like Starbucks could sell a lot of K cups because of the brand appeal. But might they be undercutting themselves in the long run?

Rick Aristotle Munarriz, a frequent contributor to the The Motley Fool financial website, estimates that a K cup could be sold by Starbucks for 40 cents. It would deliver a cup of coffee close to what a café customer would have to pay $2 to get. How long would that disparity be tolerated, even with the delivery of the mystical Starbucks Experience that Howard Schultz is always crowing about?

So Starbucks isn’t selling K cups. Nor, apparently, is Peet’s, a brand with limited retail operations. Nor Dunkin’ Donuts. Or McDonald’s/McCafe. You won’t find Tim Hortons grinds or BK Joe in a K cup, either.

But Caribou sells its coffee that way. Coffee People, too. Diedrich sold its Gloria Jeans concept last week. But it held on to the K cup part of the business. The secondary brands seem to have shrugged and decided, What do we have to lose?

Which makes you stop and wonder: Are the big coffee brands missing an opportunity? Would there be a way to exploit the booming K cup market without cannibalizing walk-up café sales?

You know it’s a question that’s consuming the marketers in Seattle, Oakbrook and Canton, Mass.

Is Wendy's/Arby's shopping for another chain?

Last October I had lunch at a midtown Wendy’s with Roland Smith, the newly named CEO of the chain and its adoptive parent of a few weeks, Wendy’s/Arby’s Group. Smith and his team were blitzing the media to discuss how the company formerly known as Triarc was going to generate more value for shareholders as a two-concept fast-food franchisor.

Among the more surprising routes mentioned by Smith was the acquisition of more brands. The company had just spent $2.3 billion to buy Wendy’s after more than a year of contentious pursuit. Was it really open to other deals?

Fast forward to yesterday morning, when Wendy’s/Arby’s announced plans to raise $550 million in debt. About $125 million will be used to pay off outstanding loans—the equivalent of paying off a big credit-card bill. The other $425 million, the company said, would be used for “general corporate purposes.” It listed seven specific possibilities, including “acquisitions of other restaurant companies.”

Most of the other options are moves that would likely appease shareholders—things like new unit development, paying a dividend, or buying back stock. Yet the company’s share price dipped. “There’s clearly some hesitation on the part of investors,” Bob O’Brien wrote on a Barron’s blog. “The likeliest source of concern: that Wendy’s would make another big-ticket acquisition.”

Back in October, Smith wouldn't discuss possible acquisition candidates, nor even what kind of companies might have been on his shopping wish list. The only clue he provided was a comment that any target would have to be a high-quality rather than a low-cost provider.

It’s a safe presumption that it would also have to be a potential or current franchisor, since that’s Wendy’s/Arby’s business. Smith didn’t say anything about menus, but presumably the company would want something that wouldn’t compete with its burger or sandwich chains. That means it’d have to specialize in something like chicken, pizza or beverages.

The criteria are smoky at best. But there are plenty of candidates that would fit.

Jamba Juice, for one. It’s the hands-down leader in the smoothie segment, with a healthy average ticket.

Church’s has traditionally been a value provider, but it might be an affordable play in the chicken market, and is widely reported to be for sale.

The chain's sister concept, Caribou Coffee, would also meet Smith's vague criteria.

There are also any number of upstart, high-quality pizza concepts currently competing on a regional basis.

Since co-branding figures large in Wendy’s/Arby’s growth strategy, a dessert add-on might also make sense. A regional soft-serve specialist, maybe?

This, of course, is all speculation. But a $425-million down payment makes a lot more sense than “general corporate purposes.” That’s a lot of new carpet and paper clips.

Caribou Coffee joins the parade of peanut recallers

Caribou Coffee has become what appears to be the first restaurant chain to recall a product because it may contain peanuts contaminated with salmonella.

The Food and Drug Administration disclosed the recall of Caribou Fruit & Nut Blend Trail Mix this afternoon via Twitter. The announcement explains that Caribou, the (distant) Number Two coffee chain behind Starbucks, was informed the peanuts in the mix were supplied by Peanut Corp. of America, the Georgia processor implicated as the source of the two-months-long-and-counting salmonella outbreak. No one has reported being sickened by the product, which Caribou was selling in three-ounce, sealed cellophane packets, the announcement noted.

It also noted that the mix, supplied ready-to-sell by Marra Brothers/Marich Confectionary, was still being distributed as of last Friday.

Starbucks had earlier pulled some of its peanut-containing products, but had not issued a recall. The items were merely taken off store shelves or no longer sold.

More than 500 people have been sickened by salmonella that was traced back to Peanut Corp.