This Starbucks Shot Won't Kill Green Mountain

After a strong run through the first two weeks of September, shares of Green Mountain Coffee Roasters (Nasdaq: GMCR  ) tumbled nearly 14% last week.

You don't need to look hard to find the culprit. Starbucks (Nasdaq: SBUX  ) finally began selling its Verismo coffee maker online last week, and investors are starting to worry if the new espresso-centric platform will eat into Green Mountain's Keurig franchise.

The fears are overblown. Let's go through the many reasons why Verismo isn't the Green Mountain slayer that some worrywarts are making it out to be.

1. Verismo and Keurig are entirely different machines
Green Mountain's Keurig is the undisputed champ in low-pressure brewing. Verismo is entering a competitive market in high-pressure machines, where Nestle's Nespresso is the world leader; but others, including Tasssimo, Senseo, and CBTL, are also battling for customers.

It's true that Verismo also makes traditional brewed coffee, but it's just not cost-effective.

2. Verismo is far more expensive than Keurig
The first wave of Verismo brewers all retail for $199. Keurig has brewers starting at roughly half that price, but the disparity goes beyond the initial cover charge.

There are six varieties of Verismo pods. The three espresso and three brewed coffee pods sell for the same price of $11.95 for a 12-count box. In short, we're talking roughly $1 a pop. This is naturally cheaper than hitting up your local Starbucks store, especially for espressos; but what about the brewed coffee economics?

Keurig pods start at a little more than half as much through some retailers, and that's going to get cheaper now that the patents expired last week, and private-label companies offer even cheaper brews.  

3. Selection is a problem for Verismo
Unlike the hundreds of Keurig varieties, Starbucks isn't likely to let other coffee makers get in on the Verismo fun. It's how the company will protect its high pricing. Unfortunately, it also means that selection is going to be weak.

Are three espresso varieties -- with one of them simply being a decaf version -- enough? 

Verismo is a stylish brewer. The ability to use milk pods to make cafe latte -- at a higher price of $1.62 per serving -- will win over espresso drinkers, but the math and selection won't work for mainstream drip coffee sippers.

4. Verismo is iOS, and Keurig is Android
It may seem silly to compare Verismo and Keurig to Apple (Nasdaq: AAPL  ) and Google's (Nasdaq: GOOG  ) Android, but it's fitting.  

Verismo will be the altruistic brand enjoyed by well-to-do buffs of European coffee. It will be the one generating the headlines. It should be the profit margin leader given the hefty ransoms. However, just as Google's open-source Android is the global market share leader, Keurig is now as good as "open source," because its K-Cup patents expired earlier this month.

Keurig will be the one that's widely available. Verismo is lining up retailers for a holiday push outside of its namesake stores, but it's more of a walled garden at this point.

5. Verismo may actually help Green Mountain
Starbucks has promoted Verismo by pointing out that the vast majority of its customers don't own a Keurig or any other single-serve coffee maker. It wants to change that; but in educating consumers, the company puts itself in a position to expose them to the category leader.

We've seen this happen in the smoothie space, where Starbucks and burger joints adding fresh-fruit beverages to their menu have only drawn more attention to standalone leader Jamba (Nasdaq: JMBA  ) . Instead of destroying Jamba Juice, quarterly comps have been positive for more than a year.

Starbucks is going to get more people excited about making high-quality brews at home, and then it will lose some of those converts to Keurig when they do the math.

If Keurig is too simple -- and Keurig VUE doesn't go far enough -- Green Mountain's own espresso platform, designed in cahoots with Italy's Luigi Lavazza, will hit the market either later this year or early next year.

In short, Green Mountain has its bases covered. 

Brew ha ha
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The Motley Fool owns shares of Starbucks, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters, Google, Starbucks, and Apple. Motley Fool newsletter services have recommended writing covered calls on Starbucks. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a bear put spread position in Green Mountain Coffee Roasters. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he brews them. He does not own shares in any of the stocks in this story, except for Green Mountain and Jamba. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On September 26, 2012, at 2:45 PM, mandytripso wrote:

    this article was pretty good. the topic was so boring but the writer made it so much better. this writer needs to go on to better news articles. im talking New York Times articles. so whoever wrote this, i tip my hat to you. good luck

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