Starbucks Revolutionizes the Coffee Market Yet Again
I think Starbucks (NAS: SBUX) CEO Howard Schultz would approve of how I'm enjoying my morning with a French-press Sumatra coffee I fired up right here at home (with Starbucks beans, of course). Though if Schultz has his way, I imagine he's hoping that come this holiday season I'll be enjoying something straight from the new Verismo machine that Starbucks unveiled last night. Don't worry, Howard, chances are pretty good that a Verismo will make its way into our household as soon as they're available.
Let's first understand what it is
After the press release, management held a conference call to introduce their latest invention. First and foremost, the Verismo, as management describes, will be a signature at-home, single-cup machine that will deliver a "coffee experience" committed to Starbucks' taste and quality that consumers expect and demand.
The actual concept dates back three years ago when the company started estimating the size of the single-cup market. When the company realized the significant market opportunity back then, VIA was what followed and Starbucks had its name in the game. Ultimately, VIA is estimated to become a $1 billion business and a significant part of the $8 billion global single-cup market. The introduction of Verismo should only help it pick up even more market share.
Just build it; we'll get one
The machines will be manufactured via Kruger Co., a private Germany-based company, and the coffee and milk pods will be manufactured and sold by Starbucks. The coffee will be 100% Starbucks coffee and lest you think the milk will go sour, the company has developed a shelf-stable, 100% natural and 100% dairy "tastes like fresh milk" pod to complement the beverages. Management plainly stated that the Verismo is expected to revolutionize the at-home espresso market.
The Verismo will be introduced and validated via (see what I did there?) "online in high end specialty retail stores and select Starbucks retail stores in the US and select international markets this fall." And it was made very clear that the goal is to have these things rolling out in time for the holiday gift-buying season where it's estimated that approximately 50% of the single-cup brewing machine sales actually occur. And I have a feeling that number may be going up this year.
Now let's understand what it is not
I think people need to understand that the Verismo is not necessarily Starbucks' answer to Green Mountain Coffee Roasters' (NAS: GMCR) Keurig brewer. To be sure, the Keurig is a low-pressure coffee machine and management was very quick to note the difference here (a number of times) that the Verismo is a high-pressure machine geared toward producing espressos, cappuccinos, and the like. It gets even more interesting, too. Schultz was quick to note on the call that the company fully expects its relationship with Green Mountain to continue:
We want to support Green Mountain. We want to support K-cups, and we believe we can continue as we have in the early days to build a billion dollar business in that category. But the context that I want to try to explain to you, is that we felt from day one that the biggest prize in this category over the long-term domestically and globally was going to be espresso based beverages which is at the heart and soul of the equity of the Starbucks retail experience. The Green Mountain partnership because it is a machine that basically brews brewed coffee and is a low pressure machine we needed an opportunity to compliment the partnership with Green Mountain and candidly compete with what Nestle has done overseas in a very positive way. The Verismo machine will give us Starbucks like quality in terms of espresso based beverages and will also give us the ability to make milk-based beverages unlike anything that we have found on the market today. When you look at the comprehensive offering we have for our customers, VIA, single cup on the go, our partnership which we will continue to support with Green Mountain which is brewed coffee, single cup, and now the introduction of Verismo we are putting ourselves in a position where unlike any other company we have a comprehensive offering which is just the beginning to satisfy the unique needs that our customers have.
So what needs to be understood here is that the Verismo is more an answer to Nestle and its line of Nespresso machines that have performed so well in Europe, not as much a response to Green Mountain's machines. As it stands, the Verismo will only accommodate Starbucks brands, and there is no reason to believe this will change anytime soon, giving Starbucks full control.
Stealing away your own business?
It's reasonable to think that a machine like this could steal customers away from Starbucks' actual stores. But I believe this concern is overblown. Think about it: This is simply another way to extend the Starbucks/consumer relationship for those who prefer this convenience.
A real-life example: You finish dinner one night at home and you don't necessarily want to go to a store to get an espresso or cappuccino. This machine gives a superior alternative while staying in that Starbucks universe. It's actually quite compelling and yet another way that it is separating itself from competitors such as Dunkin' Brands (NAS: DNKN) and even McDonald's (NYS: MCD) . In regard to pricing, not much was said other than that it will be in-line with what consumers are used to with the single-cup market; we'll gain more clarity on that in the coming months.
Bringing it all home
The bottom line is that this is a different product than what Green Mountain has on the market today. One is a low-pressure coffee machine; the other is a high-pressure machine for specialty beverages. Heck, I can even see why one might have one of each of these machines. The Verismo is more a response to Nestle. While Nestle has penetrated the European market, it doesn't carry the same name here. And I'd also argue that folks from here to Kazakhstan will certainly give it a second thought if they have a choice between the two.
Either way, yesterday's announcement certainly shook things up a bit. Starbucks shot up a bit more than 3.5% afterhours while Green Mountain got pummeled to the tune of 15% on the bad side. That seems like a bit of an overreaction on the Green Mountain side considering the nature of the two machines and the fact that Schultz reiterated Starbucks' partnership with Green Mountain. But it also shows who the real coffee king is; Green Mountain's got nothing on these guys. Now if you'll excuse me, I'm going to get back to my morning Sumatra.
At the time this article was published Stock Advisor analystJason Moserowns shares of Starbucks. The Motley Fool owns shares of Starbucks.Motley Fool newsletter serviceshave recommended buying shares of Starbucks, Green Mountain Coffee Roasters, and McDonald's.Motley Fool newsletter serviceshave recommended creating a lurking gator position in Green Mountain Coffee Roasters.Motley Fool newsletter serviceshave recommended writing covered calls on Starbucks. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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