Will Nestle's Nespresso VertuoLine Cause Problems for Green Mountain's Keurig 2.0?

Green Mountain Coffee Roasters (NASDAQ: GMCR  ) is about to encounter new competition at the worst possible moment. After failing to succumb to competition from Starbucks' (NASDAQ: SBUX  ) Verismo, Green Mountain's Keurig brewer will be put to the test again as Nestle's (NASDAQOTH: NSRGY  ) Nespresso VertuoLine system begins hitting retail shelves in the U.S. and Canada.

Nestle, which has a 35% global share of the single-serve market, has only a tiny presence in North America. However, its renewed push into the U.S. and Canadian single-serve market comes just months before Green Mountain launches Keurig 2.0. If Green Mountain is unable to fend off the resurgence in competition, Keurig 2.0 could flop.

Competitive landscape
According to Euromonitor International, North America is the second-largest market in the $8 billion single-serve market, trailing only Europe in size. Nestle dominates the European market with a commanding 70% share. Its Nespresso single-serve brewers produce the espresso shots that are popular among Europeans.

However, espressos have yet to take hold in the U.S., where consumers prefer larger cups or whole pots of coffee. Green Mountain dominates the U.S. single-serve market; it has a 72% share compared to Nestle's 3% share. In Canada, licensed K-Cups account for more than 50% of portion-pack sales compared to just 5% for Nestle's pods. VertuoLine has an uphill battle if it wants to unseat Green Mountain.

Pricing and quality
Nestle's VertuoLine, Starbucks' Verismo, and Green Mountain's Keurig 2.0 are all touted for producing high-quality brews.

The standard VertuoLine comes in red, chrome, or black and retails for $299. Its capsules contain technology that tells the brewer exactly how to blend the beverage. Unlike its European brewers, which brew smaller servings, VertuoLine brews 250-milliliter servings. A milk frother, which finishes a beverage with a foamy topping of milk, can be added for $50.

Starbucks' Verismo brewer is advertised as delivering Starbucks-quality coffee at home. Starbucks' storefront presence gives it a natural advantage in reaching customers, yet Verismo has largely been a disappointment. The standard Verismo brewer -- Verismo 580 -- is available in four different colors and retails for $149. It automatically adjusts the temperature and pressure to the beverage being brewed. Serving sizes range from a 30-milliliter espresso to a 210-milliliter coffee.

Finally, Keurig 2.0 -- set for launch in fall 2014 -- enhances the original Keurig Hot brewer by adding a 28-ounce serving size, in addition to the traditional single-serve sizes, and interactive reader technology that only brews licensed K-Cups. The latter feature is vital to Green Mountain's goal of closing its system to unlicensed brands. If Keurig 2.0 achieves household penetration similar to Keurig 1.0, Green Mountain's profits will soar for another decade.

Impact on Green Mountain
The VertuoLine, Verismo, and Keurig 2.0 all deliver high-quality brews with largely the same bells and whistles. Keurig 2.0's 28-ounce serving size is the key differentiator in brewing functionality and may be an important one. A survey conducted by Green Mountain found that 60% of coffee drinkers had not yet bought a Keurig because it does not brew a full pot of coffee. Neither VertuoLine nor Verismo offers consumers the ability to brew a full pot of coffee, but Keurig 2.0 does.

In addition, Keurig 2.0 has an advantage in beverage variety. VertuoLine and Verismo only brew their respective makers' coffee, whereas Keurig 2.0 offers a wide variety of brands, including Starbucks, Dunkin' Brands, and even Campbell Soup. Ultimately, Keurig 2.0's wider offering makes it a more attractive option for most consumers than any other brewer.

Keurig 2.0's biggest competition is not VertuoLine or Verismo but its own predecessor. Keurig brewers are already in 18 million households. Keurig 2.0 -- the key to Green Mountain's future -- needs to replace the old Keurig brewers in as many households as possible so as to create a strong financial incentive for brands like Starbucks to pay up for licensed K-Cups. If Keurig 1.0 remains the market leader, Starbucks and other licensees will have greater bargaining power in future negotiations because they can produce unlicensed K-Cups for the old system without paying Green Mountain a dime. This is why it is crucial that Keurig 2.0's enhanced functionality entices millions of households to upgrade.

Foolish takeaway
Nestle and Starbucks pose only a peripheral threat to Green Mountain's dominance of the single-serve market. The greatest threat to Green Mountain's continued prosperity is itself. Is the next generation of Keurig brewers attractive enough for current-generation Keurig owners to upgrade? The answer to this question is also the answer to whether or not Green Mountain will continue to grow earnings at a high rate. We will have to wait at least until the release of Keurig 2.0 to know the answer for sure.

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