Why Starbucks’ Verismo Won’t Lead To The Demise Of Green Mountain

Starbucks Corporation (NASDAQ:SBUX) launched its much awaited single cup brewer Verismo for $199. The larger version, which contains temperature control and self-cleaning, is priced at $399. Due to its marketing muscle and a long history of being associated with high quality coffee, the market views this machine as a significant threat to Green Mountain Coffee Roasters (NASDAQ:GMCR). However, we believe the demand for Keurig brewers is likely to remain high for a number of reasons. ^[1]

Firstly, Starbucks’ Verismo uses a high-pressure system and is primarily used for making lattes and espressos. Keurig brewers, on the other hand, use a low pressure system and are primarily used in preparing non-espresso coffee and tea. So, both the brewers cater to different customers and might not end up competing directly against each other.

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It is also important to note that only 2 out of a total 38 patents that Keurig possesses expire in September. Most of the patents are pretty technical and contingent on the legal interpretation of their description. Thus, any company looking to introduce single cup brewers will have to use a different technology or is likely to face a litigation battle against Green Mountain.

Here is a complete list of its patents.

But technology is not the most important thing at the end of the day. Customers want a good coffee at an affordable price and Green Mountain has a reputation for this. If a brewer uses an altogether different technology, there is no guarantee that the quality of coffee brewed will be superior and customers may hesitate to switch to brands of brewers they don’t know or that are too expensive.

Green Mountain’s stock has plummeted significantly and there have been questions raised over its accounting policies but there is one thing that remains true: Keurig’s customers are satisfied. The machines have received positive reviews and Green Mountain’s customer service is excellent. Customer retention is likely to remain high. Moreover, customers will be limited to a few coffee options in case of other brewers since the K-cups won’t be compatible with them. Right now, K-cups are available in more than 200 different varieties under 25 different brands.

With Keurig Vue brewers, Green Mountain has also stepped up its presence in specialty drinks (such as espressos and lattes). It also in the process of developing high pressure brewers with Italian giant Lavazza. Thus, there are solid reasons to believe that the demand for Keurig brewers will continue to remain high.

We could also see a fundamental shift in the way the company generates profits. Until now, the Keurig K-cup single brewers were sold at cost price or sometimes even at loss to encourage customers to buy the machines. The company generated profits essentially through the recurring sale of K-cups. Now with the K-cup market ready to be hit with new varieties (due to patent expiration), sales of Green Mountain’s own K-cups are likely to get negatively impacted. Hence profits earned through the sale of brewers will become more important.

We have a $33 price estimate for Green Mountain Coffee Roasters, which is slightly above the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Starbucks to elbow in on Green Mountain with October debut of one-cup brewer, September 20, 2012, cnbc.com [↩]