Keurig vs Nespresso: The Battle for Single-Cup Coffee Supremacy
In the first generation of capsule-based home-brewers, Keurig Green Mountain clearly won in the United States with its K-Cup system, which has become the dominant single-cup coffeemaker.
Keurig however has struggled with its attempts to create a second hit machine as its follow-ups to the K-Cup system, the Vue and the Rivo, have failed to generate significant sales. Now the company has announced that it plans to offer a machine that brews full carafes of coffee using a variant of its K-Cup pods dubbed K-Carafe.
That brewer, the Keurig 2.0, will eventually replace the existing line of K-Cup machines. However, it will face a new round of competition for U.S. customers from rival Nespresso, a Nestle subsidiary. Nespresso has already launched its VertuoLine, which does not make full pots but which does make eight-ounce cups of coffee, instead of the smaller espresso drinks that the company previously focused on.
"Our business in the U.S. is still small because we are focusing on espresso drinkers," Nespresso CEO Jean-Marc Duvoisin told FT.com.
With its new machines Nespresso can take the fight to Keurig, which has certainly established that there is an American market for full-size single cups of coffee.
The size of the single-serve coffee market
Since 2007 the global coffee capsules market has grown at more than five times the rate of the overall coffee industry, according to Euromonitor International. Capsule sales neared $11 billion in 2013 and Nespresso -- not Keurig -- is actually the market leader everywhere except the U.S. and Canada with $3.4 billion in capsule/pod sales outside of North America.
In 2013 Keurig did approximately 92% of its sales through the combination of portion packs and Keurig Single Cup brewers and related accessories. The company had $4.3 billion in total sales with $3.1 billion of that coming from portion pack sales and $827.6 million coming from Keurig Single Cup Brewer and accessories net sales. Almost all of that revenue came from the United States and Canada.
In the U.S. Nespresso only does $300 million in sales in what the company estimates is a nearly $5 billion market for coffee pods/capsules.
Nespresso has likely fallen behind in the U.S. because while Starbucks has popularized espresso-based beverages, Americans do not have a tradition of drinking tiny cups of espresso. As a nation we like our coffees large, and our espresso drinks full of sugary syrups, whipped cream, and whatever makes them not taste like espresso.
That has made the possible market share that Nespresso could win relatively small as the company would have to create its own audience and educate American customers about the joys of sipping a well-made espresso. For now espresso is the soccer of U.S. beverages -- we have it here and it's even popular in Seattle -- but it has made little progress with the public at large.
Nespresso wants U.S. market share
With the VertuoLine Nespresso wants a bigger share of the market in the U.S., which it plans to gain by offering a higher-end alternative to Keurig's machines. That's a crowded space as Keurig has its Vue system as well as its Rivo latte/cappucino makers, and Starbucks is competing as well with its Verismo system, which makes full-size cups of coffee, espresso, and lattes.
Starbucks may have fallen so far behind Keurig in single cup that it had to partner with its rival and start selling K-Cups. However, it holds a number of distinct advantages over Nespresso in selling higher-end machines. Starbucks has over 11,000 stores in the United States where it can demo and sell the Verismo. Starbucks also has a price advantage (likely because it can afford to take a loss selling the brewer to gain pod sales down the road) -- the Verismo often sells for as low as $99 while the Nespresso VertuoLine retails for $299.
All hope is not lost for Nespresso however as the company has no place to go but up in the U.S. and its carefully built reputation as a higher-quality brand may appeal to coffee snobs. By virtue of their sizes neither Starbucks nor Keurig can position itself as an alternative to anything. In the U.S. Nespresso -- which is sold mostly in pricey stores that include Williams-Sonoma -- can be marketed as an upscale luxury brand, which might help justify the price of its brewer.
Keurig plans to take on the world
While Nespresso attempts to gain ground in the U.S. Keurig will slowly start taking on the rest of the world.
"We are planning to launch our Keurig Hot system global platform with the introduction of a specifically designed Keurig Single Cup brewer, in the United Kingdom, Australia, South Korea, and Sweden," the company said in its 2013 annual report.
Given that it has almost no market share anywhere except the United States and Canada, Keurig should be able to grow its business globally. While espresso may be popular worldwide, the concept of a cup of coffee is not foreign in the way espresso is to many Americans. Keurig will have challenges with tailoring its offering to each market, but its strong history of partnering extensively should serve it well.
Will U.S. customers buy new brewers?
Whether either company can establish a new brewer is a major question -- none has caught on since the original Keurig K-Cup system. The Keurig 2.0 doesn't replace its predecessor, so it should succeed as existing customers replace their worn-out machines. That's a slow path to success but one that should work.
Nespresso faces a tougher battle -- it has no track record with most U.S. customers. Still it has managed a small niche with expensive machines that have limited capabilities, so it's not inconceivable that an expensive and more versatile brewer will find an audience.
Which company will win the home and office coffee war?
The new brewers from Keurig and Nespresso are not apples-to-apples competitors, but they meet in the middle with their ability to make full cups of coffee. Both companies have shown that they can sell a huge volume of coffee and brewers on their home turf, but neither has shown that it can crack the rest of the world.
This is actually a war that both companies can win -- Keurig has the ability to go abroad and essentially establish a new category while Nespresso can grow by building a new niche in the U.S. It seems unlikely that Nespresso will take much market share from Keurig in the U.S. as Starbucks has failed to do that. Similarly the rest of the world is not likely to drop Nespresso for Keurig.
Still there is market share to be taken from other areas of the coffee consumption world and both companies could steal business from stores and restaurants to grow without hurting the other.
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The article Keurig vs Nespresso: The Battle for Single-Cup Coffee Supremacy originally appeared on Fool.com.Daniel Kline has no position in any stocks mentioned. He owns a Verismo and multiple Keurig machines. The Motley Fool recommends Keurig Green Mountain and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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