Guess Who's Behind the Machine That Could Kill Starbucks
But will the fancy European coffee drinks this appliance will crank out really be as good as Starbucks (SBUX)? Starbucks probably hopes so: It's the company that's putting out the machine.
Shares of Starbucks rose after it unveiled its plans for Verismo, so clearly, investors believe the new system will be an incremental revenue stream. Why shouldn't they? It's been a couple of years since Starbucks introduced its VIA instant coffee packs, yet store-level sales continue to improve.
The market for the Verisimo is there. CEO Howard Schultz sent a memo to key executives a year ago, telegraphing the Verismo move: "The single-serve segment of the coffee industry is poised for a sea change of innovation," he wrote at the time, pointing out how 80% of Starbucks customers do not own a single-cup brewing system. He also pointed out how just 6% of the country had a single-cup brewer at the time, compared to a 40% market penetration in Germany.
Starbucks will apply enough marketing muscle to get the Verismo noticed. (Remember, skeptics scoffed at VIA, yet Starbucks made it relevant.) However, if the company is forced to discount Verismo machines or budge from its initial coffee prices, the public will wonder if the Starbucks brand is losing some of its panache.
Then again, if it succeeds too well, it could dry up store traffic along the way.
Let's go over a few of the reasons why Starbucks may have its hands full.
1. Verismo's Competition Has Received a Tepid Response
Green Mountain Coffee Roasters' (GMCR) Keurig one-cup brewer is a low-pressure system that makes coffee, tea, hot cocoa and cider. It's not a high-pressure platform of the type that the Verismo must be to make the high-end European drinks -- and that's a bigger problem than you may think.
Verismo isn't the first machine to hit the single-portion espresso market. Tassimo, Nespresso, Senseo, and CBTL are just some of high-pressure devices that have been available in recent years. There are countless more options in Europe.
Green Mountain shipped 4.2 million Keurig brewers through its partners during the holiday quarter. Everybody else? Not so much.
Why is Keurig so popular? It could be that its black coffee specialty is something that many bean-water buffs can have a couple of times a day. Good luck finding a large market of people who need multiple daily latte fixes.
The high-pressure systems do make premium black coffee, but the refills are typically more expensive. If Verismo succeeds, it may actually validate the high-pressure machines that are likely cheaper and have a wider variety of brews. No one would be surprised if the rising tide of Starbucks marketing actually lifts all of these ships.
2. Ubiquity Cuts Both Ways
Starbucks sells VIA packets at its stores, giving buyers access to traditional coffee on the go, so long as they can find hot water. The presence of VIA hasn't slowed down the registers. Folks still come into the stores for the aromatic atmosphere and to order up the fancy drinks that can't be sprinkled out of a packet.
Starbucks has surely worked out the math. It knows that it will still make a good chunk of change on every Verismo coffee pack and milk pod it sells. It doesn't need in-store customers to make money. However, if the Verismo quality is nearly as good as the real deal, consumers will begin to wonder why they're overpaying for the in-store experience. Traffic will dry up. All of the baked goods and assorted beverages that used to be sold along with your morning mocha will be toast.
3. Brand on the Run
Not everything Starbucks touches turns to gold. It hasn't been a hit in every overseas market. (G'day, Australia!) It balked on its Chantico chocolate drink. It also failed to make Tassimo a hit.
Kraft's (KFT) Tassimo had an exclusive deal with Starbucks for its T-Discs. Surely consumers would flock to Tassimo -- over the low-pressure Keurig -- if Starbucks brews came in a T-Disc variety -- right? Nope. When the exclusivity deal expired last year, Starbucks quickly struck a deal to hop on Keurig's K-Cup bandwagon.
Why didn't the Starbucks-Tassimo duo work out? Was it too expensive? Did Tassimo lack a variety of flavors? If it's either of those two reasons, Verismo is going to have its hands full.
Darned If You Do ...
If Verismo fails, it will clearly be bad for the company. But if Schultz is right, and it succeeds, how crowded do you think your local Starbucks will be this time next year?
Starbucks may not like the answer.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article, except for Green Mountain. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks. Motley Fool newsletter services have recommended writing covered calls in Starbucks. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters.