Do You Own the Biggest Beneficiary in the Global Coffee Pod War?

The biggest winner in the pod wars is becoming clearer by the day. Do you know who it is?

Mar 18, 2014 at 11:00AM

Keurig Green Mountain (NASDAQ:GMCR) and Starbucks (NASDAQ:SBUX) receive the lion's share of the press regarding single-serve pods -- and rightly so. Green Mountain is the U.S. market leader, with a 36% share of the pod market compared to Starbucks' 16% share. The two may be credited with jump starting the at-home brewing trend in North America.

The cabal looks like a pretty sweet deal for U.S. coffee giants until you consider the broader market. Nestle (NASDAQOTH:NSRGY) and other competitors pose a legitimate threat to the coffee hegemony in the U.S. and abroad. Although the ultimate outcome is far from certain, it is safe to say that dominance of the pod market is far from settled. In all likelihood, there is only one clear winner in the coffee pod wars.

Massive growth ahead
There are three basic ways to consume coffee: single-serve in a retail location, multi-serve (carafe/coffee pot) at home or at work, and single-serve at home or at work. For years, at-home multi-serve was the preferred method for most consumers. For many, firing up the drip coffee maker is still part of a long-established morning routine. Regular visits to retail coffee chains are increasingly popular as well, as Starbucks can attest.

However, single-serve home-brewed coffee is the hottest of the three segments. Although Nestle's Nespresso has long had a presence in Western European homes, Green Mountain's Keurig brewer is riding the recent explosion in North American consumers' interest in single-serve brewers. As a result of the fanfare, Green Mountain's home market, North America, experienced 80% growth in pod sales from 2011 to 2012.

Market fragmentation
Single-serve pods' stratospheric growth has caught the attention of coffee companies everywhere, with everyone moving in to capture a share of the pie. Green Mountain and Starbucks want to expand internationally, while Nestle wants to expand in North America. Taken together, Western Europe and North America account for more than 90% of the single-serve pod market.

However, the U.S. and international markets are quite different from one another. For instance, Nestle's Nespresso, which has a 26% share of global pod value, dominates Europe. European customers favor espressos rather than the large cups of coffee preferred in the U.S. Green Mountain captures the no. 2 global single-serve share by dominating the North American market. Its Keurig brewer has achieved 13% household penetration in the U.S., a figure that will likely increase when it introduces its next-generation brewer that brews both single-serve and multi-serve portions.

The differences in customer preferences and the establishment of clear market leaders in North American and Western Europe make it unlikely that massive overseas growth is in store for either company. Even with brewers tailored to Western Europeans' preferences, Keurig faces an uphill battle against the well-established Nespresso. The same goes for Nespresso in North America. As a result, both companies' future growth largely relies on pod sales in their current markets.

Pod prices falling
Relying on pod growth alone may not be the most secure position. Although North American pod sales continue to surge, prices are falling. Overall U.S. pod prices declined 5.4% last December, while Green Mountain's prices declined 6.4% and Starbucks' declined 5.9%. The declines are due to increasing competition in the competitive market. With companies from McDonald's (NYSE:MCD) to Panera Bread (NASDAQ:PNRA) entering the single-serve coffee market, prices are bound to fall even more.

This presents an interesting scenario in which unit sales are surging but unit prices are falling. This should ultimately benefit premium brands like Starbucks because the spread between discounted brands and premium brands will shrink. As a result, more consumers will trade up to the premium brand.

However, Green Mountain has the most to benefit from reversing the current arrangement. If its next-generation Keurig brewer can effectively shut private labels out of the market, prices will rise once again – with Green Mountain reaping most of the gains.

Nestle, on the other hand, is stuck in the slow-growing European market. Unless it can make an unlikely surge in North America, it will have to place its hopes in smaller markets, like Brazil.

Who's the big winner?
Single-serve pods are taking over the developed world. Nobody knows exactly how it will shake out, but the current landscape suggests that pod prices, and thus margins, will continue to decline unless Green Mountain can reestablish a near-monopoly position in the market. However, with more and more entrants joining the market, it seems likely that consumers will be the biggest winners in the single-serve frenzy.

Starbucks has proven itself a growth machine, but will Green Mountain?
Does Green Mountain have what it takes to be an ultimate growth company or will competitive pressures stifle future profits? Investors will want to keep this question in mind. But in the meantime, the Motley Fool's David Gardner has several other high-growth stock picks you won't want to miss. With stock returns like 926%, 2,239%, and 4,371%, David has developed his scientific approach to crushing the market, which he and the Motley Fool have done for over twenty years. Click here now for his six picks for ultimate growth.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers