Starbucks' next target? Speculation turns to Peet's

The stock price of Peet's Coffee & Tea spiked this week after a report that it has been in talks with Starbucks, which until recently was thought to have its eye on Green Mountain Coffee Roasters of Vermont.

Acquisition rumors began last fall, when Starbucks CEO Howard Schultz said he wanted to buy something, presumably as a way to invest the company's $1.8 billion in cash.

Green Mountain was considered a front-runner, and its stock hit a record high before Starbucks announced last week that it had struck a deal to make coffee for Green Mountain's popular single-cup brewing machines.

Now acquisition speculation has turned to Peet's, whose stock hit a new 52-week high this week after Mergermarket Group, part of the Financial Times Group, reported that Starbucks and the Bay Area roaster have been in talks.

"An industry banker claiming knowledge of the situation said Starbucks and Peet's have been 'flirting' for quite some time, but that talks have become more serious in recent months," Mergermarket reported.

Another source familiar with Starbucks' strategy said it likes Peet's wholesale-distribution channels, its premium price point and the companies' shared heritage. That source "would be surprised if Starbucks didn't buy Peet's within the month," the report said.

Perhaps not coincidentally, that could give Schultz big news to announce at Starbucks' annual shareholders meeting next Wednesday.

Starbucks and Peet's spokeswomen declined to comment Thursday.

If a deal is cut, it would be the second time Starbucks has bought Peet's.

A Dutch immigrant named Alfred Peet started the Bay Area roastery in 1966. Peet later taught Starbucks' founders how to roast coffee.

In 1984, Starbucks bought Peet's. A few years later, Starbucks' owners sold everything but the Peet's operation to Howard Schultz and a group of investors who believed in Schultz's dream of running a chain of espresso-style coffee shops. It now has more than 17,000 shops worldwide.

Both were private companies and have since gone public; Starbucks co-founder Jerry Baldwin still sits on Peet's board.

Besides owning almost 200 coffeehouses, Peet's distributes its coffee directly into about half the groceries nationwide and roasts coffee to order, even for large grocery chains.

That system might appeal to Starbucks, which in recent months publicly fired Kraft, which had distributed its coffee into groceries for more than a decade.

For now, Starbucks is using vendors to distribute its coffee and a company called Acosta to make sure it looks good on grocery shelves.

"Just like we don't own the trucks that deliver coffee, dairy and other supplies to our stores, we are working with vendors who deliver our product to grocery," according to spokeswoman Stacey Krum.

Mitchell Pinheiro, an analyst who follows Peet's for Janney Capital Markets in Philadelphia, thinks Starbucks would be foolish to use Peet's distribution model.

He doesn't even like it for Peet's. He called the model expensive and unnecessary for a product that — unlike bread or milk — tastes good to most consumers whether it is 2 or 4 weeks old.

"It's the highest-cost way to deliver a product when the consumer can't tell the difference," Pinheiro said.

He also thinks that owning Peet's would dilute Starbucks' marketing dollars. "Why would you need another super-premium coffee brand, when I'd argue Starbucks is the number one super-premium coffee brand in the country, if not the world?"

Some "Peetniks" also are anti-Starbucks and might take their coffee dollars elsewhere, Pinheiro said, but he did not know how many people are in that group — or whether they would notice.

Large companies often buy small ones without customers realizing it. For example, it is not widely known that Hershey owns Scharffen Berger Chocolate, and Colgate bought Tom's of Maine.

Although Pinheiro does not follow Starbucks officially, he attended its analyst conference in New York City last fall and "was impressed by the enormous opportunity they have to deploy capital in China ... Why they would spend capital anywhere but on international growth at least for a year or two is beyond me."

If Peet's is in play, he thinks it makes more sense for a buyer like Kraft, which is now without a premium coffee brand. Any suitor would be expected to pay well above Peet's current market capitalization of almost $610 million, Pinheiro said, "maybe $700 or 800 million."

Peet's shares fell 24 cents on Thursday, to $46.47, but climbed 53 cents in after-hours trading to $47. This week marked the first time it reached above $43 in a year.

Starbucks shares rose 9 cents to $35.09 on Thursday. It reached a 52-week high last week when its announcement about making coffee for Green Mountain's single-cup brewers quelled speculation that it would buy the Vermont roaster.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com