Starbucks takes on Green Mountain, Nestle and Starbucks?


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As Starbucks (NASDAQ: SBUX ) introduces its Verismo single-serve coffee, espresso and café beverages machine, the company has fired another bullet in its war with Green Mountain (NASDAQ: GMCR ) and Nestle for the $8 billion single-serve market. The Verismo, priced at $199, not only makes coffee (like Green Mountain's dominant Keurig "K-Cup" brewers) but also lattes and other fancy drinks -- similar to Kuerig's new Vue machine and Nestle's Nespresso.

The Verismo looks like a fabulous machine that allows users to make lattes and other "fancy" beverages that (until now) were only available at Starbucks. Of course, people could always make these drinks with a high-end espresso machine, but those are generally expensive and frequently impractical. The Verismo appears to be no harder to use than Keurig's machines, and judging from the promo materials - which admittedly, aren't going to make anything look bad - it seems like the machine makes a mean café-style latte.

The Nespresso does exactly the same thing, but, Nestle, which hoped to take away a share of the customers Starbucks serves in its stores, has never achieved critical mass. Yes, the brewer makes all the fancy drinks, but the entry-level machines retail for $229 and are only sold in upscale stores like William Sonoma, rather than Target (NYSE: TGT ) and Wal-Mart (NYSE: WMT ) like Keurig's line. It is also nearly impossible to find Nespresso pods in a store. Whereas almost every grocery chain, Starbucks and Dunkin' Donuts (NASDAQ: DNKN ) stock K-Cups.

The Keurig Vue attempts to tackle this market as well, but the recently introduced machines have been met mostly with a ho-hum reaction from an audience that's more or less satisfied with their current Keurig brewers. That leaves the Verismo as the first serious challenger that might make a person stay home rather than go out for a latte or caramel macchiato.

So, to defend its market share and own the entire coffee market -- no matter where someone chooses to drink a cup -- Starbucks may be swapping a $4-6 in-store sale (plus the ancillary chance to sell you a pastry or a CD) for a $1.62 at-home sale. Yes, consumers have to buy the machine, but it is hard to imagine there is much profit in that. Is Starbucks so eager to keep Green Mountain and Nestle away from its customers that it is willing to trade the big sale for a small one?

In short, the answer is yes. With the Verismo, Starbucks is betting that no matter how enticing its stores are, a certain percentage of coffee will be consumed at home or work. It is only a matter of time before home-brewers that make lattes caught on. If Starbucks was not the one selling them, the company would have to chase the trend as it did when it started selling its own branded K-Cups.

The company showed its willingness to go after the single-serve home/office market when it started selling its Via instant coffee. Via sacks make a single cup of coffee when added to water. They cost around $0.60 each compared to around $2 in-store for a medium (or grande in Starbucks-speak) regular cup of coffee. Ostensibly, that's a bad deal for Starbucks, but it's much easier to argue that customers had lots of options to brew a decent cup of coffee at home. Any sales of Via would come at the expense of competitors -- not in-store visits.

With the Verismo, however, Starbucks will be letting customers home-brew the beverages that were previously both the chief reason to visit its stores as well as a key revenue driver. In that case, it can be argued that some of the sales it captures will come at the expense of its own sales, not its competitors.

Is this market worth fighting for?

Wanting a share of the billion dollar home and office single-serve market is understandable for Starbucks. Improving technology threatens to chip away at the number of people willing to leave home or work to buy their beverage of choice in a store. Still, although Starbucks sells plenty of cups of plain-old coffee, the chain's not-so-secret secret is that the real money is in the fancy drinks.

If these frothy, sugary, high-margin beverages become attainable at home, Starbucks has to fight for a piece of that action. The company does not want to give consumers the ability to make café-quality beverages at home for less, any more than it wants put a Frappucino-maker in cars. However, the company is facing reality and making a shrewd move to defend its turf.

What does it mean for the stock?

Starbucks has an enormous marketing advantage over Green Mountain and Nestle. With thousands of stores with which to market the Verismo, the company can put its machine in front of the public much more easily than its competitors. The company rolled out Via by giving out samples in stores, so it's easy to see them doing the same with Verismo.

This is not a guaranteed win for Starbucks, as it remains debatable whether customers will shell out $200 for a new brewer just to make fancier drinks when they already have a Keurig machine or can buy one for under $100. That said, the Verismo is likely another nail in the coffin for the Keurig Vue and it keeps the Nespresso as a niche player marketed to the types of folks who shop solely at Crate & Barrel.

With Verismo, Starbucks has a chance to recapture market share from Green Mountain/Keurig. If that happens, it should catapult both earnings and the share price much higher.

The worst case scenario is that Verismo proves that the market for higher-end home/work single-serve brewers is only a niche one. In that case, it might make the Verismo a limited success or even a failure, but it would also mean that customers will keep heading into stores for this kind of higher-priced, higher-margin beverages. That, in the long-term, would be a win for Starbucks as well.

(c) 2012 Benzinga does not provide investment advice. All rights reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
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