Starbucks (SBUX -0.21%) has struggled to gain a toehold in the United States single-serve coffee maker market with its Verismo brewer, but the company remains committed to selling the system. The coffee chain does not release sales figures for Verismo, but spokesperson Erin Shane told The Motley Fool via email that "the Verismo system continues to deliver on our sales expectations."
That may be true, but the company is well behind Keurig Green Mountain (GMCR.DL) in the United States, and Nestle (NSRGY -0.09%) globally, though that does not seem to deter Starbucks. "Starbucks is committed to strengthening its global leadership position in the highly competitive nearly $8 billion ... premium single-cup coffee category," Shane wrote. "We will continue to invest in the single-serve business, which we believe will be an important driver of our long-term at home coffee growth."
Going forward, the question for the coffee giant is whether it makes sense to continue to pump resources into a platform that has yet to find a large audience. It's not about whether the company can afford to keep pushing Verismo, but whether it's worth the shelf space and resource cost when Starbucks is succeeding with other single-cup offerings.
A display of Verismo products in a Starbucks store. Source: Author.
How dominant is Keurig in the U.S.?
Starbucks is a player in the single-serve market, but that's due to its partnership with Keurig, for which it makes Starbucks-branded K-Cups. It's not due to sales of the Verismo. K-Cups are a huge part of the single-cup market, especially in the United States, where Mintel reports that, in 2013, U.S. consumers bought $3.1 billion worth of coffee pods, according to The Seattle Times. That number is clearly a low estimate just based on Keurig's reported sales, but it shows you how clearly the company dominates the market.
Keurig had $4.25 billion in total sales in 2013, with $3.7 billion of that coming from the U.S., and nearly all the rest from Canada. The company reported an overall $3.13 billion in portion-pack sales, but does not break that down between the U.S. and Canada. If you assume that the ratios are roughly the same between the countries, the company controls roughly $2.7 billion of that estimated $3.1 billion pod market in the U.S.
Globally, it's Nestle's Nespresso that's the leader. Looking at the success of Keurig and Nestle in this area shows how hard it is to establish an alternative brewer once there's a clear market leader. With Verismo, Starbucks' only chance is that its customers would want a Starbucks experience at home. They might, but so far, it's clear that many of them believe they can get that with a branded K-Cup, or they're willing to go in another direction, because Keurig has made it so easy.
It's hard to knock off the incumbent
K-Cups are sold in every supermarket chain, in Dunkin' Brands stores, as well as in Krispy Kreme locations. It's even sold in Starbucks. In fact, in the dozens of Starbucks I have visited in Massachusetts, Connecticut, and Washington state during the last few months, I have never seen a Starbucks that gave more shelf space to Verismo than it did to its K-Cup offering. Some did not have the brewer or its pods at all. That's certainly anecdotal, but it's a lot easier to sell pods for an established brewer than it is to get people to shell out $119 for a new one -- and that's down from $199 when the system launched a couple of years ago.
Keurig stays dominant because its brewers are good enough that it's hard to justify replacing a working K-Cup machine with a Verismo, even if the Starbucks machine is superior -- which I think it is. That's the same problem Keurig has bumped into trying to launch its Vue system and its Keurig 2.0 machines.
Will Starbucks really push forward?
Continuing to sell Verismo when it has very little market share makes little sense except that Starbucks can afford to play a very long game. And the company intends to do just that. "In the coming year, we plan to expand the distribution of the Verismo 600 to a wider selection of specialty retailers and Starbucks stores, and we also have continued machine innovation in the pipeline," Shane wrote.
That may seem foolish, but Starbucks' only real opportunity to sell a Verismo is when someone needs to replace a worn-out Keurig brewer. If the company can slowly -- even very slowly -- gain market share, it may be worth it, as Verismo pod sales don't require the company to send Keurig a piece of the action.
It's an uphill battle, though. If customers are satisfied with their brewers, then they'll be inclined to stick with the brand they owned previously. Still, Starbucks has a loyal audience and a massive retail platform that it can, perhaps, ultimately win over.
