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Coffee Maker Says, "Supersize Me"

By Rich Duprey – Feb 20, 2014 at 1:00PM

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Nestle looks to fend off Green Mountain Coffee Roasters' latest innovation, but is it a tempest in a teapot?

Maybe the home-brewing coffee phenomenon will come full circle and Mr. Coffee machines will be all the rage again.

After Green Mountain Coffee Roasters (GMCR.DL) said its new Keurig 2.0 machine will be able to brew carafe-size pots of joe, Nestle (NSRGY -0.26%) said yesterday its next-generation Nespresso system will brew "large cup" sizes of coffee. The VertuoLine will appeal not only to Americans who prefer to drink bigger cups of coffee but also to their daintier European cousins who still relish the traditional espresso size. Then again, maybe people will just buy a coffeemaker that brews a whole pot.

I drink a lot of coffee, so I don't think I was ever the target demographic of these single-serve systems, but last quarter alone Green Mountain sold 5.1 million Keurig brewers, quite a lot still, even if that was lower than last year due to a 4% drop in sales volume. Indeed, according to research company Mintel Group, ownership of single-cup brewing coffee or espresso makers among adults has grown to 36% in 2013 from 24% a year ago. For those of us who love a pot of roasted coffee, Mintel says that market share is expected to continue eroding away.

Of course, the new Keurig system due out has some companies like TreeHouse Foods worried because it has lockout features that will prevent generic serving pods from being used in it. It's a dual-edged sword, though. While TreeHouse is taking the unseemly route of suing Green Mountain in court to force open its system to let in third-party pods, there's no guarantee that coffee drinkers will want to upgrade to a new premium system that will limit their coffee choices.

Source: Nestle.

According to Nestle, the portioned coffee category is far and away the fastest-growing segment in coffee and one of the fastest-growing segments in all of the North American consumer goods market, where sales have tripled over the last three years. The U.S. alone is expected to account for half of the global growth the segment is forecast to achieve.

Nestle might view its new coffeemaker as a game changer, but it still has a pretty big gap to make up to change the field that much. Green Mountain has at least an 89% share of the single-brew coffee system market and 73% of the portion packs. With its own new system due out soon that once again would give it patent protection from knockoff pod makers, rivals like Nestle need some sort of innovation to break Green Mountain's stranglehold on the market.

Yet the bottom of the field is pretty crowded with also-rans as Kraft Foods, Hillshire Brands' Sara Lee division, Starbucks, and privately held Mars have all sought to tap the growth of the single-cup coffee market. That's why supersizing the serving is really the only way to go in coffee and helps explain why Green Mountain is diversifying into cold beverages with a do-it-yourself home-based soda maker made in partnership with Coca-Cola

They say that if all you have to compete on is price, you've already lost. In coffee, it may be if the only innovation you have is a larger serving of coffee, particularly when cheap coffeemakers that can brew whole pots are available, then you'll find yourself as unsavory as day-old cup of joe. For Green Mountain Coffee Roasters, its soda machine seems a real innovation. Nestle's big cup of coffee? Not so much.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters. It recommends and owns shares of Coca-Cola and Starbucks. 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.

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