As Starbucks (NASDAQ:
) introduces its Verismo single-serve coffee, espresso and café
beverages machine, the company has fired another bullet in its war
with Green Mountain (NASDAQ:
) 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
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
) and Wal-Mart (NYSE:
) 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:
) 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
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
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
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