Starbucks takes on Green Mountain, Nestle and Starbucks?

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As Starbucks introduces its Verismo single-serve coffee, espresso and café beverages machine, the company has fired another bullet in its war with Green Mountain and Nestle for the $8 billion single-serve market. The Verismo, priced at $199 makes not only coffee, like Green Mountain's dominant Keurig “K-Cup” brewers, but lattes and other fancy drinks like Kuerig's new Vue and Nestle's Nespresso. The Verismo looks like a fabulous machine that allows users to simply make lattes and other “fancy” beverages that you used to have to go to a Starbucks to get. Yes, of course, you could use a high-end espresso machine, but those are expensive and impractical for most people. 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 they are sold in upscale stores like William Sonoma instead of Target and Wal-Mart like Keurig's line. It's also nearly impossible to find Nespresso pods in a store whereas every grocery chain, plus Starbucks and Dunkin Donuts along with Bed, Bath & Beyond and others 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 thirsty person craving a latte or a caramel macchiato stay home rather than go out. So, to defend market share and own the entire coffee market, no matter where someone choose to drink a cup, Starbucks is trading 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, you have to buy a machine, but it's hard to imagine there is much profit in that, so is Starbucks so eager to keep Green Mountain and Nestle away from its customers that it is willing to trade a big sale for a small one? In short, the answer is yes as Starbucks is betting that no matter how enticing its stores are, a certain percentage of coffee will be consumed at home or work. It only seemed a matter of time before home-brewers that make lattes and their ilk caught on and if Starbucks was not the one selling them, the company would end up having 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 $.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, so any sales of Via would come at the expense of competitors not in-store visits. With the Verismo, however, Starbucks will be letting you 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 home and office single-serve market is understandable for Starbucks as 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. Previously, though 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 five consumers the ability to make café-quality beverages at home for less any more than it wants put a Frappucino-maker in your car, but it sees the reality and is 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 to use to market the Verismo, the company can put its machine in front of the public much easier than its competitors. The company rolled out Via by giving out samples in its stores and it's easy to see them doing the same with Verismo. This is not a guaranteed win for Starbucks stock 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, then it should send earnings and the stock price higher. The worst case scenario is that Verismo proves that the market for a higher-end home /work single-serve brewer is only a niche one. If that's true, 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 will be a win for Starbucks too.
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