Green Mountain Wants to Step Away From Starbucks
As the week came to an end, Friday saw Green Mountain Coffee Roasters (NASDAQ: GMCR) respond to Starbucks' (NASDAQ: SBUX) recently announced plans to make a move into the single-serve coffee market by looking to point out the differences between its own Keurig machine and Starbuck's forthcoming Verismo.
You might think that one single-serve brewing machine is much the same as another, but apparently not. The differences? Well, while Starbucks has developed the Verismo with German company Krueger GmbH & Co to make coffee and expresso using high-pressure, Green Mountain's machine uses low-pressure to make non-expresso coffee and tea.
In other words, Green Mountain has created a chilled out coffee machine. It's not about grabbing a shot and dashing out. It's about allowing the drink to drip through at its own pace, and then enjoying it over the newspaper.
As a result, both companies believe that the two machines will not be competing against each other. However, particularly in this economic climate, how many consumers will really be looking to buy two separate coffee brewing machines, one high and one low pressure? It seems unrealistic. The machines will inevitably compete against each other, just as they will both be competing against other types of coffee making machines.
According to Market Watch, GMCR CEO Lawrence Blanford, however, said that the two companies will continue to collaborate on Keurig system, with SBUX continuing to sell their own K-cups.
Blanford said that, “there also is opportunity for complementary high-pressure espresso-based systems.”
Starbucks CEO Howard Schultz said that, “We believe the category is still in its nascent stage. We have an opportunity to launch the Verismo system but also to support Green Mountain," he had said. "It's in both our interests for Starbucks and Green Mountain to cooperate in a way where we continue to sell those K-cups in the same spirit as when we began."
Despite the noises of collaboration, Bank of America Merrill Lynch downgraded Green Mountain to Neutral from Buy on Friday. In a research report, it said that, while there are still details about the system that it doesn't know (e.g. price points for the machines and the pods), it does believe it creates potential risk to GMCR by diverting consumer attention and creating more competition in the next generation of single cup systems.
“In our view this is not fatal for GMCR,” said BOA. “Verismo is a more direct competitor of Nespresso. In addition, SBUX clearly stated how it views the market segmentation (instant, brewed and espresso) and its plans to compete in all three.”
Of course, BOA is quite correct. The two companies can make as much as they want stating that there won't be any level of competition, but the new machine will certainly divert customer attention.
Deutsche Bank said that SBUX announced that it is introducing a new, single-cup coffee machine called Verismo, and that this was somewhat surprising since almost 1 year ago to the day SBUX announced a multi-year partnership with Green Mountain Coffee Roasters. “This announcement speaks to the leverage that the SBUX brand has in the broader coffee market, and it is encouraging to see the company putting this leverage to work without putting significant company capital at risk.”
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